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As confidentially submitted to the Securities and Exchange Commission on July 16, 2021. This draft registration statement has not been publicly filed with the Securities and Exchange Commission and all information herein remains strictly confidential.

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

RENT THE RUNWAY, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7389   80-0376379

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

10 Jay Street

Brooklyn, New York 11201

(646) 832-3582

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Jennifer Y. Hyman, Co-Founder, Chief Executive Officer and Chair

Rent the Runway, Inc.

10 Jay Street

Brooklyn, New York 11201

(646) 832-3582

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Marc D. Jaffe

Emily E. Taylor

Latham & Watkins LLP

1271 Avenue of the Americas

New York, New York 10020

(212) 906-1200

 

Scarlett O’Sullivan

Cara Schembri

Rent the Runway, Inc.

10 Jay Street

Brooklyn, New York 11201

(646) 832-3582

 

Nicole Brookshire

Christina T. Roupas

Cooley LLP

500 Boylston Street

Boston, Massachusetts 02116

(617) 937-2300

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

 

 

 

 

Title of Each Class of Securities To Be Registered   Proposed
  Maximum Aggregate  
Offering Price(1)(2)
  Amount of
  Registration Fee(3)  

Class A common stock, $ par value per share

  $                   $                

 

 

(1)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes the offering price of shares of Class A common stock that the underwriters have the option to purchase. See “Underwriting.”

(3)

To be paid in connection with the initial public filing of the registration statement.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated                , 2021.

            Shares

 

 

LOGO

Rent the Runway, Inc.

Class A Common Stock

 

 

This is an initial public offering of shares of Class A common stock of Rent the Runway, Inc. We are selling                 shares of Class A common stock.

 

 

We will have two classes of common stock outstanding after this offering: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to                votes per share and is convertible into one share of Class A common stock at any time. Holders of shares of our Class A common stock and Class B common stock will vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders except as otherwise provided in our amended and restated certificate of incorporation or as required by applicable law. After giving effect to the sale of the shares of Class A common stock offered hereby, shares of Class A common stock will collectively represent approximately                % of our total issued and outstanding shares and                % of the voting power attached to all of our issued and outstanding shares (or                % and                %, respectively, if the underwriters’ exercise in full their option to purchase additional shares), and shares of Class B common stock will collectively represent approximately                % of our total issued and outstanding shares and                % of the voting power attached to all of our issued and outstanding shares (or                % and                %, respectively, if the underwriters’ exercise in full their option to purchase additional shares).

Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share of Class A common stock will be between $                and $                . We intend to apply to list our Class A common stock on the                 under the symbol “                .”

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, and will be subject to reduced public company reporting requirements. This prospectus complies with the requirements that apply to an issuer that is an emerging growth company. See the section titled “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

 

See “Risk Factors” beginning on page 20 to read about factors you should consider before buying shares of our Class A common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $        $    

Proceeds to us, before expenses

   $        $    

 

(1)

See “Underwriting” for additional information regarding underwriter compensation.

To the extent the underwriters sell more than ____ shares of Class A common stock, the underwriters the option to purchase up to an additional                shares of Class A common stock from us at the initial public offering price less the underwriting discounts and commissions.

The underwriters expect to deliver the shares of Class A common stock against payment in New York, New York on                , 2021.

 

 

 

Goldman Sachs & Co. LLC   Morgan Stanley               Barclays

 

 

Prospectus dated                , 2021.


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TABLE OF CONTENTS

Prospectus

 

     Page  

ABOUT THIS PROSPECTUS

     ii  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     20  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     65  

MARKET, INDUSTRY AND OTHER DATA

     67  

USE OF PROCEEDS

     68  

DIVIDEND POLICY

     69  

CAPITALIZATION

     70  

DILUTION

     72  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     75  

BUSINESS

     102  

MANAGEMENT

     131  

EXECUTIVE COMPENSATION

     139  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     149  

PRINCIPAL STOCKHOLDERS

     153  

DESCRIPTION OF CAPITAL STOCK

     155  

SHARES ELIGIBLE FOR FUTURE SALE

     163  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR CLASS A COMMON STOCK

     166  

UNDERWRITING

     170  

LEGAL MATTERS

     176  

EXPERTS

     176  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     176  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

Through and including                , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Neither we nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any related free

writing prospectuses we have prepared. Neither we nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of Class A common stock offered by this prospectus, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any free writing prospectus is current only as of its date regardless of the time of delivery of this prospectus or any sale of shares of Class A common stock. Our business, financial condition, results of operations and prospectus may have changed since that date.

For investors outside the United States: we have not, and the underwriters have not, done anything that would permit this offering or the possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside the United States. See “Underwriting.”

 

 

 

 

 

 

 


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ABOUT THIS PROSPECTUS

Certain monetary amounts, percentages, and other figures included in this prospectus have been subject to rounding adjustments. Percentage amounts included in this prospectus have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements included elsewhere in this prospectus. Certain other amounts that appear in this prospectus may not sum due to rounding.

Our fiscal year begins on February 1 and ends on January 31 of the following year. All references to (i) fiscal 2019 or fiscal year 2019 relate to the year ended January 31, 2020, (ii) fiscal 2020 or fiscal year 2020 relate to the year ended January 31, 2021 and (iii) fiscal 2021 or fiscal year 2021 relate to the year ending January 31, 2022.

 

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PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, all references in this prospectus to “we,” “us,” “our,” “our company,” “Rent the Runway” and “RTR” refer to Rent the Runway, Inc. and its consolidated subsidiary.

Our Mission

Our mission is to power women to feel their best every day.

Since our founding, we have disrupted the trillion-dollar fashion industry and changed the way women get dressed by creating the world’s first Closet in the Cloud: a dream closet filled with a massive selection of designer styles to rent, wear and return (or keep!).

Overview

We built the world’s first and largest shared designer closet — that we call the Closet in the Cloud — with over 18,000 styles by over 750 designer brands. We give customers ongoing access to our “Unlimited Closet” through our Subscription offering or the ability to rent a-la-carte through our Reserve offering. We also give our subscribers and customers the ability to buy our products through our Resale offering. Our Closet in the Cloud offers a wide assortment of items for every occasion, from evening wear and accessories to ready-to-wear, workwear, denim, casual, maternity, outerwear, blouses, knitwear, loungewear, jewelry, handbags, activewear, ski wear, home goods and kidswear. We have served over 2.5 million lifetime customers across all of our offerings and we had             total subscribers (active and paused) as of                 , 2021. In the first six months of fiscal year 2021,                 % of our total revenue was generated by subscribers.

We have created a two-sided discovery engine: customers are finding new brands they love and brand partners are finding new customers they need. For customers, we unlock freedom of self-expression through access to our “Unlimited Closet” that has a constantly rotating supply of styles for all occasions, seasons, moods and price points. For brand partners, we enable them to grow their customer bases, their access to data and their businesses.

When our customers use Rent the Runway, they experience the magic of accessing an “Unlimited Closet” while saving money and time and reducing clothing waste. We deliver significant financial value to customers, with our average subscriber wearing clothes worth more than 20 times what she pays for a monthly RTR subscription on an annualized basis (approximately $47,000 and $37,000 in designer retail value on an annualized basis in fiscal year 2019 and for the first five months of fiscal year 2021, respectively).1 We have become an everyday utility; our most engaged subscribers

 

1 

We calculate designer retail values using original retail and/or comparable value prices. An original retail price is the price at which the manufacturer suggested that retailers in the marketplace, including department stores and specialty retailers, sell the item in new condition. A comparable value price is used for our Exclusive Designs and is based on an evaluation of prices for new comparable merchandise sold elsewhere in the marketplace.


 

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wear Rent the Runway more than 100 days per year. We believe that the convenience and access to a broad assortment of designer brands, categories and styles helps drive our strong customer engagement.

Our tremendous selection is enabled by our designer brand partnerships. We source our products directly from over 750 brand partners that include many of the most renowned and relevant names in the fashion industry. Our platform continues to be a valued launching pad for new and emerging brands and a business builder for existing brands. The transformative nature of our customer value proposition means our customers are different from other audiences our brands are exposed to. Approximately 91% of our brand partners work with us because we introduce them to new, desirable customers and deepen awareness of their brands. Over the last 12 years, we have fostered strong relationships with our brand partners and we have retained nearly 100% of our brand partners.

Our Closet in the Cloud connects our deeply engaged customers and our differentiated brand partners on a powerful platform built around our brand, data, logistics and technology advantages.

 

   

Brand Partner Advantage. Our assortment contains thousands of new, current season styles procured from our brand partners that luxury competitors simultaneously carry - all available for subscription, a-la-carte rental, and resale at much lower prices. We believe our engaged and loyal customer base paired with the data that we provide to our brand partners makes us an essential destination for many of the world’s most important brands. As we have grown, our commercial relationships with our brand partners have evolved to balance our margins and the capital needs of our business. Today, we acquire our products through three channels: Wholesale, Share by RTR and Exclusive Designs. Through Share by RTR, we acquire items directly from brand partners on consignment, at zero or low upfront cost and revenue share with our brands each time an item is rented. We leverage our data to create highly desirable Exclusive Designs in collaboration with select brand partners that we manufacture through third-party partners to be more durable and at significantly lower cost. The portion of our products sourced through Share by RTR and Exclusive Designs - our more asset-light sources - has grown from approximately 26% in fiscal year 2019 to approximately 54% in fiscal year 2020.

 

   

Data Advantage. We capture a vast amount of quality, actionable data on our customers and products. We leverage this data to create benefits for our customers (deep personalization of styles and fit), brand partners (understanding of customer demand patterns and garment lifecycle) and our business (higher subscriber lifetime value and better product return on investment).

 

   

Technology and Logistics Advantage. We have developed a proprietary operating system for the sharing economy of physical goods that pairs proprietary intelligent software with differentiated infrastructure and hardware. Our expertise in vertically integrated just-in-time reverse logistics and garment science allows us to achieve multi-year monetization on our garments. We have also built a custom front-end platform that supports subscription, a-la-carte rental and resale in one easy experience for the customer.

Since our inception, organic growth, or word-of-mouth marketing, has been a key advantage for RTR. Many of our customers publicly share their love of the Rent the Runway experience on social media and in their personal lives, which helps drive brand awareness and new customer acquisition. Because of how customers use Rent the Runway, renting bold dynamic pieces, and the confidence they feel, our clothing becomes a visual billboard and advertising for the platform. As a result, since our founding, we have spent less than 10% of total revenue on marketing, and our growth has been mostly organic.


 

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More than 88% of our customers over the last 12 years have been acquired via word-of-mouth. Our brand and deeply engaged community have allowed us to acquire customers efficiently even as we have scaled.

We generate revenue from our Subscription, Reserve and Resale offerings. The majority of revenue comes from our Subscription offering, which is highly recurring and drives customer engagement.

We have achieved the following operating and financial results:

 

   

We had 147,866 and 95,245 total subscribers at the end of fiscal year 2019 and fiscal year 2020, respectively, and 133,572 and 54,797 active subscribers (excluding paused subscribers), respectively;

 

   

Revenue was $256.9 million and $157.5 million in fiscal year 2019 and fiscal year 2020, respectively;

 

   

Gross Profit was $53.6 million and $15.6 million in fiscal year 2019 and fiscal year 2020, respectively;

 

   

Gross Profit Excluding Product Depreciation was $129.2 million and $85.4 million in fiscal year 2019 and fiscal year 2020, respectively;

 

   

Net Loss was $(154.0) million and $(171.1) million in fiscal year 2019 and fiscal year 2020, respectively; and

 

   

Adjusted EBITDA was $(18.0) million and $(20.3) million in fiscal year 2019 and fiscal year 2020, respectively.

Trends in Our Favor

We are witnessing trends that are driving consumer and brand behavior in our favor.

Consumer Trends

Some of the key trends impacting consumers in our industry include:

 

   

Shift from Ownership to Access: In 2020, access models represented 64% of the U.S. recorded music market, 71% of the U.S. home entertainment market and 17% of the U.S. hospitality market.2 Businesses such as Spotify, Netflix and Airbnb have been built in the transition to access and we believe that the apparel industry is ripe for this same disruption.

 

   

Desire for Variety and Newness: Consumers are increasingly seeking variety and newness in their wardrobes. Closets are growing and, according to the Wall Street Journal, the average consumer buys approximately 70 items of clothing per year as compared to 40 items per year in 1990.3

 

2 

Access models within the recorded music market according to Recording Industry Association of America, Year-End Music Industry Revenue Report, 2020. Access models within the home entertainment market according to Digital Entertainment Group, DEG Year-End Digital Media Entertainment Report, 2020, Access models within the hospitality market according to Euromonitor International Ltd.

3 

Wall Street Journal, Ups and Downs of U.S. Clothes Shopping, September 2014.


 

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Growth of Online Shopping: Despite the fact that closets are growing, online sales represent the fastest growing part of the apparel market. U.S. online apparel grew at a 17% CAGR between 2015 and 2020 while the broader apparel sector declined, according to Euromonitor.4

 

   

Social Media Driving Fashion: Millennials post nine selfies a week on social media, according to Now Sourcing.5 The ubiquity of fashion on social media has meant that consumers have a higher awareness of aspirational brands outside their income level.

 

   

An Increasingly Female Workforce: As of January 2021, women represented 47% of the workforce according to the U.S. Bureau for Labor Statistics and U.S. Census.6 This increasingly female workforce is spending 3x more than their male counterparts on workwear, with 50% of women feeling pressure to be “put together” at work according to a Refinery29 study.7

 

   

Importance of Sustainability: Consumers are increasingly aware of the impact their choices are making on the environment and seeking more sustainable alternatives. According to McKinsey, internet searches for “sustainable fashion” grew 3x between 2016 and 2019.8

 

   

Normalization of Secondhand: Secondhand fashion has become more mainstream, driven by its affordability, uniqueness, selection and alignment with environmental consciousness.

All designer brands, whether accessible or prestige, face challenges to grow their businesses and serve their consumers. Those challenges include:

 

   

Decline of Traditional Wholesale Channels: It is estimated that 80,000 retailers, or 9% of the 878,000 stores in the U.S. will close their doors in the next five years.9 Department stores, one-fifth of which have closed since 2018, have traditionally represented a majority of brands’ revenue, making a decline in traffic a headwind on revenue.10

 

   

Direct-to-Consumer, or DTC, as an Essential Channel for Every Brand: Given the growth in online and the challenges associated with traditional wholesale channels, brands are increasingly seeking DTC channels but often lack the financial or human capital to build them.

 

   

Larger, More Fractured Discovery Landscape: According to Publicis Sapient, 87% of shoppers today begin product searches online, meaning that younger customers are focused on direct search for brands they already know.11

 

   

Aging Consumer Base: The average age of a luxury department store customer is 51 years old, meaning it is more difficult for brand partners to reach younger customers through traditional channels.12

 

   

Heightened Competition from Mass and Fast Fashion: The desire for newness has led to enormous competition in the apparel industry from mass and fast fashion brands who can quickly

 

4 

Euromonitor International Ltd, Apparel & Footwear 2021 (“Euromonitor Apparel & Footwear 2021”). Retail Value RSP includes sales tax, current prices, year-over-year exchange rates. Apparel is defined as apparel and footwear.

5 

Now Sourcing, How Augmented Reality Has Changed Selfies Forever.

6 

U.S. Bureau for Labor Statistics, Labor Force Statistics from the Current Population Survey—Household Data Annual Averages—Employment Status of the Civilian Noninstitutional Population by Age, Sex, and Race, 2020.

7 

Triple spend on clothing according to Glamour, The Glass Runway: Our Exclusive Survey on the State of the Fashion Industry, May 2018. 50% of women according to Refinery29 and Rent the Runway, Self Expression & Dressing: Survey Findings, February 2019 (“Refinery29 Survey”).

8 

McKinsey & Co., Fashion’s New Must-Have: Sustainable Sourcing at Scale, October 2019.

9 

Quartz, What an Estimated 80,000 Store Closings Say About the Future of US Retail, April 2021.

10 

Forbes, Unprecedented Decline: One Fifth of All American Department Stores Have Closed Since 2018, July 2020.

11 

Salesforce and Publicis Sapient, Shopper First Retailing, 2018.

12 

Racked, More than 40% of Neiman Marcus Shoppers are Millionaires, August 2015.


 

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manufacture and copy styles at lower prices than designer brands. In 2020, mass market and fast fashion comprised 42% of the U.S. apparel market, up from 31% ten years ago.13

 

   

Growing Importance of Data: Data is critical to helping brands assess their product and efficiently acquire customers. Through traditional wholesale channels, brands receive very minimal data, and the data they do receive is often a season old.

Our Customer Value Proposition

Through our platform, we have helped more than 2.5 million lifetime customers discover the transformative power of utilizing our Closet in the Cloud across all of our offerings. Our customer base is diverse and spans age, household income distribution and U.S. geography.

The Magic of Rent the Runway

When our customers use Rent the Runway, they experience the magic of accessing an “Unlimited Closet” of constantly rotating styles while saving money and time and reducing clothing waste.

 

   

Variety and Discovery. With over 18,000 styles across over 750 brands and hundreds of categories available in our Closet in the Cloud, Rent the Runway gives customers the ability to always wear something new to them and encourages customers to expand their fashion tastes. We are a brand discovery engine, as our subscribers wear 54 brands in their first year, on average.

 

   

Value. Rent the Runway makes thousands of designer styles accessible to all through our Subscription offering for a flat monthly price or through our Reserve offering on a per item basis. For instance, in our most popular $135 per month eight-item subscription plan, the effective cost to the customer per item is approximately $17, for an item that would typically retail for above $350, making Rent the Runway comparable to or cheaper than many mass market and fast fashion players while offering access to authentic designer items. Approximately 60% of our subscribers report spending between $100 and $500 less per month on clothes when they have a subscription to RTR.

 

   

Self-Confidence. 83% of our subscribers say RTR makes them the most confident version of themselves at work or in social settings. Because there is no commitment to keep an item on RTR, we fuel greater self-expression for our customers. Our average subscriber receives four compliments each time she wears RTR.

 

   

Personalization and Convenience. We use our rich customer data to create a personalized storefront for customers based on their style preferences, browsing history and past rentals. Our understanding of our customer improves with each interaction, and we use our personalization algorithm to continuously tailor style recommendations. In fiscal year 2019, subscribers who used our personalized recommendations had 2.7x longer tenure.

 

   

Customer Experience and Community. Our customers are deeply engaged, as evidenced by the 22 million customer reviews submitted through June 2021. Our customers use the millions of reviews posted by our community to make smarter choices and feel good about their selections. As our community has grown, Rent the Runway has also benefited from powerful virality and word-of-mouth marketing. 81% of subscribers have shared RTR with at least five people; 32% have shared with over 20 people.

 

13 

GlobalData, Resale Report, 2021. Mass market is defined as Amazon, off-price, and value retail.


 

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Sustainability. Our success in building a rent versus buy mindset is evidenced by the fact that 83% of our subscribers have bought less fast fashion since using RTR and 89% buy fewer clothes than they used to prior to joining RTR.

Our Brand Value Proposition

We designed our platform with the intent of creating deep partnerships with designer brands, enabling them to broaden their customer base and grow their businesses. Today, we partner with more than 750 brands, including many of the most renowned and relevant names in fashion. As of January 31, 2021, no single brand partner accounted for more than 2% of active units available on site.

We procure virtually 100% of our products directly from brand partners with their explicit permission, and our business model has been built on shared success with brands. As they deepen their relationship with us, they get access to more data and more customers. Our partnerships with brands have created a significant product and cost advantage, in contrast to other secondhand resellers, and allows brands to control how they appear to a new and critical customer segment. Because we source directly from brands, we can control our assortment and acquire styles in the depths and sizes we want, we have access to current season items and all of our items are guaranteed authentic without the cost or infrastructure of traditional authentication platforms.

Brands that were on the RTR platform for five years from fiscal year 2014 through fiscal year 2019 saw the gross merchandise value, or GMV, of their products acquired by RTR increase by 293% over that time.14 We are widely recognized by the brand community as an important and growing distribution channel for their businesses.

Benefits for Brands

When our brand partners join Rent the Runway, they trust that our platform will grow their customer base, build their brand awareness and enable them to innovate their business.

 

   

Our Brand. Rent the Runway is a trusted platform for discovery and access, and we present our brand partners in an aspirational way. Brand partners appreciate that we are often a customer’s first exposure to their brand and so they trust us to provide an elevated customer experience. We are proud that we’ve retained nearly 100% of our brand relationships.

 

   

Customer Discovery and Acquisition. With over 2.5 million lifetime customers as of June 2021 across all offerings, we provide our brand partners with a new way to reach both current luxury consumers and aspirational luxury consumers. Approximately 82% of our subscribers purchased one or more brands they discovered on Rent the Runway (either from RTR or elsewhere).

 

   

Grow Their Business. We serve as an important channel for over 750 brands that see us as essential to their future business success. In fiscal year 2019, we were in the top 30% of distribution partners, by revenue, for 64% of our brands. Of our brand partners, approximately 85% believe that RTR is a growing distribution channel for their business. We have proven that we can help brands grow their businesses by attracting new customer segments.

 

14 

GMV is calculated using original retail and/or comparable value prices. An original retail price is the price at which the manufacturer suggested that retailers in the marketplace, including department stores and specialty retailers, sell the item in new condition. A comparable value price is used for our Exclusive Designs and is based on an evaluation of prices for new comparable merchandise sold elsewhere in the marketplace.


 

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More Profitable Partnership. We are a more profitable partner to brands than legacy retailers because we do not require brands to sign margin agreements with us or return-to-vendor agreements, which have historically levied brands with higher inventory risk than their retail partners.

 

   

Ability to Compete with Mass and Fast Fashion. We enable brands to compete with wear-it-once, mass and fast fashion by offering their premium products at a more accessible price point, enabling brands to connect with a broad customer base without diluting their brand.

 

   

Data. We provide our brand partners with actionable data and customer feedback that is not available via traditional wholesale channels and is differentiated from what they collect through their own DTC channels. This data allows them to adjust their designs in order to grow and optimize their businesses and manufacture styles that last longer and are more sustainable.

 

   

Sustainability. Our platform allows brands to participate in the circular economy and provides a way for them to address the secondhand market. As of June 2021, 67% of our brand partners believed that RTR is an important part of their business’s sustainability strategy.

Rent the Runway Virality and Marketing Strategy

Our brand and deeply engaged consumer base have allowed us to acquire customers efficiently. Since our founding, we have spent less than 10% of total revenue on marketing, and our growth has been mostly organic. More than 88% of our customers over the last 12 years have been acquired via word of mouth. As of June 2021, we have had close to 3 trillion earned media impressions since 2018. As we have scaled, we have seen the value of the Rent the Runway brand grow and increasingly become a significant point of differentiation with consumers and brand partners. We have an opportunity to continue to increase brand awareness and as of June 2021, our unaided brand awareness was 20% among U.S. women ages 18 - 45 with a household income of $50,000 or more.

Total Addressable Market

Apparel is a large market that is rapidly shifting online. According to Euromonitor, the U.S. apparel market was $286 billion in 2020 of which 37% or $107 billion is online. The online U.S. apparel market is expected to grow at a 12% compound annual growth rate, or CAGR, compared to the overall apparel market, which is expected to grow at a 3% CAGR between 2020 and 2025. In 2025, the U.S. apparel market is expected to be $395 billion of which 49% or $192 billion is expected to be online.15

We address the secondhand market, which is the fastest growing portion of the apparel market today. According to GlobalData, this market is at $27 billion in 2020 and is expected to increase to $77 billion in 2025, growing at a 23% CAGR. We are changing consumer purchasing behavior by creating a sharing economy for fashion and believe we will contribute to the growth of this market.

We believe we are in the early innings of this opportunity. As of the end of fiscal year 2019 and 2020, we had 147,866 and 95,245 total subscribers (which includes both active and paused), respectively. Since 2009, we have had over 2.5 million lifetime customers across all of our offerings, and as of July 31, 2021, we had over                total subscribers, representing less than                % of the total population of women aged 18 and above in the U.S.

 

15 

Euromonitor Apparel & Footwear 2021. Euromonitor International Ltd, Retailing, 2020 (“Euromonitor Retailing 2020”). Retail Value RSP includes sales tax, current prices and year-over-year exchange rates. Apparel is defined as apparel and footwear.


 

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Our Growth Strategies

The key elements of our growth strategy are:

 

   

Grow our Subscribers. With our differentiated brand and organic virality, strong funnel of new customers through Reserve and Resale and our continued focus on marketing efficiency, we are focused on growing our subscriber base.

 

   

Expand our Assortment by Adding New Brand Partners and Deepening Existing Brand Partner Relationships. We are focused on expanding our product assortment and in particular, we intend to accelerate our capex-light partnerships via Share by RTR and Exclusive Designs.

 

   

Continue to Invest in the Customer Experience. Our customer experience includes interactions online and the experience customers have offline wearing Rent the Runway. We are focused on driving continuous improvements in both areas, particularly on personalization, social features and transportation innovation.

 

   

Launch New Categories and Offerings. Our flexible membership platform and physical logistical infrastructure means that we can launch new categories and offerings that resonate with our customers and their lifestyles.

 

   

Deepen our Brand Partner Marketplace Enablement Tools. Our goal is to help our brands build bigger businesses both on and off our platform. We intend to continue to expand Share by RTR and provide more tools to our brand partners to grow their businesses and assortments across subscription, rental and resale.

 

   

Drive Leverage in Operational Efficiency. We are focused on using our data to drive actionable insights and improve key parts of our operations.

 

   

Expand Internationally. We may invest in creating a sharing economy of physical goods around the world. We may choose to do this organically or through partnerships and acquisitions.

Risk Factors Summary

Investing in our Class A common stock involves numerous risks, including the risks described in the section titled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Below are some of these risks, any one of which could materially adversely affect our business, financial condition, results of operations and prospects.

 

   

We have grown rapidly in recent years and have limited experience at our current scale of operations. If we are unable to manage our growth effectively, our brand, company culture, and financial performance may suffer.

 

   

The COVID-19 pandemic has had, and may in the future continue to have, a material adverse impact on our business.

 

   

The global fashion industry is highly competitive and rapidly changing, and we may not be able to compete effectively.

 

   

Our continued growth depends on our ability to attract new, and retain existing, customers, which may require significant investment in paid marketing channels. If we are unable to cost-effectively grow our customer base, our business, financial condition and results of operations would be harmed.


 

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If we fail to retain customers, our business, financial condition, and results of operations would be harmed.

 

   

If we are unable to accurately forecast customer demand, manage our products effectively and plan for future expenses, our operating results could be adversely affected.

 

   

Shipping and logistics are a critical part of our business and our supply chain and any changes or interruptions in shipping or logistics operations could adversely affect our operating results.

 

   

We rely heavily on the effective operation of our proprietary technology systems and software, as well as those of our third-party vendors and service providers, for our business to effectively operate and to safeguard confidential information.

 

   

We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate the material weaknesses in a timely manner, identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations, our ability to comply with applicable laws and regulations and our access to the capital markets to be impaired.

 

   

Our business is subject to a large number of U.S. and non-U.S. laws and regulations, many of which are evolving.

 

   

We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anticorruption laws, and anti-money laundering laws and regulations. Compliance with these legal standards could impair our ability to compete in domestic and international markets, and we could face criminal liability and other serious consequences for violations, which could harm our business.

 

   

Failure to adequately maintain and protect our intellectual property and proprietary rights could harm our brand, devalue our proprietary content, and adversely affect our ability to compete effectively.

 

   

We are subject to rapidly changing and increasingly stringent laws and industry standards relating to data privacy, data security, data protection, and consumer protection. The restrictions and costs imposed by these laws, or our actual or perceived failure to comply with them, could subject us to liabilities that adversely affect our business, operations, and financial performance.

 

   

We face risks associated with brand partners from whom our products are sourced or co-manufactured.

 

   

We rely on third parties for elements of the payment processing infrastructure underlying our business. If these third-party elements become unavailable or unavailable on favorable terms, our business could be adversely affected.

 

   

We depend on search engines, social media platforms, mobile application stores, content-based online advertising and other online sources to attract consumers to and promote our website and our mobile application, which may be affected by third-party interference beyond our control and as we grow our customer acquisition costs will continue to rise.

 

   

Any failure by us, our brand partners, or our third-party manufacturers to comply with our vendor code of conduct, product safety, labor, or other laws, or to provide safe factory conditions for their workers, may damage our reputation and brand, and harm our business.

 

   

The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the listing of our Class A common stock


 

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on                , including our founders, directors, executive officers, and their respective affiliates, which will limit your ability to influence the outcome of important transactions, including a change of control.

 

   

An active, liquid, and orderly market for our Class A common stock may not develop or be sustained. You may be unable to sell your shares of Class A common stock at or above the price at which you purchased them.

 

   

Our share price may be volatile, and you may be unable to sell your shares at or above the offering price.

 

   

After this offering, company insiders will continue to have the ability to control or significantly influence all matters submitted to stockholders for approval.

 

   

Our management has broad discretion in the use of the net proceeds from this offering and may not use the net proceeds effectively.

If we are unable to adequately address these and other risks we face, our business may be harmed.

Corporate Information

We were incorporated as Rent the Runway, Inc. in Delaware on March 3, 2009. Our principal executive offices are located at 10 Jay Street, Brooklyn, New York 11201. Our telephone number is (646) 832-3582. Our website address is www.renttherunway.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.

Our design logo, “Rent the Runway,” and our other registered or common law trademarks, service marks or trade names appearing in this prospectus are the property of Rent the Runway, Inc. This prospectus also contains trademarks, trade names and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Solely for convenience, our trademarks and tradenames referred to in this prospectus may appear without the ® and symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor, to these trademarks and tradenames.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise generally applicable to public companies. As a result:

 

   

we are required to have only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;

 

   

we are not required to engage an auditor to report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, the Sarbanes-Oxley Act;


 

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we are permitted to take advantage of extended transition periods for complying with new or revised accounting standards which allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies;

 

   

we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency,” and “say-on-golden parachutes;” and

 

   

we are not required to comply with certain disclosure requirements related to executive compensation, such as the requirement to disclose the correlation between executive compensation and performance and the requirement to present a comparison of our Chief Executive Officers’ compensation to our median employee compensation.

We may take advantage of these reduced reporting and other requirements until the last day of our fiscal year following the fifth anniversary of the completion of this offering, or such earlier time that we are no longer an emerging growth company. If certain events occur prior to the end of such five-year period, including if we have more than $1.07 billion in annual gross revenue, have more than $700 million in market value of our Class A common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period, we will cease to be an emerging growth company prior to the end of such five-year period. We may choose to take advantage of some but not all of these reduced requirements. We have elected to adopt the reduced requirements with respect to our financial statements and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure. We also have elected to take advantage of the extended transition periods for complying with new or revised accounting standards. As a result, the information that we provide to stockholders may be different than the information you may receive from other public companies in which you hold equity.


 

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THE OFFERING

 

Shares of Class A common stock offered by us

                   shares (             shares if the underwriters exercise in full their option to purchase additional shares).

Shares of Class A common stock to be outstanding after this offering

  


                shares (             shares if the underwriters exercise in full their option to purchase additional shares).

Shares of Class B common stock to be outstanding after this offering

  


                shares.

Total shares of Class A common stock and Class B common stock to be outstanding after this offering

  



                shares (             shares if the underwriters exercise in full their option to purchase additional shares).

Over-allotment option to purchase additional shares of Class A common stock

  


                shares.

Use of proceeds

   We estimate, based upon an assumed initial public offering price of $         per share (which is the midpoint of the price range set forth on the cover page of this prospectus), that we will receive net proceeds from this offering of approximately $         million (or $         million if the underwriters exercise in full their option to purchase additional shares), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for working capital, to fund growth and for other general corporate purposes. We will have broad discretion in the way that we use the net proceeds of this offering. See “Use of Proceeds.”

Voting rights

   Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to votes per share and is convertible into one share of Class A common stock at any time. Holders of shares of our Class A common stock and Class B common stock will vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders except as otherwise provided in our amended and restated certificate of incorporation or as required by applicable law. Immediately following the completion of this offering, shares of Class A common stock will collectively represent

 

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   approximately     % of our total issued and outstanding shares and     % of the voting power attached to all of our issued and outstanding shares (or     % and     %, respectively, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and shares of Class B common stock will collectively represent approximately     % of our total issued and outstanding shares and     % of the voting power attached to all of our issued and outstanding shares (or     % and     %, respectively, if the underwriters exercise in full their option to purchase additional shares of Class A common stock). See “Description of Capital Stock” for additional information.

Dividend policy

   We do not expect to pay any dividends on our common stock for the foreseeable future. See “Dividend Policy.”

Risk factors

   Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 20 and other information included in this prospectus for a discussion of factors you should carefully consider before investing in our Class A common stock.

Proposed trading symbol

   “                 .”

The number of shares of Class A common stock and Class B common stock to be outstanding after this offering is based on                shares of our Class A common stock and                shares of our Class B common stock outstanding as of                , 2021, after giving effect to the automatic conversion of all outstanding shares of our redeemable preferred stock into                shares of our Class A common stock upon closing of this offering, and excludes:

 

   

            shares of Class A common stock issuable upon exercise of stock options outstanding as of                , 2021 under our 2009 Stock Incentive Plan, as amended, or the 2009 Plan, at a weighted average exercise price of $                per share;

 

   

            shares of Class A common stock issuable upon exercise of stock options outstanding as of                , 2021 under our 2019 Stock Incentive Plan, as amended, or the 2019 Plan, at a weighted average exercise price of $                per share;

 

   

            restricted stock units, or RSUs, covering                shares of Class A common stock as of                 , 2021, which are issuable upon satisfaction of service-based and liquidity-based vesting conditions;

 

   

            shares of Class A common stock issuable upon exercise of stock options outstanding as of                , 2021, granted to early participants of our “designer collective,” or the Designer Collective Grants, at a weighted average exercise price of $                per share;

 

   

            shares of Class A common stock reserved for future issuance under our 2021 Incentive Award Plan, or the 2021 Plan, which will become effective on the date immediately prior to the date our registration of which this prospectus forms a part becomes effective, as described in “Executive Compensation—Equity Compensation;”


 

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the exercise of warrants to purchase                 shares of Class A common stock, which will result in the net issuance of                 shares of Class A common stock in connection with this offering; and

 

   

            shares of Class A common stock issuable upon the exercise of warrants outstanding as of                 , 2021 with an exercise price of $                 per share.

Unless we indicate otherwise or the context otherwise requires, all information in this prospectus assumes or gives effect to:

 

   

the filing and effectiveness of our amended and restated certificate of incorporation, or Amended Charter, and the adoption of our amended and restated bylaws, or Amended Bylaws, each of which will occur upon closing of this offering;

 

   

the automatic conversion of all outstanding shares of our redeemable preferred stock into                shares of our Class A common stock, upon closing of this offering;

 

   

no exercise of the outstanding options or settlement of outstanding RSUs described above after                , 2021;

 

   

no exercise by the underwriters of their option to purchase up to                additional shares of Class A common stock from us; and

 

   

an initial public offering price of $                per share of Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus.


 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The summary consolidated statements of operations data for the years ended January 31, 2020 and 2021 and the summary consolidated balance sheet data as of January 31, 2021 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of our results in any future period.

You should read the following summary consolidated financial data together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Year Ended January 31,  
     2020     2021  
     (in thousands, except share
and per share data)
 

Consolidated Statements of Operations Data:

    

Revenue:

    

Subscription and Reserve rental revenue

   $ 235,417     $ 135,895  

Other revenue

     21,449       21,604  
  

 

 

   

 

 

 

Total revenue, net

     256,866       157,499  

Costs and expenses:

    

Fulfillment

     118,111       52,951  

Technology

     40,186       37,657  

Marketing

     22,913       8,146  

General and administrative

     98,876       77,229  

Rental product depreciation and revenue share

     85,185       88,975  

Other depreciation and amortization

     21,580       23,036  
  

 

 

   

 

 

 

Total costs and expenses

     386,851       287,994  
  

 

 

   

 

 

 

Operating loss

     (129,985     (130,495

Interest income / (expense), net

     (24,048     (46,621

Other income / (expense), net

     (74     6,035  
  

 

 

   

 

 

 

Net loss before benefit from income taxes

     (154,107     (171,081

Benefit from income taxes

     151       1  
  

 

 

   

 

 

 

Net loss

   $ (153,956   $ (171,080
  

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(1)

   $ (14.04   $ (15.36
  

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted(1)

     10,964,634       11,138,851  
  

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

     $    
    

 

 

 

Weighted-average shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

    
    

 

 

 

 

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(1)

See Note 14 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate our basic and diluted net loss per share and the weighted-average number of shares used in the computation of the per share amounts.

(2)

Pro forma net loss per share gives effect to the automatic conversion of all of our outstanding shares of redeemable preferred stock into an aggregate of shares of Class A common stock.

 

     As of January 31, 2021  
     Actual     Pro
Forma(2)
     Pro Forma As
Adjusted(2)(3)
 
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 95,260     $                    $                

Working capital(1)

     62,745       

Total assets

     320,768       

Redeemable preferred stock

     388,072       

Accumulated deficit

     (589,373     

Total stockholders’ deficit

     (526,615     

 

(1)

Working capital is defined as current assets less current liabilities.

(2)

Gives effect to the automatic conversion of all of our outstanding shares of redeemable preferred stock into an aggregate of                shares of Class A common stock, upon closing of this offering.

(3)

Gives effect to (i) the pro forma adjustments set forth in footnote (2) above and (ii) the issuance and sale of             shares of our Class A common stock in this offering at the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease, as applicable, in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of cash and cash equivalents, total assets and total stockholders’ deficit on a pro forma basis by approximately $             million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each 1,000,000 share increase or decrease, as applicable, in the number of shares offered in this offering would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $             million, assuming that the price per share for the offering remains at $             (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.


 

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Key Business and Financial Metrics

In addition to the measures presented in our consolidated financial statements, we use the following key business and financial metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. The calculation of the key business and financial metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts or investors. Each key business and financial metric should be considered in conjunction with other metrics and components of our results of operations, such as each of the other key business and financial metrics and our revenue, fulfillment and net loss.

 

     Year Ended January 31,  
     2020     2021  
     ($ in thousands)  

Active subscribers (at the end of period)

     133,572       54,797  

Gross profit

   $ 53,570     $ 15,573  

Gross profit excluding product depreciation

   $ 129,249     $ 85,408  

Adjusted EBITDA

   $ (18,033   $ (20,338

Each of Gross Profit Excluding Product Depreciation and Adjusted EBITDA is a non-GAAP financial measure. See below for a reconciliation of Gross Profit Excluding Product Depreciation and Adjusted EBITDA to each of their most directly comparable GAAP financial measures, gross profit and net loss, respectively. For additional information about, and the definitions of, our key business and financial metrics and why we consider Gross Profit Excluding Product Depreciation and Adjusted EBITDA to be useful metrics, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Key Business and Financial Metrics” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Metrics.”

Non-GAAP Financial Metrics

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial metrics are useful in evaluating our performance. These non-GAAP financial metrics are not meant to be considered as indicators of our financial performance in isolation from or as a substitute for our financial information prepared in accordance with GAAP and should be read only in conjunction with financial information presented on a GAAP basis. There are limitations to the use of the non-GAAP financial metrics presented in this prospectus. For example, our non-GAAP financial metrics may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial metrics differently than we do, limiting the usefulness of those measures for comparative purposes.

Reconciliations of each of the below non-GAAP financial metrics to its most directly comparable GAAP financial measure are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial metrics for each of the periods presented. In future periods, we may exclude similar items, may incur income and expenses similar to these excluded items, and may include other expenses, costs and non-recurring items.

We use Gross Profit Excluding Product Depreciation to measure our total variable profit excluding non-cash expenses as an indicator of the cash gross profit available to cover our costs and expenses and capital expenditures.

We use Fulfillment Profit to measure the efficiency of inbound, outbound and processing costs. We use Contribution Profit as a key measure of our overall efficiency, including fulfillment expense, total product costs and credit card fees.


 

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The following table presents a reconciliation of total revenue, net, the most comparable GAAP financial measure, to each of Fulfillment Profit, Gross Profit Excluding Product Depreciation, and Contribution Profit, respectively, for the years ended January 31, 2020 and 2021:

 

     Year Ended January 31,  
     2020      2021  
     (in thousands)  

Total revenue, net

   $ 256,866      $ 157,499  

Fulfillment

     118,111        52,951  
  

 

 

    

 

 

 

Fulfillment profit

     138,755        104,548  

Revenue share

     9,506        19,140  
  

 

 

    

 

 

 

Gross profit excluding product depreciation

     129,249        85,408  

Rental product depreciation

     75,679        69,835  
  

 

 

    

 

 

 

Gross profit

     53,570        15,573  

Credit card processing fees

     8,208        4,404  
  

 

 

    

 

 

 

Contribution profit

     45,362        11,169  

Technology

     40,186        37,657  

Marketing

     22,913        8,146  

General and administrative (excluding credit card processing fees)

     90,668        72,825  

Other depreciation and amortization

     21,580        23,036  
  

 

 

    

 

 

 

Operating loss

   $ (129,985    $ (130,495

Adjusted EBITDA is included in this prospectus because it is a key performance measure used by management to assess our operating performance and the operating leverage of our business.

The following table presents a reconciliation of net loss, the most comparable GAAP financial measures, to Adjusted EBITDA, for the years ended January 31, 2020 and 2021 (amounts in thousands):

 

     Year Ended January 31,  
     2020      2021  
     (in thousands)  

Net loss

   $ (153,956    $ (171,080

Interest (income) / expense, net(1)

     24,048        46,621  

Rental product depreciation

     75,679        69,835  

Other depreciation and amortization(2)

     21,580        23,036  

Stock compensation(3)

     6,766        8,190  

Write-off of liquidated assets(4)

     4,121        3,287  

Non-recurring adjustments(5)

     3,781        4,169  

Benefit from income taxes

     (151      (1

Other (income) / expense, net

     74        (6,035

Other (gains) / losses(6)

     25        1,640  
  

 

 

    

 

 

 

Adjusted EBITDA

   $ (18,033    $ (20,338
  

 

 

    

 

 

 

 

(1)

Includes debt discount amortization of $3.2 million in fiscal year 2019 and $5.1 million in fiscal year 2020.

(2)

Includes non-rental product depreciation and capitalized software amortization.


 

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(3)

Reflects the non-cash expense for stock-based compensation.

(4)

Reflects the write-off of the remaining book value of liquidated products that had previously been held for sale.

(5)

Fiscal year 2019 Non-recurring adjustments includes $2.8 million of costs related to a September 2019 software outage and $1.0 million related to legal costs and settlements. Fiscal year 2020 Non-recurring adjustments includes $3.2 million of costs associated with COVID-19-related matters including severance, furlough benefits, one-time bonuses and related legal fees and $0.5 million of shipping carrier transition costs.

(6)

Includes costs associated with the write-off of asset disposals, operating lease termination and foreign exchange.


 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this prospectus, including our consolidated financial statements and related notes appearing elsewhere in this prospectus, before making an investment decision. The risks described below are not the only ones we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition, or results of operations. In such case, the trading price of our Class A common stock could decline, and you may lose some or all of your original investment. In addition, the impacts of the COVID-19 pandemic may exacerbate the risks described below as well as risks and uncertainties not presently known to us.

Risks Related to Our Business and Industry

We have grown rapidly in recent years and have limited experience at our current scale of operations. If we are unable to manage our growth effectively, our brand, company culture, and financial performance may suffer.

We have grown rapidly over the last several years, due in large part to the growth in demand for our subscription offerings, and therefore, our recent growth rates and financial performance should not necessarily be considered indicative of our future performance. Although the COVID-19 pandemic has materially adversely affected our fiscal year 2020 operating and financial results, resulting in our total revenue decreasing 38.7% from $256.9 million in fiscal year 2019 to $157.5 million, our revenue increased                % from $                million for the six months ended July 31, 2020 to $                million for the six months ended July 31, 2021 and we may experience significant growth in the future. To effectively manage and capitalize on our growth, we must continue to expand our brand awareness and marketing, enhance customer experience, iterate our subscription products, invest in digital consumer innovation, and upgrade our management information and reverse logistics systems and other processes. Our continued growth has in the past, and could in the future, strain our existing resources, and we could experience ongoing operating difficulties in managing our business across numerous jurisdictions, including difficulties in hiring, training, and managing a diverse and growing employee base. Failure to scale and preserve our company culture as we grow could also harm our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.

Our growth strategy is focused on continuing to grow and retain our subscriber and customer base, expanding our brand partner relationships and product assortment, increasing our brand awareness, advertising and other marketing spending, and continuing to invest in our offerings and technology. For the six months ended July 31, 2021, over                % of our total revenue was generated by our subscribers. Our base subscription plans range from $89 to $199 per month and customers can customize their subscription monthly by purchasing additional slots and shipments. Our subscriptions renew automatically on a monthly basis and the subscribers may disable automatic renewal by canceling their subscription prior to the next month’s bill date. Customers may also pause their subscriptions for one to three months at a time. As a result, even though a significant number of subscribers have historically renewed their monthly subscription, there can be no assurance that we will be able to retain a significant portion of subscribers beyond the existing monthly subscription periods. In addition, any limitation or restriction imposed on our ability to bill our subscribers on a recurring basis, whether due to new regulations or otherwise, may significantly lower our subscription retention rate. We also offer our customers the option to rent items via our Reserve offering a-la-carte for four or eight days at individual rates and we provide resale offerings allowing customers to purchase pre-loved items. Our plans and offerings do not have demonstrably long track records of success and may not grow as much or as fast as we expect. If our growth rate declines, investors’ perception of our business, financial condition and results of operations may be adversely affected. To

 

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the extent our growth rate slows, our business performance will become increasingly dependent on our ability to retain revenue from existing subscribers and increased sales to existing customers.

The fashion industry is rapidly evolving and our business may not develop as we expect. Overall growth of our revenue will depend on a number of factors, including our ability to:

 

   

change traditional consumer buying habits and normalize clothing rental and resale;

 

   

price our subscription, a-la-carte and resale offerings so that we are able to attract new customers, and retain and expand our relationships with existing customers;

 

   

accurately forecast our revenue and plan our fulfillment and operating expenses;

 

   

ensure that we maintain an adequate depth and breadth of available products to meet evolving customer demands and respond swiftly and appropriately to new and changing styles, trends or desired consumer preferences;

 

   

successfully transition from “unlimited” subscriptions to usage-based subscription plans at different price points;

 

   

successfully maintain and grow our relationships with existing and new brand partners, including continuing to grow our Share by RTR and Exclusive Design offerings;

 

   

avoid disruptions in acquiring and distributing our products and offerings;

 

   

provide customers with a high-quality experience, including customer service and support that meets their needs;

 

   

maintain and enhance our reputation and the value of our brand;

 

   

hire, integrate and retain talented personnel across all levels of our organization;

 

   

successfully compete with other companies that are currently in, or may in the future enter, the industry or the markets in which we operate, and respond to developments from these competitors such as pricing changes and the introduction of new offerings;

 

   

comply with existing and new laws and regulations applicable to our business;

 

   

successfully expand into new and penetrate existing geographic markets in the United States;

 

   

successfully develop new offerings and innovate and enhance our existing offerings and their features, including in response to new trends, competitive dynamics or the needs of customers and subscribers;

 

   

effectively manage growth of our business, personnel, and operations, including expanding our shipping and distribution network and fulfillment center operations, as well as our logistics footprint and the number of facilities we operate in the future;

 

   

effectively manage our costs related to our business and operations;

 

   

avoid or manage interruptions in our business from information technology downtime, cybersecurity incidents and other factors that could affect our physical and digital infrastructure; and

 

   

successfully identify and acquire, partner or invest in products, technologies, or businesses that we believe could complement or expand our business.

Because we have a limited history operating our business at its current scale, it is difficult to evaluate our current business and future prospects, including our ability to plan for and model future growth. Our limited operating experience at this scale, combined with the rapidly evolving nature of the market in which we sell our offerings, substantial uncertainty concerning how these markets may

 

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develop, and other economic factors beyond our control, reduces our ability to accurately forecast quarterly or annual revenue. Failure to manage our future growth effectively could have an adverse effect on our business, financial condition, and results of operations.

We also expect to continue to expend substantial financial and other resources to grow our business, and we may fail to allocate our resources in a manner that results in increased revenue growth in our business. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our business, financial condition, and results of operations may be harmed, and we may not achieve or sustain profitability in the future.

The COVID-19 pandemic has had, and may in the future continue to have, a material adverse impact on our business.

The COVID-19 pandemic and the travel restrictions, quarantines, and related public health measures and actions taken by governments and the private sector have adversely affected global economies, financial markets and the overall environment for our business, and the extent to which it may continue to impact our future results of operations and overall financial performance remains uncertain. The global macroeconomic effects of the pandemic may persist for an indefinite period of time, even after the pandemic has subsided. In addition, we cannot predict the impact the COVID-19 pandemic has had and will have on our brand partners, third-party vendors and service providers, and we may continue to be materially adversely impacted as a result of the negative past, present and future impact upon our brand partners, third-party vendors and service providers.

The COVID-19 pandemic has materially adversely affected our fiscal year 2020 operating and financial results due to the occurrence of the following events or circumstances, among others:

 

   

the global shelter-in-place restrictions significantly reduced our number of active subscribers and engagement with all of our offerings because of the decrease in special events, social gatherings and interactions outside the home;

 

   

a significant number of subscribers paused or canceled their subscriptions or downgraded to lower-priced plans, and we experienced significant decreased demand for our a-la-carte offering and customers canceled their existing orders for special events;

 

   

subscribers engaged less, which impacted the success of our organic marketing and reduced the volume of our data and business insights;

 

   

disruptions of the operations of our brand partners and delays in shipment and delivery of our products;

 

   

pausing all of our paid marketing spend and eliminating or significantly reducing investments in growth initiatives;

 

   

carrying more products relative to customer demand, negatively impacting gross margins;

 

   

performance-based revenue share payments to brands were decreased due to lower total revenue, impacting our brand partner relationships and value proposition;

 

   

implementing temporary salary cuts, employee layoffs and furloughs, and pausing recruiting efforts, which negatively impacted employee morale and resulted in an increase in regrettable employee attrition; and

 

   

the closure of our brick-and-mortar retail stores, which was perceived negatively by some customers.

As the recovery period continues, particularly in the United States, and shelter-in-place orders and travel advisories are lifted, the effects of the COVID-19 pandemic, including the identification and spread of new variants of the virus, may continue to have a negative impact on our business

 

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operations and long-term financial results of operations due to the occurrence of the following events or circumstances, among others:

 

   

the difficulty in accurately predicting the timing and pace of our business recovery, particularly increased demand, subscriber levels, and Reserve and resale orders, leading to potentially over-spending and lower profitability if recovery is not as strong as or when we expected;

 

   

our inability to meet increased demand and provide an optimal customer experience as a result of difficulty in hiring additional employees, particularly in our fulfillment, operations and customer experience functions;

 

   

continuing disruptions of the operations of our brand partners, which could impact our ability to acquire an adequate depth and breadth of products at favorable prices in a timely manner to match demand;

 

   

our ability to efficiently re-start our paid marketing efforts; and

 

   

possible resurgences of the COVID-19 pandemic, including as a result of new variants of the virus or otherwise, that lead to new or additional shelter-in-place orders and/or travel advisories, which may dampen future demand for our products and offering.

The continued scope and duration of the pandemic, whether additional actions may be taken to contain the virus, the impact on our customers and partners, the speed and extent to which markets fully recover from the disruptions caused by the pandemic, and the impact of these factors on our business, will depend on future developments that are highly uncertain and cannot be predicted with confidence. In addition, to the extent COVID-19 adversely affects our operations and global economic conditions more generally, it may also have the effect of heightening many of the other risks described in these Risk Factors.

Although we anticipate that our operating results in future fiscal years will begin to reflect a more normal operating environment, the current economic and public health climate has created a high degree of uncertainty and there is no assurance that our scale, number of customers and revenue will return to or surpass pre-pandemic levels for a sustained period of time. As such, we continue to closely monitor this global health crisis and will continue to reassess our strategy and operational structure on a regular, ongoing basis as the situation evolves. See “Management’s Discussion and Analysis of Financial Position and Results of Operations” for more details on the impact of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we have experienced to date.

The global fashion industry is highly competitive and rapidly changing, and we may not be able to compete effectively.

We compete with other fashion rental companies and also with a range of traditional and online retail and resale fashion companies and we expect competition to continue to increase in the future. To be successful, we need to continue to attract and retain customers and brand partners.

We believe our ability to compete effectively depends on many factors within and beyond our control, including:

 

   

our ability to normalize fashion rental and change traditional retail shopping habits and norms;

 

   

how effectively differentiated our offerings and value proposition are from those of our competitors;

 

   

how effectively we market and communicate how to use our subscription and Reserve offerings;

 

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our ability to expand and maintain an appealing depth and breadth of our products to meet customer demand;

 

   

our ability to attract new brand partners and retain existing brand partners in our Share by RTR and Exclusive Design programs and acquire products on favorable and efficient terms;

 

   

the speed and cost at which we can deliver products to our customers and the ease with which they can return our products;

 

   

the effectiveness of our customer service;

 

   

further developing our data science capabilities for brand partners;

 

   

maintaining favorable brand recognition and effectively marketing our services to customers;

 

   

the amount, diversity, and quality of brands that we or our competitors offer;

 

   

the price at which we are able to offer our rental and resale offerings;

 

   

the success of our reverse-logistics processes in delivering products in good condition to customers; and

 

   

anticipating and successfully responding to changing apparel trends and consumer shopping preferences.

Many competitors or potential competitors may have longer operating histories, greater brand recognition, existing consumer and supplier relationships and significantly greater financial, marketing and other resources. In addition, they may be able to innovate and provide products and services faster and with more selection than we can. They may be willing to price their products and services more aggressively in order to gain market share or generally employ a low-cost pricing model. In addition, brands set pricing for their own new retail items, which can include promotional discounts that may adversely affect the relative value of rental and/or resale items offered by us, and, in turn, our revenue, results of operations and financial condition.

Additional competitors are expanding and may continue to expand into the rental and resale space in which we operate and we remain vulnerable to the marketing power and high level of customer recognition of these larger competitors and to the risk that these competitors or other smaller entrants could attract our customer base. Some of our potential competitors are vertically integrated and are also engaged in the manufacture and distribution of clothing. These competitors may advantageously leverage this structure to gain market share and certain vertically-integrated organizations with significant market power could potentially utilize this power to make it more difficult for us to compete.

Furthermore, we are revolutionizing the fashion industry by changing the way women get dressed. Although we believe that there are numerous trends in our favor that support the continued growth and success of online fashion rental, changing traditional retail and e-commerce shopping habits is difficult, particularly the shift from an ownership to an access model. Our business model may not achieve acceptance as broadly and within the time frame that we expect by customers and brand partners. In addition, the trends in our favor may evolve and no longer provide compelling support for our business model. If online fashion rental does not achieve broad acceptance by consumers and our brand partners, our growth could be limited and our competitiveness hampered.

Our inability to respond effectively to competitive pressures, improved performance by our competitors, failure to achieve broad acceptance and changes in the fashion retail markets could result in lost market share and have a material adverse effect on our business, financial condition, and results of operations.

Our continued growth depends on our ability to attract new, and retain existing, customers, which may require significant investment in paid marketing channels. If we are

 

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unable to cost-effectively grow our customer base, our business, financial condition and results of operations would be harmed.

The growth of our business is dependent upon our ability to continue to grow by cost-effectively adding new customers. Historically, a substantial portion of new customer acquisition has originated from organic word-of-mouth and other non-paid referrals. Although we will continue to encourage customer engagement, loyalty, and word-of-mouth referrals, there is no guarantee that we will be successful and our organic growth may decline. Paid marketing is also a key part of our growth strategy and while we paused paid marketing as a result of COVID-19, we plan to significantly increase spending and run marketing campaigns to acquire additional subscribers and customers, all of which could impact our overall profitability. We may incur marketing expenses significantly in advance of the time we anticipate recognized revenue associated with such expenses, our paid marketing may not effectively reach potential customers, changes in regulations or third-party interference could limit the ability of search engines and social media platforms for marketing, they may decide not to rent through our platform or the spend of new customers may not yield the intended return on investment, any of which could negatively affect our results of operations. Moreover customer preferences may change and customers may not rent through our platform as frequently or spend as much with us. If we are not able to continue to expand our customer base through cost-effective methods, our revenue may grow slower than expected or decline. Relatedly, an inability to attract and retain customers could harm our ability to attract and retain brand partners, who may decide to partner with alternative platforms.

If we fail to retain customers, our business, financial condition, and results of operations would be harmed.

A high proportion of our revenue comes from highly engaged subscribers. For the six months ended July 31, 2021, over                % of our total revenue was generated by our subscribers. A decrease in the number of existing customers or a reduction in the amount existing customers spend on our offerings could negatively affect our operating results.    

Our number of customers and the amounts they spend on our offerings may decline materially or fluctuate as a result of many factors, including, among other things:

 

   

the quality, consumer appeal, price, and reliability of our offerings;

 

   

our ability to quality control the products delivered to our customers;

 

   

ensuring on-time delivery of orders;

 

   

a negative customer service experience;

 

   

intense competition in the fashion industry;

 

   

negative publicity that impacts our brand and reputation;

 

   

changes in consumer preferences regarding the use of pre-loved apparel;

   

lack of market acceptance of our business model;

 

   

the unpredictable nature of the impact of the COVID-19 pandemic or a future outbreak of disease or similar public health concern;

 

   

the failure (or perceived failure) to meet customer expectations regarding our environmental, social and governance, or ESG, initiatives;

 

   

changes in efficiency of our historic or current customer acquisition methods; or

 

   

dissatisfaction with changes we make to our offerings and products.

If existing customers no longer find our offerings and products appealing or appropriately priced or if we are unable to provide high-quality support to customers to help them resolve issues in a timely and acceptable manner, they may stop using our offerings, negative publicity may be generated and

 

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word-of-mouth and other referrals may be hampered. Even if our existing customers continue to find our offerings and products appealing and our customer service satisfactory, they may decide to downgrade to a less frequent, lower cost subscription and rent fewer items over time as their demand for apparel and accessories declines. For example, as a result of changes to daily life due to the COVID-19 pandemic, including increased rates of working remotely from home, many customers’ demand for a variety of apparel was, and in the future may be, reduced or eliminated. If customers who rent most frequently and rent a significant amount of items from us were to make fewer or lower priced rentals or stop using our offerings, our financial results could be negatively affected.

If we fail to anticipate and respond successfully to new and changing fashion trends and consumer preferences, our business could be harmed.

Our success is, in large part, dependent upon our ability to identify fashion trends, predict and gauge the tastes of our customers, and provide availability of items and a service that satisfies customer demand in a timely manner. However, lead times for many of our purchasing decisions may make it difficult for us to respond rapidly to new or changing apparel trends or customer acceptance of products chosen by us. In addition, external events may disrupt or change customer preferences and behaviors in ways we are not able to anticipate. For example, the COVID-19 pandemic has resulted in significant changes to daily life, working arrangements, and social events, which has impacted the type of apparel our customers seek to rent. We generally enter into purchase contracts in advance of anticipated rentals and typically before apparel trends are confirmed by customer rentals. We have not always predicted our customers’ preferences and acceptance levels of our products with accuracy.

Additionally, our success is dependent on the ability of our brand partners to anticipate, identify and respond to the latest fashion trends and consumer demands and to translate such trends and demands into product options in a timely manner. The failure of our brand partners to anticipate, identify or respond swiftly and appropriately to new and changing styles, trends or desired consumer preferences, to accurately anticipate and forecast demand for certain product offerings or to provide relevant and timely product offerings to rent on our platform may lead to lower demand for our offerings, which could have a material adverse effect on our business and financial condition.

Further, although we use our data and business insights to predict our customers’ preferences and gauge demand for our products, there is no guarantee that our data and business insights will accurately anticipate demand. To the extent we misjudge the market for the service we offer or fail to execute on trends and deliver attractive products to customers, we may not attract and retain customers effectively and our operating results will be adversely affected.

We have a history of losses, and we may be unable to achieve or sustain profitability.

We had a net loss of $171.1 million for the year ended January 31, 2021 and have in the past had net losses. As of January 31, 2021, we had an accumulated deficit of $589.4 million. Because we have a short operating history at scale, it is difficult for us to predict our future operating results. We will need to generate and sustain increased revenue and manage our costs to achieve profitability. Even if we do, we may not be able to sustain or increase our profitability.

Our ability to generate profit depends on our ability to grow revenues and drive operational efficiencies in our business to generate better margins. We expect to incur increased operating costs and may continue to generate net losses in the near term in order to:

 

   

acquire products;

 

   

increase the engagement of customers;

 

   

drive customer acquisition and brand awareness through marketing and promotional initiatives;

 

   

enhance our website and mobile offerings and functionality; and

 

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invest in our operations, including our logistics fulfillment and capacity, to support the growth in our business.

We may discover that these initiatives are more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these expenses or realize the benefits we anticipate. We will also face greater compliance costs associated with the increased scope of our business and being a public company. Any failure to adequately increase revenue or manage operating costs could prevent us from achieving or sustaining profitability. We may not realize the operating efficiencies we expect to achieve through our efforts to scale the business, reduce friction in the rental experience, and optimize costs. As such, due to these factors and others, we may not be able to achieve or sustain profitability in the near term or at all. If we are unable to achieve or sustain profitability, the value of our business and the trading price of our Class A common stock may be negatively impacted.

If we are unable to accurately forecast customer demand, manage our products effectively and plan for future expenses, our operating results could be adversely affected.

We are vulnerable to demand and pricing shifts and to suboptimal selection and timing of product purchases. We obtain substantially all of our products directly from over 750 brand partners through purchasing products from our brand partners typically at a discount to wholesale cost, or Wholesale, acquired directly from brand partners on consignment at low upfront cost, with performance- based revenue share payments to our brand partners over time, or Share by RTR, and designing items using our data in collaboration with our brand partners and manufacturing items through third-party partners, or Exclusive Designs, arrangements with designer or manufacturing partners. For our business to be successful, our brand partners must be willing and able to provide us with products in specific quantities and styles of sufficient quality, in compliance with regulatory requirements, at acceptable costs and on a timely basis. We typically do not enter into long-term contracts with our brand partners and, as such, we operate without significant contractual assurances of continued supply, pricing or access to products. Although we believe we have had limited attrition of brand partners to date, a brand partner could choose to no longer work with us or provide less favorable terms for a variety of reasons, including as a result of the COVID-19 pandemic and resulting impacts. In addition, some of our brand partners may not have the capacity to supply us with sufficient products to keep pace with our growth plans, especially if we plan to demand significantly greater amounts of products. In such cases, our ability to pursue our growth strategy will depend in part upon our ability to expand capacity with existing brand partners or develop new brand partners relationships.

In fiscal years 2019 and 2020, we expanded our relationships with brand partners and increased the proportion of our products procured under Share by RTR, and Exclusive Designs arrangements, which reduced our upfront cost of products. For Wholesale and Share by RTR items, entering into contracts in advance of a particular season requires brand partners to agree to incur costs related to manufacturing products before we have paid for it, which requires the brand partner and brands to continue to trust us. If we were viewed as less financially viable, we may receive less favorable terms and conditions from our brand partners, including requiring upfront payments or other demonstrations of credit. The cash flow benefits we currently experience from our brand partners’ willingness to revenue share could be adversely affected if revenue share terms change or if brand partners no longer wish to revenue share due to (1) lack of trust in us, (2) lack of revenue earned in comparison to the projections we provided, (3) their inability to continue to spread their earnings out over the time period that the products are earning revenue on our site, among other reasons. For our Exclusive Design arrangements, we must continue to increase the number of brand partners with whom we work, design an assortment of styles that meet customer demand, maintain and enhance our third-party manufacturing capabilities and partners and ensure the products manufactured meets brand partners’ and our quality standards. Our ability to obtain a sufficient selection or volume of Share by RTR

products on a timely basis at competitive prices could suffer as a result of any deterioration or change in our brand partner relationships or events that adversely affect our partners.

 

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We also source products directly from brand partners outside of the United States, including Europe, Asia and around the globe. Global sourcing and foreign trade involve numerous factors and uncertainties beyond our control including increased shipping costs, the imposition of additional import or trade restrictions, including legal or economic restrictions on overseas brand partners’ ability to produce and deliver products, increased custom duties and tariffs, unforeseen delays in customs, more restrictive quotas, loss of a most favored nation trading status, currency exchange rates, transportation delays, foreign government regulations, political instability and economic uncertainties in the countries from which we or our brand partners source our products. As a result of the COVID-19 pandemic, most of our products sourcing in fiscal years 2020 and 2021 was handled remotely via video and teleconference instead of in-person. Future extended disruptions in travel and the ability to source products in-person may not be successful, and our partners may continue to face challenges in capital availability, which could lead to reduced or suboptimal products and harm our business. In addition, negative press or consumer sentiment about internationally sourced products may lead to reduced demand for our products. These and other issues affecting our international brand partners or internationally sourced products could have a material adverse effect on our business, financial condition, and results of operations.

In addition, we rely on our merchandising team to order styles that our customers will rent and we rely on our data science to inform the levels of and which products we purchase, including when to reorder items that are renting well and when to sell or write-off items that are not renting well. If our teams do not predict customer demand and tastes well or if our algorithms do not help us reorder the right products or write off the right products timely, we may not effectively manage our products and our operating results could be adversely affected.    

Furthermore, we must execute our cleaning and repair protocols and reverse logistics operations efficiently and at a significant scale to maximize the utilization of units and reduce the number of units purchased, the failure of which may adversely affect our operating results. We cannot control products while they are out of our possession or prevent all damage while in our fulfillment centers, during shipping, or while with customers, third-party suppliers or partners. We may incur additional expenses and our reputation could be harmed if customers and potential customers believe that our products are not of high quality or may be damaged.

If we are not able to keep pace with technological changes and enhance our current offerings and develop new offerings to respond to the changing needs of partners and customers, our business, financial performance, and growth may be harmed.

Our industry is characterized by rapidly changing technology, new service and product introductions, and changing customer demands and preferences, and we are not able to predict the effect of these changes on our business. The technologies that we currently use to support our business platform may become inadequate or obsolete, and the cost of incorporating new technologies into our offerings and services may be substantial. Any failure by us to adequately integrate technological developments in our approach to data management could harm our ability to leverage data, including customer data, collected through our technology and our systems, which could have a negative effect on our business. If we are unable to adequately utilize our data in support of our operations due technical or other limitations, our ability to drive leverage in operational efficiencies and to attract new customers and retain existing customers could be impaired. In addition, if we are unable to successfully leverage new technology to automate and otherwise drive efficiencies in our operations, our business, results of operations and financial condition could be harmed.

Our partners and customers may not be satisfied with our technological or other platform enhancements or new offerings or may perceive that these offerings do not respond to their needs or create value for them. Our customers may also be dissatisfied with the products mix we currently or will offer in the future.

 

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Additionally, as we invest in and experiment with new offerings or changes to our platform, our partners and customers may find these changes to be disruptive and may perceive them negatively. For example, we have recently phased out our “unlimited swaps” subscription plan and shifted to several subscription plans at different price points based on usage, which may introduce too much complexity for customers or be perceived as less value than the previously offered plans. We have increased our resale offerings of pre-loved products, which could introduce the uncertainty of merchandise returns and negatively impact our business. We also have expanded the categories of products we offer, such as including kidswear and home accessories, and may further expand our categories in the future. These new plans and offerings do not have demonstrably long track records of success for us. In addition, developing new offerings and services is complex, and the timetable for their public launch is difficult to predict and may vary from our historical experience. As a result, the introduction of new offerings may occur after anticipated release dates, or they may be introduced as pilot programs, which may not be continued for various reasons. In addition, new offerings may not be successful due to defects or errors, negative publicity, or our failure to market them effectively. New offerings may not drive revenue growth, customer acquisition or retention, may require substantial investment and planning, and may bring us more directly into competition with companies that are better established or have greater resources than we do. If we do not continue to cost-effectively develop new offerings that satisfy our brand partners and customers, then our competitive position and growth prospects may be harmed. In addition, new offerings may have lower margins than we anticipate or than existing offerings, and our revenue from the new offerings may not be enough to offset the cost of developing and maintaining them, which could adversely affect our business, financial performance, and growth.

If we fail to maintain and enhance our brand, our ability to attract and retain customers will be impaired and our business, financial condition, and results of operations may suffer.

Maintaining and enhancing our appeal and reputation as a stylish, revolutionary and trusted brand is critical to attracting and retaining customers and brand partners. The successful promotion of our brand and awareness of our offerings and products will depend on a number of factors, including our marketing efforts, ability to continue to develop our offerings and products, the quality and appeal of our products, and ability to successfully differentiate our offerings from competitive offerings. We expect to invest substantial resources to promote and maintain our brand, but there is no guarantee that our brand development strategies will enhance the recognition of our brand or lead to increased customer acquisition and sales. The strength of our brand will depend largely on our ability to provide a compelling customer value proposition for our rental and resale offerings and continued customer engagement and word of mouth organic marketing. Brand promotion activities may not yield increased revenue, and even if they do, the increased revenue may not offset the expenses we incur in promoting and maintaining our brand and reputation.

Furthermore, whether accurate or not, negative publicity about our business, operations, or employees, and customer complaints could harm our reputation, customer trust and referrals of our services, brand partner confidence, employee morale and culture, and our ability to recruit new employees effectively. In addition, negative publicity related to our brand partners, influencers and other vendors that we have partnered with may damage our reputation, even if the publicity is not directly related to us. Negative commentary concerning us or our brand partners may also be posted on social media platforms at any time and may have an adverse impact on our brand, reputation and business. The harm of negative publicity, particularly on social media platforms, may be immediate, without affording us an opportunity for redress or correction.

If we fail to maintain, protect, and enhance our brand successfully or to maintain loyalty among customers, or if we incur substantial expenses in unsuccessful attempts to maintain, protect, and enhance our brand, we may fail to attract or increase the engagement of customers, and our business, financial condition, and operating results may suffer.

 

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We rely heavily on the effective operation of our proprietary technology systems and software, as well as those of our third-party vendors and service providers, for our business to effectively operate and to safeguard confidential information.

We rely heavily on in-house proprietary technology, third-party software, and customized off-the-shelf technology solutions across our business. Our ability to effectively manage all areas of our business, particularly our product management and fulfillment operations, depends significantly on the reliability and capacity of these systems. We are critically dependent on the integrity, connectivity, security and consistent operations of these systems, which are highly dependent on coordination of our internal business, operations, product and engineering teams. For example, in September 2019, we experienced a software outage at our Secaucus, New Jersey facility, during which we were unable to fulfill thousands of Reserve and subscription orders on a timely basis and made the decision to stop taking new orders until the issue was adequately resolved. We also experienced significant negative customer reviews and negative press as a result of the outage, which we believe damaged our customer relationships, reputation and brand. The outage also resulted in substantial financial losses and increased costs largely due to: lost revenues, customer refunds, credits, promotions and/or related payments, and incremental labor and shipping costs. Our insurance policy covered a substantial portion of these losses but not all of them. While we have taken remediation measures in response to the outage, similar outages or other disruptions may occur in the future, which could harm our ability to meet customer expectations, fulfill orders, manage our products, and achieve our objectives for operating efficiencies and profitability.

The technology underlying our platform is highly interconnected and complex and may contain undetected errors or vulnerabilities. Due to the interconnected nature of the software underlying our platform, updates to parts of our code, third-party code, and APIs, on which we rely and that maintain the functionality of our systems, could have an unintended impact on other sections of our code, which may result in errors or vulnerabilities to our platform that negatively impact the customer experience and functionality of our offerings. In some cases, such as our mobile application, errors may only be correctable through updates distributed through slower, third-party mechanisms, such as app stores, and may need to comply with third-party policies and procedures to be made available, which may add additional delays due to app review and customer delay in updating their mobile apps. In addition, our systems are increasingly reliant on machine learning systems, which are complex and may have errors or inadequacies that are not easily detectable. These systems may inadvertently reduce the efficiency of our systems, or may cause unintentional or unexpected outputs that are incorrect, do not match our business goals, do not comply with our policies, or otherwise are inconsistent with our brand, guiding principles and mission. Any errors or vulnerabilities discovered in our code could also result in damage to our reputation, loss of our customers, unauthorized disclosure of personal and confidential information, loss of revenue or liability for damages, any of which could adversely affect our growth prospects and our business.

Any significant technology disruption or failure or data security incident could adversely affect our business, financial condition and operation.

Our ability to effectively manage our business, particularly our products management and fulfillment operations, depends significantly on the reliability and capacity of our in-house proprietary technology, third-party software and infrastructure, and customized off-the-shelf solutions. We also collect, process and store sensitive and confidential information, including our proprietary business information and information regarding our customers, employees, suppliers and business partners. The secure processing, maintenance and transmission of this information is critical to our operations. Our systems or those of our service providers and business partners may be subject to damage or interruption from power outages or damages, telecommunications problems, data corruption, software errors, network failures, acts of war or terrorist attacks, fire, flood and natural disasters. Our existing safety systems, data backup, access protection, user management and information technology emergency planning may not

 

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be sufficient to prevent data loss or long-term network outages. In addition, we may have to upgrade our existing information technology systems or choose to incorporate new technology systems from time to time in order for such systems to support the increasing needs of our expanding business. Costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could disrupt or reduce the efficiency of our operations.

Our systems and those of our third-party service providers and business partners may be vulnerable to security incidents, attacks by hackers, acts of vandalism, malware, social engineering, denial or degradation of service attacks, computer viruses, supply chain attacks, phishing attacks, ransomware attacks, misplaced or lost data, human errors or other similar events. If unauthorized parties gain access to our networks or databases, or those of our third-party service providers or business partners, they may be able to steal, publish, sell, delete, use inappropriately or modify private and sensitive information including credit card information and personally identifiable information, any or all of which could harm our business, financial condition and results of operations. Ransomware attacks, including those from organized criminal threat actors, nation-states and nation-state supported actors, are becoming increasingly prevalent and can lead to significant interruptions, delays, or outages in our operations, loss of data, loss of income, significant extra expenses to restore data or systems, reputational loss and the diversion of funds. To alleviate the financial, operational and reputational impact of a ransomware attack it may be necessary to make extortion payments, but we may be unable to do so if applicable laws or governmental pressure prohibit or prevents such payments. In addition, employees may intentionally or inadvertently cause data or security incidents that result in unauthorized release of personal or confidential information. Because the techniques used to circumvent security systems can be highly sophisticated, change frequently, are increasingly designed to evade detection, are often not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to address all possible techniques or implement adequate preventive measures for all situations.

The aforementioned types of security incidents have occurred in the past, and may occur in the future, resulting in unauthorized, unlawful, or inappropriate access to, inability to access, disclosure of, or loss of sensitive, proprietary and confidential information. For example, although no sensitive information was affected, our platform has been the subject of credential stuffing attacks (i.e., email addresses and passwords involved in security incidents reported by other companies have been used to attempt to gain unauthorized access to our platform) and brute force attacks (i.e., attempts to try different username and password credentials to gain access to our platform). The security measures we employ to prevent, detect, and mitigate potential harm to our users from the theft of or misuse of user credentials on our network may not be effective in every instance.

Moreover, while we maintain cyber insurance that may help provide coverage for these types of events, we cannot assure you that our insurance will be adequate to cover costs and liabilities related to these incidents. Any such incident, attack, virus or other event could result in costly investigations and litigation exceeding applicable insurance coverage or contractual rights available to us, in particular because certain data privacy laws, including the California Consumer Privacy Act, or CCPA, grant individuals a private right of action arising from certain data security incidents, civil or criminal penalties, operational changes or other response measures, loss of consumer confidence in our security measures, and negative publicity that could adversely affect our business, financial condition, and results of operations.

We also rely on a number of third-party service providers to operate our critical business systems and process confidential and personal information, such as our shipping partners, Human Resources Information System and payment processor. These service providers may not have adequate security measures and could experience a security incident that compromises the confidentiality, integrity, or availability of the systems they operate for us or the information they process on our behalf and may not react or notify us in a timely manner. Moreover, we or our third-party service providers may be

 

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more vulnerable to such attacks in remote work environments, which have increased in response to the COVID-19 pandemic. Any cyberattack, security incident, or material disruption or slowdown affecting our systems or those of our third-party service providers and business partners, could have a material adverse effect on our business, financial condition, and results of operations.

Our e-commerce business faces distinct risks, such as fulfillment of orders, and our failure to successfully manage these risks could have a negative impact on our profitability.

As an e-commerce business, we encounter risks and difficulties frequently experienced by businesses with significant internet operations. The successful operation of our business as well as our ability to provide a positive customer experience that will generate subscription and rental and resale orders depends on efficient and uninterrupted e-commerce order-taking and fulfillment operations. If we are unable to allow real-time and accurate visibility to products availability when customers are ready to order, quickly and efficiently fulfill our customers’ orders using the fulfillment and payment methods they demand, provide a convenient and consistent experience for our customers regardless of the ultimate channel or effectively manage our online sales, our ability to compete and our results of operations could be adversely affected.

Risks associated with our e-commerce business include:

 

   

uncertainties associated with our website and mobile application including changes in required technology interfaces, website downtime and other technical failures, costs and technical issues as we upgrade our systems software, inadequate system capacity, computer viruses, human error, security incidents, legal claims related to our systems operations and fulfillment;

 

   

disruptions in internet service or power outages;

 

   

reliance on third parties for computer hardware and software, as well as delivery of products to our customers;

 

   

rapid technology changes;

 

   

credit or debit card fraud and other payment processing related issues;

 

   

changes in applicable federal, state and international regulations;

 

   

liability for online content;

 

   

cybersecurity and consumer privacy concerns and regulation; and

 

   

natural disasters or adverse weather conditions.

Our online offerings also expose us to broader applicability of regulations, as well as additional regulations, such as the rules relating to registration of internet sellers, certain anti-money laundering, trade sanction, anti-corruption, anti-bribery and international trade laws. Problems in any of these areas could result in a reduction in sales, increased costs, sanctions or penalties and damage to our reputation and brands.

In addition, we must keep up to date with competitive technology trends, including the use of new or improved technology, creative user interfaces, virtual and augmented reality and other e-commerce marketing tools such as paid search and mobile applications, among others, which may increase our costs and which may not increase sales or attract customers. Our competitors, some of whom have greater resources than we do, may also be able to benefit from changes in e-commerce technologies or adapt better than us, which could harm our competitive position.

Shipping and logistics are a critical part of our business and our supply chain and any changes or interruptions in shipping or logistics operations could adversely affect our operating results.

We currently rely on several third-party national and regional shipping vendors for our outbound and inbound logistics; however a substantial majority of our inbound shipments from customers are

 

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currently returned through a single vendor. Additionally, our business relies on the successful management of reverse logistics needed to ingest, clean, and restock returned items quickly and efficiently in order to offer them for rental or resale to other customers. If we are not able to negotiate acceptable pricing and other terms with these vendors or they experience performance problems or other difficulties, our operating results and customers’ experience could be negatively impacted.

Our ability to receive inbound products efficiently and ship products to and from customers may be negatively affected by many events outside of our control including, inclement weather, public health crises such as the COVID-19 pandemic, governmental regulations, labor disputes and other factors. We are also subject to risks of damage or loss during delivery by our shipping vendors. If our customers do not receive their orders in good condition on time, they could become dissatisfied and cease using our services, which would adversely affect our business and operating results. Our shipping vendors have faced and may continue to face increased volumes which, in turn, could cause a decrease in their service levels or result in an increase of their prices. Increases in shipping costs or other significant shipping difficulties or disruptions or any failure by our brand partners or third-party carriers to deliver high-quality products to us or to our customers, as applicable, in a timely manner or to otherwise adequately serve our customers could damage our reputation and brand and may substantially harm our business.

In addition to offering the ability to return products through our third-party shipping vendors, we offer multiple physical drop-off points for customers located in certain cities, including, for example, New York City, Boston, Nashville, Houston, and San Francisco to return their orders. In the event that we do not successfully manage these logistics, it will make it more difficult for us to maintain our products, and satisfy our customers which will negatively affect our brand, financial condition and results of operations.

Our quarterly and annual results of operations may fluctuate, which may make it difficult to predict our future performance.

Our results of operations could vary significantly from quarter to quarter and year to year because of a variety of factors, many of which are outside of our control. Even if our revenue increases, our revenue growth rates may decline in the future as a result of a variety of factors, including macroeconomic factors, increased competition, and the maturation of our business. As a result, comparing our results of operations on a period-to-period basis or our revenue growth rate for any prior period may not be meaningful. In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include:

 

   

our success in attracting and retaining customers and subscribers;

 

   

maintaining successful relationships with brand partners and our ability to acquire products at acceptable prices and offer a compelling mix of products that are available for subscription, a-la-carte rental or purchase at any given time;

 

   

the amount and timing of our fulfillment costs and operating expenses;

 

   

the timing and success of product launches, including new services and features we may introduce;

 

   

the success of our marketing and promotional efforts;

 

   

adverse economic and market conditions, such as those related to the COVID-19 pandemic, and other adverse global events that negatively impact commerce and consumer behavior;

 

   

disruptions or defects in our software or operations, such as privacy or data security incidents, outages, or other incidents that impact the availability, reliability, or performance of our business;

 

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the impact of competitive developments and our response to those developments;

 

   

our ability to manage our business and future growth;

 

   

our ability to recruit and retain employees including fulfillment center labor to process, itemize, list, pack and ship our products; and

 

   

changes to financial accounting standards and the interpretation of those standards, which may affect the way we recognize and report our financial results.

The impact of one or more of the foregoing and other factors may cause our results of operations to vary significantly. As such, quarter-to-quarter and year-over-year comparisons of our results of operations may not be meaningful and should not be relied upon as an indication of future performance.

Fluctuations in our quarterly operating results and key metrics may be particularly pronounced in the current economic environment due to the uncertainty caused by, and the unprecedented nature of, the COVID-19 pandemic, consumer spending patterns, and the impacts of the gradual reopening of the offline economy and lessening of restrictions on movement. Fluctuations in our quarterly operating results and key metrics may cause those results to fall below our financial guidance or other projections, or the expectations of analysts or investors, which could cause the price of our Class A common stock to decline.

Fluctuations in our results could also cause a number of other problems. For example, analysts or investors might change their models for valuing our Class A common stock, we could experience liquidity issues, our ability to retain or attract key personnel may diminish, and other unanticipated issues may arise. We believe that our quarterly operating results and key metrics may vary in the future and that period-to-period comparisons of our operating results may not be meaningful. For example, our overall historical growth rate and the impacts of the COVID-19 pandemic may have overshadowed the effect of seasonal variations on our historical operating results. These seasonal effects may become more pronounced over time, which could also cause our operating results and key metrics to fluctuate.

Environmental, social and governance matters may impact our business and reputation.

There has been increased focus, including by consumers, investors, employees and other stakeholders, as well as by governmental and non-governmental organizations, on environmental, social and governance matters generally and with regard to the fashion industry specifically.

We have and plan to continue undertaking environmental, social and governance, or ESG initiatives. Any failure by us to meet our commitments or loss of confidence on the part of customers, investors, employees, brand partners, and other stakeholders as it relates to our ESG initiatives could negatively impact our brand, the demand for our offerings, our financial condition, results of operations and prospects. These impacts could be difficult and costly to overcome, even if such concerns were based on inaccurate or misleading information.

In addition, achieving our ESG initiatives may result in increased costs in our supply chain, fulfillment, and/or corporate business operations, and could deviate from our initial estimates and have a material adverse effect on our business and financial condition. In addition, standards and research regarding environmental, social, and governance initiatives could change and become more onerous for both for us and our third-party suppliers and vendors to meet successfully. Evolving data and research could undermine or refute our current claims and beliefs that we have made in reliance on current research, which could also result in costs, a decrease in revenue, and negative market perception that could have a material adverse effect on our business and financial condition.

 

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A variety of organizations measure the performance of companies on such ESG topics, and the results of these assessments are widely publicized. In addition, investment in funds that specialize in companies that perform well in such assessments are increasingly popular, and major institutional investors have publicly emphasized the importance of such ESG measures to their investment decisions. Topics taken into account in such assessments include, among others, the company’s efforts and impacts on climate change and human rights, ethics and compliance with law and the role of the company’s board of directors in supervising various sustainability issues. In light of investors’ increased focus on ESG matters, there can be no certainty that we will manage such issues successfully, or that we will successfully meet society’s ESG expectations or achieve our financial goals.

We rely on the experience and expertise of our Co-Founder and Chief Executive Officer, senior management team, key technical and strategic employees and hourly personnel.

Our success and future growth depend largely upon the continued services of our senior management team, including our Co-Founder, Chief Executive Officer and Chair, Jennifer Y. Hyman. From time to time, there may be changes in our executive management team resulting from the hiring or departure of these executives. Our executive officers are employed on an at-will basis, which means they may terminate their employment with us at any time. The loss of one or more of our executive officers, or the failure by our executive team to effectively work with our employees and lead our company, could harm our business. We do not maintain key man life insurance with respect to any member of management or other employee.

In addition, our future success will depend upon our ability to fill key roles, such as engineering, data science, analytics, buying and planning, and logistics, as well as hourly fulfillment workers and customer service agents. Such efforts will require significant time, expense, and attention as there is intense competition for such individuals, particularly in New York City, Galway, New Jersey and Texas, and new hires require significant training and time before they achieve full productivity. In addition to maintaining competitive wage and salary levels, which are likely to increase further due to inflation and the potential minimum wage increases, prospective and existing employees often consider the value of the equity awards they may receive in connection with their employment. If the perceived value of our equity awards declines or experiences significant volatility, it may adversely affect our ability to recruit and retain key employees.

Our corporate and customer service employees are currently almost fully remote. As COVID-19 restrictions are lifted and we contemplate reopening our offices, we plan to move to a hybrid model for New York City and Galway, and we anticipate that employees will be present in the office two to three days per week. If our needs are not aligned with our employees’ preferences, it may adversely affect our ability to recruit and retain employees. In addition, the hybrid model may negatively impact our company culture, collaboration and productivity.

We laid off 31% of all employees and furloughed 34% of employees in fiscal year 2020 due to the unprecedented impact of COVID-19 on our business and also experienced increased voluntary attrition. If we experience continued voluntary attrition at significant rates in the future, and/or if we are unable to attract and retain qualified employees in a timely fashion, particularly in critical areas of operations such as engineering, data science and analytics, our ability to achieve our strategic objectives will be adversely impacted, and our business and future growth prospects will be harmed.

Our company culture has contributed to our success and if we cannot maintain this culture as we grow, our business could be harmed.

We believe that our company culture has been critical to our success. Our company culture stands for being entrepreneurial, passionate, kind and positive. Our ability to continue to cultivate and maintain this culture is essential to our growth and continued success.

 

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We face a number of challenges that may affect our ability to sustain our corporate culture, including:

 

   

failure to identify, attract, reward, and retain people in leadership positions in our organization who share and further our culture, values, and mission;

 

   

the increasing size, complexity and geographic diversity of our workforce, and our ability to promote a uniform and consistent culture across all our offices and employees;

 

   

the employee and market perception of our ESG efforts, which may impact employee morale and recruiting efforts;

 

   

competitive pressures to move in directions that may divert us from our mission, vision, and values;

 

   

the continued challenges of a rapidly-evolving industry; and

 

   

the increasing need to develop expertise in new areas of business that affect us.

In particular, Diversity, Equality and Inclusion is a strategic imperative at RTR. We are focused on driving inclusiveness, innovation and stronger business results by attracting a diverse talent pool and continuing to foster an inclusive work environment for all our employees across offices. Although we have adopted policies to promote compliance with laws and regulations as well as to foster a respectful workplace for all employees, our employees may fail to abide by these policies. In addition to damaging our reputation, actual or alleged misconduct could tarnish our culture, result in negative publicity, affect the confidence of our stockholders, regulators and other parties and could have a material adverse effect on our business, financial condition and operating results.

We rely on consumer discretionary spending and have been, and may in the future be, adversely affected by economic downturns and other macroeconomic conditions or trends.

We are subject to variable industry and global economic conditions and their impact on consumer discretionary spending. Some of the factors that may negatively influence consumer spending include high levels of unemployment; higher consumer debt levels; reductions in net worth, declines in asset values, and related market uncertainty; home foreclosures and reductions in home values; fluctuating interest rates and credit availability; fluctuating fuel and other energy costs; fluctuating commodity prices; and general uncertainty regarding the overall future political and economic environment. We have experienced many of these factors due to the COVID-19 pandemic and related responses and have seen negative impacts on customer demand at varying levels as a result. For example, we experienced a significant decrease in consumer demand during the COVID-19 pandemic due to shelter-at-home orders and more limited social events, increased unemployment and work-from-home trends, and general economic uncertainty.

Furthermore, any increases in consumer discretionary spending or immediately after times of crisis may be temporary, such as those related to government stimulus programs or the tail of the COVID-19 pandemic in the United States, and consumer spending may decrease again. Economic conditions in certain regions may also be affected by natural disasters, such as hurricanes, tropical storms, earthquakes, and wildfires; other public health crises; and other major unforeseen events. Consumer purchases or rental of discretionary items, including the products that we offer, generally decline during recessionary periods or periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence.

Additionally, adverse economic changes could reduce consumer confidence, and could thereby negatively affect our operating results. In challenging and uncertain economic environments, we cannot predict when macroeconomic uncertainty may arise, whether or when such circumstances may improve or worsen or what impact such circumstances could have on our business. Any of these developments could harm our business, financial condition and results of operations.

 

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Our business is affected by seasonality.

Our business is subject to seasonal fluctuation. We typically realize a higher portion of revenue from our Reserve rentals during our third and fourth fiscal quarter as a result of increased wedding and holiday events and we expect this to continue in the future. For our subscription rentals, we typically acquire the highest number of subscribers in the third and fourth fiscal quarters, and we tend to see a greater number of paused subscriptions in the winter and summer months. Adverse events, such as higher unemployment or deteriorating economic conditions can deter consumers from shopping and renting. Any significant decrease in revenue during the third or fourth quarter could have a disproportionately large impact on our operating results and financial condition for that year. Any factors that harm our third or fourth quarter operating results, including disruptions in our brand partners’ supply chains or unfavorable economic conditions, including as a result of the COVID-19 pandemic, could have a disproportionate effect on our results of operations for our entire fiscal year.

In anticipation of increased rental activity during the third or fourth quarter, we may incur significant additional expenses, including additional marketing and additional staffing in our customer support operations. In addition, we may experience an increase in our net shipping costs due to ensuring timely delivery for peak seasons. In the future, our seasonal revenue patterns may become more pronounced or may change, may strain our personnel and operational activities, and may cause a shortfall in net sales as compared with expenses in a given period, which could substantially harm our business, financial condition and results of operations.

Furthermore, our rapid growth in recent years may obscure the extent to which seasonality trends have affected our business and may continue to affect our business, and the effects of the COVID-19 pandemic may alter our historical seasonality trends. Accordingly, yearly or quarterly comparisons of our operating results may not be useful and our results in any particular period will not necessarily be indicative of the results to be expected for any future period. Seasonality in our business can also be affected by introductions of new or enhanced products and offerings, including the costs associated with such introductions.

Strategic investments, partnerships, alliances, or acquisitions could be difficult to identify, pose integration challenges, divert the attention of management, disrupt our business, dilute stockholder value, and adversely affect our business, financial condition, and results of operations.

Our success will depend, in part, on our ability to expand our services and grow our business in response to changing technologies, customer demands, and competitive pressures. We may choose to expand our services and grow our business by entering into partnerships or alliances with third parties rather than through internal development or through the acquisition of complementary businesses and technologies. The identification of suitable alliance partners or acquisition candidates can be difficult, time-consuming, and costly, and we may not be able to successfully complete identified transactions. In addition, if we pursue and complete an acquisition, we may not be able to successfully integrate the acquired business. The risks we face in connection with partnerships and acquisitions include:

 

   

a partnership or acquisition may disrupt our ongoing business, divert resources, increase our expenses, and distract our management;

 

   

an acquisition may negatively affect our financial results because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

 

   

we may encounter difficulties or unforeseen expenditures in integrating the business, offerings, technologies, personnel, or operations of any company that we partner with or acquire; and

 

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if we incur debt or issue a significant amount of equity securities to fund such joint venture or acquisition, such debt may subject us to material restrictions on our ability to conduct our business, as well as financial maintenance covenants and such equity securities may cause dilution for our existing stockholders and earning per share may decrease.

The occurrence of any of these foregoing risks could adversely affect our business, financial condition, and results of operations and expose us to unknown risks or liabilities.

We may require additional capital to support the growth of our business, and this capital might not be available on acceptable terms, if at all.

We have funded our operations since inception primarily through equity and debt financings and revenue generated from our offerings. We cannot be certain when or if our operations will generate sufficient cash to fully fund our ongoing operations or the growth of our business. We intend to continue to make investments to develop and grow our business. For example, we may need additional funding to obtain products, for marketing, and headcount or other operating expenses, to develop new features or enhance our offerings, to improve our operating infrastructure, and/or to acquire complementary businesses and technologies. If we are unable to obtain adequate financing or financing on terms satisfactory to us, our ability to support our business growth, and respond to business challenges could be significantly impaired, and our business may be adversely affected.

If we incur additional debt, the debt holders would have rights senior to holders of common stock to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in the future will depend on numerous considerations, including factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any future issuances of debt or equity securities. As a result, our stockholders bear the risk of future issuances of debt or equity securities reducing the value of our common stock and diluting their interests.

Material changes in the pricing practices of our brand partners could negatively impact our profitability.

Our brand partners may increase their pricing if their raw materials become more expensive or become subject to other pricing pressures. The inputs used to manufacture the products from our brand partners are subject to availability constraints and price volatility. Our brand partners may pass the increase in sourcing costs to us through price increases, thereby impacting our margins. The fabrics used by our brand partners are made of raw materials including petroleum-based products and cotton. Significant price fluctuations or shortages in petroleum, cotton, or other raw materials could significantly increase our cost of revenue. Moreover, in the event of a significant disruption in the supply of the fabrics or raw materials used in the manufacture of the products we offer, our partners might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price. For example, disruptions in the supply chain as a result of the COVID-19 pandemic has increased raw material costs, impacting pricing with certain of our partners, and caused shipping delays for certain of our products.

Our level of indebtedness could have a material adverse effect on our ability to generate sufficient cash to fulfill our obligations under such indebtedness, to react to changes in our business and to incur additional indebtedness to fund future needs.

As of January 31, 2021, we had $75 million aggregate principal amount of borrowings outstanding under our first lien facility, which we entered into in October 2020, and was subsequently amended in April 2021, with Alter Domus (US) LLC as administrative agent for Ares Corporate Opportunities Fund V, L.P., or Ares, which we call the Ares Facility and $230 million aggregate principal amount of borrowings under a subordinated, junior lien loan agreement in July 2018, as

 

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subsequently amended in December 2018, April 2019, November 2019, June 2020, August 2020 and October 2020, with Double Helix Pte Ltd. as administrative agent for Temasek Holdings, which we refer to as our Temasek Facility, together, the Credit Agreements. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our current or future debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. We cannot assure you that our business will be able to generate sufficient levels of cash or that future borrowings or other financings will be available to us in an amount sufficient to enable us to service our indebtedness and fund our other liquidity needs. These financing risks, in addition to potential rising interest rates and changes in market conditions, if realized, could negatively impact our business, financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

Our Credit Agreements contain financial covenants and other restrictions on our actions that may limit our operational flexibility or otherwise adversely affect our business, financial condition and results of operations.

The terms of our Credit Agreements include a number of covenants that limit our ability to (subject to negotiated exceptions), among other things, incur additional indebtedness, incur liens on assets, enter into agreements related to mergers and acquisitions, dispose of assets or pay dividends and make distributions. In particular, under the Ares Facility, we are required to meet specified financial covenants that are measured based on pre-defined consolidated EBITDA thresholds starting in the second quarter of the fiscal year 2021. The terms of our Credit Agreements may restrict our current and future operations and could adversely affect our ability to finance our future operations or capital needs. In addition, complying with these covenants may make it more difficult for us to successfully execute our business strategy and compete against companies which are not subject to such restrictions.

A failure by us to comply with the covenants specified in the Credit Agreements could result in an event of default under the agreement, which would give the lenders the right to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. If the debt under the Credit Agreements were to be accelerated, we may not have sufficient cash or be able to borrow sufficient funds to refinance the debt or sell sufficient assets to repay the debt, which could adversely affect our business, financial condition and results of operations.

We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate the material weaknesses in a timely manner, identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations, our ability to comply with applicable laws and regulations and our access to the capital markets to be impaired.

In connection with the preparation of our consolidated financial statements, we identified material weaknesses in our internal control over financial reporting as of January 31, 2021, as described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We did not maintain sufficient evidence of the operation of controls to achieve complete, accurate and timely financial accounting, reporting and disclosures nor were monitoring controls evidenced at a sufficient level to provide the appropriate level of oversight of activities related to our internal control

 

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over financial reporting. This material weakness contributed to the following additional material weaknesses:

We did not design and maintain effective controls to ensure (i) the appropriate segregation of duties in the operation of manual controls and (ii) journal entries were reviewed at the appropriate level of precision.

We did not design and maintain effective controls over information technology, or IT, general controls for information systems and applications that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain (i) program change management controls to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately, (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to our financial applications, programs and data to appropriate personnel, (iii) computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements.

These IT control deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected.

The material weaknesses described above did not result in a misstatement to our annual or interim consolidated financial statements. However, each of these material weaknesses could result in a misstatement of substantially all account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

To address these material weaknesses, we have commenced actions to formalize the company’s framework and policies with respect to maintaining evidence in the operation of control procedures and improve our IT general controls, segregation of duties controls, and journal entry controls. In particular, we are implementing comprehensive access control protocols for our enterprise resource planning environment in order to implement restrictions on user and privileged access to certain applications, establishing additional controls over the preparation and review of journal entries, implementing controls to review the activities for those users who have privileged access and program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately. The implementation of these remediation efforts is in the early stages, may require additional expenditures to implement, and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, and as a result, the timing of when we will be able to fully remediate the material weaknesses is uncertain and we may not fully remediate during 2021. We can give no assurance that our efforts will remediate these material weaknesses in our internal control over financial reporting, or that additional material weaknesses will not be identified in the future. If the steps we take do not remediate the material weaknesses in a timely manner, or if we fail to implement and maintain effective internal control over financial reporting, there could be errors in our consolidated financial statements that could result in a restatement of our financial statements, and could cause us to fail to meet our reporting obligations, any of which could diminish investor confidence in us and cause a decline in the price of our Class A common stock.

Additionally, ineffective internal control over financial reporting could expose us to an increased risk of financial reporting fraud and the misappropriation of assets and subject us to potential delisting

 

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from the stock exchange on which we list or to other regulatory investigations and civil or criminal sanctions. If we are unable to remediate the material weakness in a timely manner, or if additional material weaknesses exist or are discovered in the future, and we are unable to remediate any such material weakness, our reputation, results of operations and financial condition could suffer.

The requirements of being a public company may strain our resources, divert managements attention, and affect our ability to attract and retain executive management and qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the listing standards of                , and other applicable securities rules and regulations. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems, and resources. As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could harm our business, financial condition, and results of operations. Furthermore, several members of our management team do not have prior experience in running a public company. Although we have already hired additional employees to assist us in complying with these requirements, we intend to invest substantial resources in our compliance efforts, including hiring more employees or engaging outside consultants, which will increase our operating expenses. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

We also expect that being a public company that is subject to these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations may also make it more difficult for us to attract and retain qualified members of our board of directors, particularly members who can serve on our audit committee and compensation committee, and qualified executive officers.

As a result of being a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting, and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our Class A common stock.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting as of                . This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting in our first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company.” Our compliance with Section 404 will require that we incur substantial expenses and expend significant management efforts. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.

In addition to the material weaknesses in internal control over financial reporting identified in connection with the audit of our financial statements as of and for the fiscal year ended January 31, 2021, subsequent testing by us or our independent registered public accounting firm, may reveal additional deficiencies in our internal control over financial reporting that are deemed to be material

 

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weaknesses. During the evaluation and testing process of our internal controls, if we identify additional material weaknesses in our internal control over financial reporting, we will be unable to certify that our internal control over financial reporting is effective. We cannot assure you that there will not be additional material weaknesses in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if we or our independent registered public accounting firm determines we have additional material weaknesses in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our Class A common stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

We are an “emerging growth company,” and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including:

 

   

the auditor attestation requirements of Section 404;

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and

 

   

exemptions from the requirements of holding a non-binding advisory stockholder vote on executive compensation and non-binding advisory stockholder vote to approve any golden parachute payments not previously approved.

Pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our Class A common stock less attractive to investors. In addition, if we cease to be an emerging growth company, we will no longer be able to use the extended transition period for complying with new or revised accounting standards.

We will remain an emerging growth company until the earliest of:

 

   

the last day of the fiscal year following the fifth anniversary of this offering;

 

   

the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more;

 

   

the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities; and

 

   

the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates.

We cannot predict if investors will find our Class A common stock less attractive if we choose to rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock, and our stock price may be more volatile.

 

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Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

GAAP is subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. The accounting for our business is complicated, particularly in the area of revenue recognition, and is subject to change based on the evolution of our business model, interpretations of relevant accounting principles, enforcement of existing or new regulations, and changes in SEC or other agency policies, rules, regulations, and interpretations of accounting regulations. Changes to our business model and accounting methods, principles, or interpretations could result in changes to our financial statements, including changes in revenue and expenses in any period, or in certain categories of revenue and expenses moving to different periods, may result in materially different financial results, and may require that we change how we process, analyze, and report financial information and our financial reporting controls.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes appearing elsewhere in this prospectus. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses. Significant estimates and judgments involve: revenue recognition, as well as treatment of rental products, including estimates of salvage value and useful life for rental products, share-based compensation, warrants and right of use asset. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our Class A common stock.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business could fail to grow at similar rates, or at all.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate, including as a result of any of the risks described in this prospectus.

The variables that go into the calculation of our market opportunity are subject to change over time, and there is no guarantee that any particular number or percentage of addressable customers and subscribers covered by our market opportunity estimates will become a customer or subscriber or generate any particular level of revenues for us. In addition, our ability to expand in any of our target markets depends on a number of factors, including the cost, performance and perceived value associated with our products and offerings. Even if the markets in which we compete meet the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.

 

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Expansion of our operations internationally requires management attention and resources, involves additional risks, and may be unsuccessful.

We do not currently offer our products and services internationally. In the event we decide to expand our geographic market internationally, we will need to adapt to different local cultures, standards, laws, and policies. The business model we employ may not appeal as strongly to customers in international markets. Our entry into new markets will also require us to become familiar with different trends and customer preferences in such markets. In addition, consumer shopping behavior may continue to evolve and we may need to adapt our service to such changes.

Furthermore, to succeed with customers in international locations, we will need to locate fulfillment centers in foreign markets, hire local employees and source products appealing to local preferences, and we will have to invest in these facilities, employees and products before proving we can successfully run foreign operations. We may not be successful in expanding into additional international markets or in generating revenue from foreign operations for a variety of reasons, including:

 

   

lower acceptance of our offerings and the concept of renting apparel and accessories and the need to localize our products offerings;

 

   

competition from local incumbents that understand the local market and may operate more effectively;

 

   

regulatory requirements, taxes, trade laws, trade sanctions and economic embargoes, tariffs, export quotas, custom duties, or other trade restrictions, or any unexpected changes thereto; and

 

   

risks resulting from changes in currency exchange rates.

If we invest substantial time and resources to establish and expand our operations internationally and are unable to do so successfully and in a timely manner, our operating results would suffer.

Risks Related to Our Legal and Regulatory Environment

Our business is subject to a large number of U.S. and non-U.S. laws and regulations, many of which are evolving.

We are subject to numerous evolving laws and regulations in the United States and around the world, including those relating to consumer protection, environmental protection, intellectual property, consumer product safety, privacy and information security, taxation, and immigration, labor, and other employment law matters, such as workplace safety, particularly in our fulfillment centers, and wage and hour regulations. There has been a recent focus on automatically renewing subscription offerings. For example, California’s Automatic Renewal Law, and the federal Restore Online Shoppers’ Confidence Act, or ROSCA, require companies to adhere to enhanced disclosure and cancellation requirements when entering into automatically renewing contracts with subscription customers. Regulators and private plaintiffs have brought enforcement and litigation actions against companies, challenging automatic renewal and subscription programs.

We strive to comply with all applicable laws; however, despite our efforts, we may not have fully complied in the past and may not in the future. If we fail to comply with existing or future laws or regulations, or if these laws or regulations are violated by our brand partners, suppliers or vendors, we may be subject to criminal and civil liabilities, fines, or sanctions and, while incurring substantial legal fees and costs and reputational harm. In addition, compliance and remediation efforts can be costly.

We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anticorruption laws, and anti-money laundering laws and regulations. Compliance

 

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with these legal standards could impair our ability to compete in domestic and international markets, and we could face criminal liability and other serious consequences for violations, which could harm our business.

We are subject to export control laws and regulations (including the U.S. Export Administration Regulations), U.S. Customs and import regulations, various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control, the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and other state and national anti-bribery and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption laws are interpreted broadly and generally prohibit companies and their employees, agents, contractors, and other partners from authorizing, promising, offering, or providing, directly or indirectly, corrupt payments of anything of value to recipients in the public or private sector to obtain or retain business or an improper business advantage. As a public company, we also are subject to the FCPA’s accounting provisions, which require us to make and keep complete and accurate books and records, and to maintain a system of adequate internal accounting controls. We have brand partners, suppliers, and vendors operating outside the United States and may engage other third parties to sell our products and services or to obtain necessary permits, licenses, patent registrations, and other regulatory approvals outside the United States. We can be held liable for the corrupt or other illegal activities of our employees, agents, contractors, and other partners, even if we do not explicitly authorize such activities. Although we have policies and controls in place to promote compliance with these laws and regulations, there are no assurances that these policies and controls will always prevent illegal or improper acts by employees, agents, third parties, or business partners. Violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, investigation costs, and other consequences, any of which could have a material adverse effect on our business, financial condition, and results of operations.

Failure to adequately obtain, maintain, protect and enforce our intellectual property and proprietary rights could harm our brand, devalue our proprietary content, and adversely affect our ability to compete effectively.

Our success depends in part on our ability to obtain, maintain, protect, and enforce our intellectual property rights, including those in our proprietary technologies, know-how, and brand. To protect our rights to our intellectual property, we rely on a combination of trademark, copyright patent, and trade secret laws, domain name registrations, confidentiality agreements, and other contractual arrangements with our employees, affiliates, customers, strategic partners, vendors, and others. However, the protective steps we have taken and plan to take may be inadequate to deter infringement, misappropriation or other violations of our intellectual property or proprietary rights and we may be unable to broadly enforce all of our intellectual property rights. Failure to adequately protect our intellectual property could harm our brand, devalue our proprietary technology and content, and adversely affect our ability to compete effectively.

If we fail to protect our intellectual property rights adequately, our competitors may gain access to our intellectual property and proprietary technology and develop and commercialize substantially identical offerings or technologies. We may not timely or successfully register our trademarks in all jurisdictions, which could enable third parties to use our brand name and create potential roadblocks to any expansion of the business outside of the U.S. The copyright registrations we have obtained for our website may not adequately protect all material contained on our website, and these registrations do not cover any material that is not part of our website. The patent prosecution process is expensive and time-consuming. We may not be able to prepare, file and prosecute all necessary or desirable patent applications at a commercially reasonable cost or in a timely manner or in all jurisdictions, creating an

 

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opportunity for third parties to patent the same technology while preventing us from continuing to use it. It is also possible that we may fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Moreover, depending on the terms of any future in-licenses to which we may become a party, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology in-licensed from third parties. Therefore, these patents and patent applications containing in-licensed content may not be prosecuted and enforced in a manner consistent with the best interests of our business. Any patents, trademarks, copyrights, or other intellectual property rights that we have or may obtain may be challenged or circumvented by others or invalidated or held unenforceable through administrative proceedings, or litigation. There can be no assurance that our patent applications will result in issued patents, or that any such patents will be of sufficient scope to adequately protect our proprietary technology or provide us with any meaningful competitive advantage. Moreover, failure to comply with applicable procedural, documentary, maintenance, renewal, fee payment and other similar requirements with the United States Patent and Trademark Office or other similar governmental agencies or administrative bodies could result in abandonment or lapse of the affected intellectual property rights. Further, the laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights in those countries may be inadequate. Accordingly, despite our efforts to obtain and protect our intellectual property, it may be possible for unauthorized third parties to copy our offerings and capabilities and use information that we regard as proprietary to create offerings that compete with ours.     

We generally enter into confidentiality and invention assignment agreements with our employees and consultants, as well as agreements with other third parties, including suppliers and other partners, that contain confidentiality obligations and assignment provisions. However, we cannot guarantee that we have entered into such agreements with each party that has developed intellectual property for us or that may have had access to our proprietary information and technology, know-how, and trade secrets. Moreover, no assurance can be given that these agreements will be effective in controlling access to our proprietary information or preventing the unauthorized distribution, use, misappropriation, reverse engineering, or disclosure of our proprietary intellectual property and other proprietary rights, information, technology, know-how, and trade secrets. These agreements may be breached, and we may not have adequate remedies for any such breach. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed, possibly leaving us without an adequate remedy to make us whole.

We may be required to spend significant financial and managerial resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management. In the alternative, the failure to enforce our intellectual property rights could result in the impairment or loss of portions of our intellectual property rights. Further, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights, and if such defenses, counterclaims, or countersuits are successful, it could result in the loss, impairment or narrowing of valuable intellectual property rights. In patent litigation in the United States, counterclaims alleging invalidity and/or unenforceability are common, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. In an infringement proceeding, a court may decide that the patent claims we are asserting are invalid and/or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patent claims do not cover the technology in question. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, inter partes review and equivalent proceedings in foreign jurisdictions (for example, opposition proceedings). Such

 

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proceedings could result in revocation of our patents, , or could result in narrowing the scope of the patent claims so that they no longer cover our technology. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we, our patent counsel, and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we may lose some, and perhaps all, of the patent protection on our technology. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could have a material adverse impact on our business by making the technology at issue freely available for others to use. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our offerings and capabilities, impair the functionality of our offerings and capabilities, delay or prevent introductions of new offerings, result in our substituting inferior or more costly technologies into our offerings, allow our competitors to gain momentum or overtake us, or injure our brand and reputation. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our Class A common stock.

We may incur costs to defend against, face liability or be vulnerable to intellectual property infringement, misappropriation, and other claims and allegations brought against us by others, which could result in substantial damages and diversion of managements efforts and attention.

Third parties may assert claims against us alleging that we infringe upon, misappropriate, dilute or otherwise violate their intellectual property rights, particularly as we expand our business. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims. These claims, regardless of their merit, could be expensive and time consuming to defend and could divert management resources. We cannot predict the outcome of lawsuits or administrative proceedings, and we cannot ensure that the results of any such actions will not have an adverse effect on our business, financial condition or results of operations. These claims are resolved against us, they could result in significant monetary liability, or prevent us from renting or selling some of our products or using some of our technology. In addition, a finding of liability or other resolution of claims may require us to change our business model, redesign or rebrand our products, replace portions of our technology platform, license rights from third parties, cease using certain brand names or other intellectual property rights altogether, or make substantial payments for royalty or license fees, legal fees, disgorgement of profits, corrective advertising, settlement payments or other costs or damages. Further, licenses may not be available to us on reasonable terms, if at all. Any of these events could harm our business and cause our results of operations, liquidity and financial condition to suffer.

Our use of third-party open-source software could adversely affect our ability to offer our products and offerings and subjects us to possible litigation.

We use third-party open-source software in connection with the development and deployment of our software applications and will likely use third-party open source software in the future. Some open-source licenses require that source code that is developed using open source software be made available to the public at no cost and that any modifications or derivative works to certain open source software continue to be licensed under open source licenses, which in some circumstances could include valuable proprietary code. In some circumstances this could require valuable proprietary code to be made available as open-source software, and may also prohibit charging fees to licensees. While we employ practices designed to monitor our compliance with the licenses of open-source software

 

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and try to ensure that we do not use any of the open-source software in a manner that would require us to disclose our proprietary source code or preclude us from charging fees, we cannot guarantee that we will be successful. We cannot guarantee that all open-source software is reviewed prior to use in our platform, or that our developers have not incorporated (and will not in the future incorporate) open-source software into our products and offerings without our knowledge. Furthermore, there are an increasing number of open-source software license types, almost none of which have been tested in a court of law, resulting in a dearth of guidance regarding the proper legal interpretation of such licenses. As a result, there is a risk that open-source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or provide our products and offerings. If we were to receive a claim of non-compliance with the terms of any of our open-source licenses, we may be required purchase a costly license, to publicly release certain portions of our proprietary source code, limit or prohibit our use of some or all of our software, or expend substantial time and resources to re-engineer some or all of our software. We could also be precluded from charging fees for third-party use of our proprietary code.

In addition, the use of third-party open-source software typically carries greater technical and legal risks than the use of third-party commercial software because open-source licensors generally do not provide support, warranties or controls on the functionality or origin of the software. To the extent that our platform depends upon the successful operation of open-source software, any undetected errors or defects could prevent the deployment or impair the functionality of our systems and injure our reputation. Use of open-source software may also present additional security risks because the public availability of such software may make it easier for hackers and other third parties to compromise our platform. Any of the foregoing could be harmful to our business, financial condition, or results of operations and could help our competitors develop offerings that are similar to or better than ours.

We are subject to rapidly changing and increasingly stringent laws and industry standards relating to data privacy, data security, data protection, and consumer protection. The restrictions and costs imposed by these laws, or our actual or perceived failure to comply with them, could subject us to liabilities that adversely affect our business, operations, and financial performance.

We collect, process, store, and use a wide variety of data from current and prospective customers, including personal information, such as home addresses, credit card numbers (through our payment processor) and geolocation. These activities are regulated by a variety of federal, state, local, and foreign data privacy, data security, data protection and consumer protection laws and regulations, as well as industry standards and guidelines, which have become increasingly stringent in recent years.

U.S. data privacy and data security laws are complex and changing rapidly, with the frequent imposition of new and changing requirements across our business. Many U.S. states have enacted laws regulating the online collection, use, and disclosure of personal information and are requiring that companies implement reasonable data security measures. Laws in all U.S. states and territories also require businesses to notify affected individuals, governmental entities, and/or credit reporting agencies of certain security incidents affecting personal information.

Further, the CCPA took effect on January 1, 2020. The CCPA gives California residents expanded rights related to their personal information, including the right to access and delete their personal information, and receive detailed information about how their personal information is used and shared. The CCPA also created restrictions on “sales” of personal information that allow California residents to opt-out of certain sharing of their personal information and may restrict the use of cookies and similar technologies for advertising purposes. We do not “sell” personal information within the meaning of the CCPA; however, our practices may change in the future and we may face additional

 

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CCPA compliance costs or could be adversely affected by the CCPA’s restrictions. The CCPA provides for civil penalties for violations, and creates a private right of action for data security incidents that is expected to increase data security-related litigation. Additionally, the California Privacy Rights Act, or CPRA, passed in California in November 2020. The CPRA will restrict use of certain categories of sensitive personal information that we handle; further restrict the use of cross-context behavioral advertising techniques on which our products and offerings may rely on in the future; expand requirements on businesses that “sell” personal information under the CCPA to businesses like ours that “share” it; require all businesses with any California employees to limit uses of employee data; establish restrictions on the retention of personal information; expand the types of data security incidents subject to the private right of action; and establish the California Privacy Protection Agency to implement and enforce the new law, as well as impose administrative fines. The majority of the CPRA’s provisions will go into effect on January 1, 2023, and additional compliance investment and potential business process changes will likely be required. Similar laws have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the United States. For example, in March 2021, Virginia enacted the Virginia Consumer Data Protection Act, or CDPA, a comprehensive privacy statute that shares similarities with the CCPA, CPRA, and legislation proposed in other states. Some observers have noted that the CCPA, CPRA, and CDPA could mark the beginning of a trend toward more stringent privacy legislation in the United States. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply.

In addition, the Telephone Consumer Protection Act, or TCPA, imposes significant restrictions on the ability to make telephone calls or send text messages to mobile telephone numbers without the prior consent of the person being contacted. We use text messages frequently to communicate service-related issues to our customers. Efforts to comply with the TCPA do not prevent third-party claims that we have violated the TCPA from being brought, and such claims could be costly to litigate, and if successful, expose us to substantial statutory damages. The Controlling the Assault of Non-Solicited Pornography and Marketing Act, or CAN-SPAM, imposes specific restrictions and requirements on our efforts to send marketing materials via email, including notice obligations that must be included in our marketing emails and the ability for recipients to unsubscribe from such emails. The Federal Trade Commission enforces CAN-SPAM, and our efforts to comply with CAN-SPAM may not prevent claims that we have violated the law, which could be costly to resolve, and if successful, expose us to substantial penalties and potential injunctive relief.

We are also subject to the European Union General Data Protection Regulation, or GDPR, due to certain of our employees being based in Ireland. The GDPR, which is wide-ranging in scope and applies extraterritorially, imposes several requirements relating to the processing of personal data. The GDPR also imposes strict rules on the transfer of personal data out of the EU, including to the U.S. In addition, GDPR compliance requirements are consistently and rapidly evolving. For example, in July 2020, the Court of Justice of the European Union invalidated the EU-U.S. Privacy Shield data transfer mechanism, and other data transfer mechanisms such as the Standard Contractual Clauses, have also faced challenged in European courts, potentially limiting how organizations can lawfully transfer personal data from EEA to the U.S. Notably, the GDPR imposes large penalties for noncompliance, including the potential for fines of up to 20 million or 4% of the annual global revenues of the noncompliant entity, whichever is greater.

In addition, privacy advocates and industry groups have regularly proposed, and may propose in the future, self-regulatory standards by which we are legally or contractually bound. If we fail to comply with these contractual obligations or standards, we may face substantial liability or fines. Consumer resistance to the collection and sharing of the data used to deliver targeted advertising, increased visibility of consent or “do not track” mechanisms as a result of industry regulatory or legal

 

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developments, the adoption by consumers of browser settings or “ad-blocking” software, and the development and deployment of new technologies could materially impact our ability to collect data or reduce our ability to deliver relevant promotions or media, which could materially impair the results of our operations.

Further, we are subject to the PCI Data Security Standard, which is a multifaceted security standard that is designed to protect credit card account data as mandated by payment card industry entities. We rely on vendors to handle PCI matters for us and to ensure PCI compliance. Despite our compliance efforts, we may become subject to claims that we have violated the PCI Data Security Standard, based on past, present, and future business practices, which could have an adverse impact on our business and reputation, and be costly for us to defend.

We may not be successful in achieving compliance with the rapidly evolving privacy, data security, and data protection requirements discussed above, as well as other data privacy, security and consumer protection frameworks that currently, or may in the future, apply to us, despite our efforts to comply, as all of these frameworks are constantly evolving and are not always consistent with each other, leading to uncertainty in interpretation. Any actual or perceived non-compliance could result in litigation and proceedings against us by governmental entities, customers or others, fines and civil or criminal penalties, limited ability or inability to operate our business, offer services, or market our business in certain jurisdictions, negative publicity and harm to our brand and reputation, and reduced overall demand for our products and offerings. Such occurrences could adversely affect our business, financial condition, and results of operations. Our insurance policies may not be adequate to compensate us for the potential losses arising from any such disruptions in or failure or security intrusion of our systems or third-party systems where information important to our business operations is stored. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance policies may not cover all claims made against us and could have high deductibles, and defending a suit, regardless of its merit, could be costly and divert management attention.

We could incur significant liabilities related to, and significant costs in complying with, environmental, health and safety laws and regulations.

Our operations are subject to a variety of federal, state, local and foreign laws and regulations relating to health, safety and the protection of the environment. These environmental, health and safety laws and regulations include those relating to, among other things, the generation, storage, handling, use and transportation of hazardous materials; the emission and discharge of hazardous materials into the environment; and the health and safety of our employees. Failure to comply with such laws and regulations which tend to become more stringent over time can result in significant fines, penalties, costs, liabilities or restrictions on operations , injunctive relief, civil or criminal sanctions, and could expose us to costs of investigation or remediation, as well as tort claims for property damage or personal injury, and could negatively affect our business, financial condition or results of operations.

We manage our waste materials as non-hazardous waste, but we cannot guarantee that our supply chain or the products we use will not contain hazardous materials or result in the generation of hazardous waste. Further, liability for the improper release or disposal of waste can be joint and several and there can be no assurance that we will not have to expend material amounts to remediate the consequences of the generation or disposal of waste in the future, particularly with respect to our dry cleaning operations. Further, we may be responsible as a lessee operator for the costs of investigation, removal or remediation of hazardous substances or waste located on or in or emanating from leased property, as well as any property damage. There can be no assurance that our future uses or conditions will not result in the imposition of liability upon us under environmental laws or expose us to third-party actions such as tort suits. Furthermore, we rely on third-party suppliers to provide

 

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chemicals, cleaning supplies, and handling instructions that comply with applicable health, safety and environmental regulations. A failure of such suppliers to abide by applicable regulations may subject us to material liabilities.

From time to time, we may be subject to legal proceedings, regulatory disputes, and governmental inquiries that could cause us to incur significant expenses, divert our managements attention, and materially harm our business, financial condition, and operating results.

From time to time, we may be subject to claims, lawsuits, government investigations, and other proceedings involving products liability, competition and antitrust, intellectual property, privacy, consumer protection, securities, tax, labor and employment, commercial disputes, and other matters that could adversely affect our business operations and financial condition. In recent years, we have seen a rise in the number and potential significance of these disputes and inquiries and evolving areas of focus for regulators and private plaintiffs. For example, there has been an increase in consumer class action lawsuits relating to subscription products. Litigation and regulatory proceedings may be protracted and expensive, and the results are difficult to predict. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages and include claims for injunctive relief. Additionally, our litigation costs could be significant. Adverse outcomes with respect to litigation or any of these legal proceedings may result in significant settlement costs or judgments, penalties and fines, or require us to modify our products and offerings, all of which could negatively affect our revenue growth. The results of litigation, investigations, claims, and regulatory proceedings cannot be predicted with certainty, and determining reserves for pending litigation and other legal and regulatory matters requires significant judgment. There can be no assurance that our expectations will prove correct, and even if these matters are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our business, financial condition, and results of operations.

In addition, as a public company, our business and financial condition will become more visible, which may result in an increased risk of threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, financial condition, and results of operations would be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, would divert the resources of our management and harm our business, financial condition, and results of operations.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes to offset taxable income or taxes may be limited.

As of January 31, 2021, we had federal net operating loss carryforwards of $459 million, $152 million of which will expire at various times through 2038. Furthermore, we had state net operating loss carryforwards of $26 million, which will expire at various times through 2041. Portions of these net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the legislation enacted in 2017, commonly referred to as the Tax Cuts and Jobs Act, or Tax Act, as modified by the Coronavirus Aid, Relief, and Economic Security, or CARES Act, U.S. federal net operating losses incurred in taxable years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal net operating losses in taxable years beginning after December 31, 2020, is limited. It is uncertain how various states will respond to the Tax Act and the CARES Act. For state income tax purposes, there may be periods during which the use of net operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. For example, California recently imposed limits on the usability of California state net operating losses to offset taxable income in tax years beginning on or after January 1, 2020 and before January 1, 2023.

 

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In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” (very generally defined as a greater than 50% change, by value, in the corporation’s equity ownership by certain shareholders or groups of shareholders over a rolling three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. In 2021, we completed a Section 382 analysis covering the period beginning in March 2009 and ending in March 2021. From the study, we concluded we experienced an ownership change in 2010 (but not since then) and $1.3 million of NOLs were subject to the limitation. However, all of those NOLs were available by the year ended January 31, 2017. We may experience additional ownership changes as a result of subsequent shifts in our stock ownership, including upon completion of this offering, some of which may be outside of our control. If we undergo another ownership change, we may incur additional limitations on our ability to utilize our NOLs existing at the time of the ownership change. Future regulatory changes could also limit our ability to utilize our NOLs. To the extent we are not able to offset future taxable income with our NOLs, our cash flows may be adversely affected. We have recorded a full valuation allowance against our U.S. deferred tax assets, which includes net operating loss carryforwards.

Changes in our effective tax rate or tax liability may have an adverse effect on our results of operations.

We are subject to income taxes in the United States and in various states within the United States. Our effective tax rate could be adversely affected due to several factors, including:

 

   

changes in the relative amounts of income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;

 

   

changes in the United States or foreign tax laws, tax treaties, and regulations or the interpretation of them;

 

   

changes to our assessment about our ability to realize our deferred tax assets that are based on estimates of our future results, the prudence and feasibility of possible tax planning strategies, and the economic and political environments in which we do business;

 

   

the outcome of current and future tax audits, examinations, or administrative appeals; and

 

   

limitations or adverse findings regarding our ability to do business in some jurisdictions.

If we expand the scale of our international business activities, any changes in the United States or foreign taxation of such activities may increase our worldwide effective tax rate and harm our business, financial condition, and results of operations.

In particular, new income or other tax laws or regulations could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws and regulations could be interpreted, modified, or applied adversely to us. For example, the Tax Act enacted many significant changes to the U.S. tax laws. Future guidance from the IRS and other tax authorities with respect to the Tax Act may affect us, and certain aspects of the Tax Act could be repealed or modified in future legislation. In addition, the recent presidential and congressional elections in the United States could result in significant changes in, and uncertainty with respect to, tax legislation, regulation and government policy directly affecting our business or indirectly affecting us because of impacts on our customers and suppliers. We are currently unable to predict whether such changes will occur and, if so, the ultimate impact on our business. To the extent that such changes have a negative impact on us, our suppliers or our customers, including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition, results of operations and cash flows.

 

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Risks Related to Our Dependence on Third Parties

We face risks associated with brand partners from whom our products are sourced or co-manufactured.

We obtain substantially all of our products directly from over 750 brand partners through Wholesale, Share by RTR, and Exclusive Designs arrangements with designer or manufacturing partners. The benefits we currently experience from these brand partner relationships could be adversely affected if they:

 

   

discontinue selling products to us;

 

   

enter into arrangements with competitors that could impair our ability to source their products, including by giving our competitors exclusivity arrangements or limiting our access to certain products;

 

   

raise the prices they charge us;

 

   

are not satisfied with the value proposition we offer them;

 

   

do not view our brand favorably;

 

   

change pricing terms to require us to pay a significant portion of the cost of items on delivery or upfront;

 

   

experience negative publicity or reputational issues;

 

   

do not follow our vendor code of conduct and/or violate legal and regulatory requirements;

 

   

experience supply chain disruptions that cause lead times to be lengthened; or

 

   

fail to execute on the design we have provided for co-manufactured products.

Events that adversely impact our brand partners could impair our ability to obtain adequate and timely products. We also source products directly from brand partners outside of the United States and many of our brand partners use manufacturers in the same geographic region, and as a result we may be subject to magnified impact from such events including, among others, difficulties or problems associated with our brand partners’ business, the financial instability and labor problems of brand partners, product quality and safety issues, natural or man-made disasters, inclement weather conditions, war, acts of terrorism and other political instability, economic conditions, imposition of additional import or trade restrictions, including legal or economic restrictions on overseas partners’ ability to produce and deliver products, increased custom duties and tariffs, unforeseen delays in customs clearance of goods, more restrictive quotas, loss of a most favored nation trading status, currency exchange rates, transportation delays, port of entry issues, the availability of their raw materials and increased production costs. Our brand partners may be forced to reduce their production, shut down their operations or file for bankruptcy. The occurrence of one or more of these events could impact our ability to acquire products, which may result in a less appealing assortment of styles for our customers and reduced availability of the styles we are able to obtain. Similarly, the occurrence of a contagious disease or illness could cause delays or increase costs in the manufacture of certain products. For example, the COVID-19 pandemic caused delays in some shipments from our brand partners.

We rely on third parties for elements of the payment processing infrastructure underlying our business. If these third-party elements become unavailable or unavailable on favorable terms, our business could be adversely affected.

The convenient customer payment mechanisms provided by our business are key factors contributing to the development of our business. We rely on third parties, including for our payment

 

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processing infrastructure, to accept payments from customers and in connection with our banking partners, to remit payments to suppliers. These third parties may refuse to renew our agreements with them on commercially reasonable terms or at all. Furthermore, we rely on a single payment processor, which may increase our risks of being unable to process payments and deliver our products in a timely and cost-effective manner. In the event of interruption, we may not be able to develop alternate or secondary processing without incurring material additional costs and substantial delays. If these companies become unwilling or unable to provide these services to us on acceptable terms or at all, our business may be disrupted. For certain payment methods, including credit and debit cards, we generally pay interchange fees and other processing and gateway fees, and such fees result in significant costs. In addition, online payment providers are under continued pressure to pay increased fees to banks to process funds, and there is no assurance that such online payment providers will not pass any increased costs on to us. If these fees increase over time, our operating costs will increase, which could adversely affect our business, financial condition, and results of operations.

Outages or other failures of the payment processing infrastructure underlying our business could harm our business and cause customers to lose trust in our payment operations and cause them to discontinue use of our products and services. If the quality or convenience of our payment processing infrastructure declines for any reason, the attractiveness of our business to customers could be adversely affected. If we are forced to migrate to other third-party payment service providers for any reason, the transition would require significant time and management resources, and may not be available on acceptable terms or as effective, efficient, or well-received by our customers.

Our business relies on third-party cloud infrastructures, and any disruption of, or interference with, our use of cloud infrastructures could adversely affect our business, financial condition or results of operations.

We are in the process of migrating a substantial portion of our primary production environment, core architecture, and data centers to a new third-party cloud provider, which provides a distributed computing infrastructure as a service platform for business operations. We also use another third-party cloud provider for portions of our business. Our third-party cloud providers will provide the cloud computing infrastructure we use to host our website and mobile application, serve our customers and support our operations and many of the internal tools we use to operate our business. Our website, mobile application and internal tools will use computing, storage, data transfer and other functions and services provided by our third-party cloud providers. We do not have control over the operations of the facilities of our third-party cloud providers. In addition, our third-party cloud providers’ facilities may be vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cybersecurity attacks, terrorist attacks, power losses, telecommunications failures and other events beyond our control. In the event that any third-party provider’s systems or service abilities are hindered by any of the events discussed above, particularly in a region where our website is mainly hosted, our ability to operate our business may be impaired. A decision to close the facilities without adequate notice or other unanticipated problems or disruptions could result in lengthy interruptions to our business. Further, our agreements with our third-party cloud providers do not provide us with an adequate remedy for every scenario that could negatively affect our business. All of the aforementioned risks may be exacerbated if our business continuity and disaster recovery plans prove to be inadequate.

Additionally, data stored with our third-party cloud providers may experience threats or attacks from computer malware, ransomware, viruses, social engineering (including phishing attacks), denial of service or other attacks, employee theft or misuse and general hacking. Any of these security incidents could result in unauthorized access to, damage to, disablement or encryption of, use or misuse of, disclosure of, modification of, destruction of, or loss of our data or our customers’ data or disrupt our ability to provide our products and offerings, including due to any failure by us to properly configure our cloud environment. Our business’ continuing and uninterrupted performance is critical to our success.

 

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Customers may become dissatisfied by any system failure that interrupts our ability to provide our merchandise and offerings to them. We may not be able to easily switch our third-party cloud operations to another cloud or other data center provider if there are disruptions or interference with cloud services and, even if we do switch our operations, other cloud and data center providers are subject to the same risks. Sustained or repeated system failures would reduce the attractiveness of our products and offerings, thereby reducing revenue. Moreover, negative publicity arising from these types of disruptions could damage our brand and reputation and may adversely impact our business.

Our third-party cloud providers do not have an obligation to renew their agreements with us on terms acceptable to us. Although alternative data center providers could host our business on a substantially similar basis to our current third-party cloud providers, transitioning our cloud infrastructure to alternative providers could potentially be disruptive, and we could incur significant one-time costs. If we are unable to renew our agreement for our cloud services on commercially acceptable terms, our agreements with our third-party cloud providers are prematurely terminated, or we add additional infrastructure providers, we may experience costs or downtime in connection with the transfer to, or the addition of, new data center providers. If our third-party cloud providers or other infrastructure providers increase the costs of their services, our business, financial condition or results of operations could be materially and adversely affected.

We depend on search engines, social media platforms, mobile application stores, content-based online advertising and other online sources to attract consumers to and promote our website and our mobile application, which may be affected by third-party interference beyond our control and as we grow our customer acquisition costs will continue to rise.

Our success depends on our ability to attract consumers to our website and mobile application and convert them into customers in a cost-effective manner. We depend, in large part, on search engines, social media platforms, mobile application stores, content-based online advertising and other online sources for traffic to our website and mobile application.

With respect to search engines, we are included in search results for both paid search listings, where we purchase specific search terms resulting in inclusion of our advertisements, and free search listings, which depend on algorithms used by search engines. For paid search listings, if one or more of the search engines or other online sources on which we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise, we could lose consumers who access our advertisements and traffic to our website could decrease, any of which could have a material adverse effect on our business, financial condition, and results of operations. For free search listings, if search engines on which we rely for algorithmic listings modify their algorithms, our websites may appear less prominently or not at all in search results, which could result in reduced traffic to our websites.

Our ability to maintain and increase the number of consumers directed to our products from digital platforms is not entirely within our control. Search engines, social media platforms and other online sources often revise their algorithms and introduce new advertising products. If one or more of the search engines or other online sources on which we rely for traffic to our website and our mobile application were to modify its general methodology for how it displays our advertisements or keyword search results, resulting in fewer consumers clicking through to our website and our mobile application, our business and operating results are likely to suffer. For example, Apple recently moved to “opt-in” privacy models for mobile applications using its operating system such as ours, requiring consumers to voluntarily choose to receive targeted ads, which may reduce the efficacy of our marketing tracking. In addition, if our online display advertisements are no longer effective or are not able to reach certain customers due to their use of ad-blocking software, our business and operating results could suffer. Furthermore, changes in customer acceptance or usage of our online sources for traffic could adversely impact the effectiveness of our advertising.

 

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Additionally, changes in regulations could limit the ability of search engines and social media platforms, including, but not limited to, Google and Facebook, to collect data from users and engage in targeted advertising, making them less effective in disseminating our advertisements to our target customers. For example, the proposed Designing Accounting Safeguards to Help Broaden Oversight and Regulations on Data (DASHBOARD) Act would mandate annual disclosure to the SEC of the type and “aggregate value” of user data used by harvesting companies, such as, but not limited to, Facebook, Google and Amazon, including how revenue is generated by user data and what measures are taken to protect the data. If the costs of advertising on search engines and social media platforms increase, we may incur additional marketing expenses or be required to allocate a larger portion of our marketing spend to other channels and our business and operating results could be adversely affected.

Furthermore, because many of our customers access our products through our mobile application, we depend on the Apple App Store to distribute our mobile application. Apple has broad discretion to change its respective terms and conditions, including those relating to the amount of (and requirement to pay) certain fees associated with our use of the Apple App Store, to interpret its respective terms and conditions in ways that may limit, eliminate or otherwise interfere with our ability to distribute our mobile application through its stores, the features we provide and the manner in which we market in-application products. We cannot assure you that Apple will not limit, eliminate or otherwise interfere with the distribution of our mobile application, the features we provide and the manner in which we market our mobile application. To the extent it does so, our business, financial condition, and results of operations could be adversely affected.

As existing social media platforms continue to rapidly evolve and new platforms develop, we must continue to maintain a presence on these platforms and establish presences on new or emerging social media platforms. If we are unable to cost-effectively use social media platforms as marketing tools or if the social media platforms we use change their policies or algorithms, we may not be able to fully optimize such platforms, and our ability to maintain and acquire consumers and our financial condition may suffer. Furthermore, as laws and regulations and public opinion rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, our network of social media influencers, our sponsors or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices or otherwise could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have an adverse effect on our business, financial condition, results of operations and prospects.

Any failure by us, our brand partners, or our third-party manufacturers to comply with our vendor code of conduct, product safety, labor, or other laws, or to provide safe factory conditions for their workers, may damage our reputation and brand, and harm our business.

Our standard vendor terms and conditions, vendor code of conduct, and other policies require our brand partners to comply with applicable laws and certain business standards. The failure of these partners to comply with our vendor code of conduct or applicable laws and regulations could damage our reputation, lead to negative press and/or customer sentiment, or result in costly litigation against us.

The products we rent or sell to our customers is subject to regulation by the Federal Consumer Product Safety Commission, the Federal Trade Commission, and similar state and international regulatory authorities. As a result, such products could in the future be subject to mandatory recalls and other remedial actions. Product safety, labeling, and licensing concerns may also result in us voluntarily removing selected products from our assortment. Such recalls or voluntary removal of products can result in, among other things, lost revenue, diverted resources, potential harm to our reputation, and increased customer service costs and legal expenses, which could have a material adverse effect on our operating results.

 

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It is possible that some of the products we rent or sell may expose us to product liability claims and litigation or regulatory action relating to personal injury. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms or at all. In addition, our partners may not have sufficient resources or insurance to satisfy their indemnity and defense obligations to us in connection with product liability claims or regulatory actions.

We may incur significant losses from fraud.

We have in the past incurred and may in the future incur losses from various types of fraud, including claims that a customer did not authorize a purchase, customers who have closed bank accounts or have insufficient funds to satisfy payments, customers who use stolen credit cards to make purchases, customers who fraudulently rented multiple products at once and customers who have failed to return rentals. In addition to the direct costs of such losses, if the fraud is related to credit card transactions and becomes excessive, it could result in us paying higher fees or losing the right to accept credit cards for payment. In addition, under current credit card practices, we are typically liable for fraudulent credit card transactions. We have implemented fraud prevention measures, such as detection tools to identify irregular or high risk customer order patterns, to reduce the risk of fraud. However, our failure to adequately prevent fraudulent transactions could damage our reputation, result in litigation or regulatory action, and lead to expenses that could substantially impact our operating results.

If our insurance coverage is insufficient for the needs of our business or our insurance providers are unable to meet their obligations, we may not be able to mitigate the risks facing our business.

We procure third-party insurance policies to cover various operations-related risks including employment practices liability, workers’ compensation, property and business interruptions, cybersecurity and data security incidents, crime, directors’ and officers’ liability, and general business liabilities. We cannot guarantee that we will continue to receive adequate insurance coverage on favorable terms. Insurance providers may discontinue their coverage or significantly increase the cost of coverage, and we cannot guarantee that we would be able to secure replacement coverage on reasonable terms or at all. In addition, if our insurance carriers change the terms of our policies in a manner not favorable to us, our insurance costs could increase. Further, if the insurance coverage we maintain is not adequate to cover losses that occur, or if we are required to purchase additional insurance for other aspects of our business, we could be liable for significant additional costs. Additionally, if any of our insurance providers becomes insolvent, it would be unable to pay any operations-related claims that we make.

Insurance providers have also raised premiums and deductibles for many businesses, including ours, and may do so in the future. As a result, our insurance and claims expense could increase, or we may decide to raise our deductibles or self-insured retentions when our policies are renewed or replaced. Our business, financial condition, and results of operations could be adversely affected if the cost per claim, premiums, the severity of claims, or the number of claims significantly exceeds our historical experience and coverage limits; we experience a claim in excess of our coverage limits; our insurance providers fail to pay on our insurance claims; we experience a claim for which coverage is not provided; or the number of claims under our deductibles or self-insured retentions differs from historical averages.

 

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Risks Related to this Offering and Ownership of Our Class A Common Stock

The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the listing of our Class A common stock on                , including our founders, directors, executive officers, and their respective affiliates, which will limit your ability to influence the outcome of important transactions, including a change of control.

Our Class B common stock has                votes per share, and our Class A common stock, which is the stock we are listing on                and is being registered pursuant to the registration statement of which this prospectus forms a part, has one vote per share. As of                , our founders, directors, executive officers, and their affiliates held in the aggregate                % of the voting power of our capital stock. Because of the                 -to-                voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively could continue to control a significant percentage of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval until the date of automatic conversion described below, when all outstanding shares of Class B common stock and Class A common stock will convert automatically into shares of a single class of common stock. This concentrated control may limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may believe are in your best interest as one of our stockholders.

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. In addition, each share of Class B common stock will convert automatically into one share of Class A common stock upon the date that is the earlier of                . The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares over the long term. As a result, it is possible that, in addition to                , one or more of the persons or entities holding our Class B common stock could gain significant voting control as other holders of Class B common stock sell or otherwise convert their shares into Class A common stock.

An active, liquid, and orderly market for our Class A common stock may not develop or be sustained. You may be unable to sell your shares of Class A common stock at or above the price at which you purchased them.

We currently expect our Class A common stock to be listed and traded on                . Prior to listing on                 , there has been no public market for our Class A common stock. An active trading market may not develop following the closing of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration. The initial public offering price was determined by negotiations between us and the underwriters and may not be indicative of the future prices of our Class A common stock.

Our share price may be volatile, and you may be unable to sell your shares at or above the offering price.

The market price of our Class A common stock is likely to be volatile and could be subject to wide fluctuations in response to the risk factors described in this prospectus, and others beyond our control, including:

 

   

actual or anticipated fluctuations in our revenue or other operating metrics;

 

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our actual or anticipated operating performance and the operating performance of our competitors;

 

   

changes in the financial projections we provide to the public or our failure to meet these projections;

 

   

the perceived adequacy of our ESG efforts;

 

   

positive or negative publicity;

 

   

failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet the estimates or the expectations of investors;

 

   

any major change in our board of directors, management, or key personnel;

 

   

the economy as a whole and market conditions in our industry;

 

   

rumors and market speculation involving us or other companies in our industry;

 

   

announcements by us or our competitors of significant innovations, new products, services, features, integrations, or capabilities, acquisitions, strategic investments, partnerships, joint ventures, or capital commitments;

 

   

the legal and regulatory landscape and changes in the application of existing laws or adoption of new laws that impact our business, including changes in e-commerce and tax laws;

 

   

legal and regulatory claims, litigation, or pre-litigation disputes and other proceedings;

 

   

the pace of the COVID-19 pandemic recovery and its impact on our business or the fashion industry and sharing economy generally;

 

   

sales or expected sales of our Class A common stock by us, our officers, directors, principal stockholders, and employees; and

 

   

other events or factors, including those resulting from war, incidents of terrorism, or responses to these events.

If the market price of our Class A common stock after this offering does not exceed the initial public offering price, you will not realize any return on your investment in us and will lose some or all of your investment. In addition, stock markets, and the trading of e-commerce companies’ and technology companies’ stocks in particular, have experienced significant price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner often unrelated to the operating performance of those companies. These fluctuations may be even more pronounced in the trading market for our Class A common stock shortly following the listing of our Class A common stock on the                as a result of the supply and demand forces described above. In the past, stockholders have instituted securities class action litigation following periods of stock volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and materially adversely affect our business, financial condition and results of operations.

After this offering, company insiders will continue to have the ability to control or significantly influence all matters submitted to stockholders for approval.

Following the completion of this offering, our executive officers, directors, and greater than 5% stockholders, in the aggregate, will beneficially own approximately % of our outstanding common stock. In addition, if any of our executive officers, directors, and greater than 5% stockholders purchase shares in this offering, or if any of our other current investors purchase shares in this offering and

 

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become greater than 5% stockholders as a result, the ability of such persons, acting together, to control or significantly influence such matters will increase. This concentration of ownership may have the effect of delaying, deferring, or preventing a change in control, impeding a merger, consolidation, takeover, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.

Our management has broad discretion in the use of the net proceeds from this offering and may not use the net proceeds effectively.

Our management will have broad discretion in the application of the net proceeds of this offering, which may include working capital, to fund growth and for other general corporate purposes. We may also use a portion of the net proceeds to acquire or make investments in businesses, products, offerings, and technologies, although we do not have agreements or commitments for any material acquisitions or investments at this time. We cannot specify with certainty the uses to which we will apply these net proceeds. We may also spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could adversely affect our ability to pursue our growth strategies and expand our business. Pending their use, the net proceeds from our initial public offering may be invested in a way that does not produce income or that loses value.

We cannot predict the effect our dual class structure may have on the trading price of our Class A common stock.

We cannot predict whether our dual class structure will result in a lower or more volatile trading price of our Class A common stock, in adverse publicity, or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indices. In July 2017, FTSE Russell announced that it plans to require new constituents of its indices to have greater than 5% of the company’s voting rights in the hands of public stockholders, and S&P Dow Jones announced that it will no longer admit companies with multiple-class share structures to certain of its indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400, and S&P SmallCap 600, which together make up the S&P Composite 1500. Also in 2017, MSCI, a leading stock index provider, opened public consultations on their treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from certain of its indices; however, in October 2018, MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. Under such announced policies, the dual class structure of our common stock would make us ineligible for inclusion in certain indices and, as a result, mutual funds, exchange-traded funds, and other investment vehicles that attempt to passively track those indices would not invest in our Class A common stock. These policies are relatively new and it is unclear what effect, if any, they will have on the valuations of publicly-traded companies excluded from such indices, but it is possible that they may depress valuations, as compared to similar companies that are included. Because of the dual class structure of our common stock, we will likely be excluded from certain indices, and we cannot assure you that other stock indices will not take similar actions. Given the sustained flow of investment funds into passive strategies that seek to track certain indices, exclusion from certain stock indices would likely preclude investment by many of these funds and would make our Class A common stock less attractive to other investors. As a result, the trading price of our Class A common stock could be adversely affected.

Our business and financial performance may differ from any projections that we disclose or any information that may be attributed to us by third parties.

From time to time, we may provide guidance regarding our projected business and/or financial performance. However, any such projections involve risks, assumptions, and uncertainties, and our

 

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actual results could differ materially from such projections. Factors that could cause or contribute to such differences include, but are not limited to, those identified in these Risk Factors, some or all of which are not predictable or within our control. Other unknown or unpredictable factors also could adversely impact our performance, and we undertake no obligation to update or revise any projections, whether as a result of new information, future events, or otherwise. In addition, various news sources, bloggers, and other publishers often make statements regarding our historical or projected business or financial performance, and you should not rely on any such information even if it is attributed directly or indirectly to us.

Our trading price and trading volume could decline if securities or industry analysts do not publish research about our business, or if they publish unfavorable research.

Equity research analysts do not currently provide coverage of our Class A common stock, and we cannot assure that any equity research analysts will adequately provide research coverage of our Class A common stock after the listing of our Class A common stock on                . A lack of adequate research coverage may harm the liquidity and trading price of our Class A common stock. To the extent equity research analysts do provide research coverage of our Class A common stock, we will not have any control over the content and opinions included in their reports. The trading price of our Class A common stock could decline if one or more equity research analysts downgrade our stock or publish other unfavorable commentary or research. If one or more equity research analysts cease coverage of our company, or fail to regularly publish reports on us, the demand for our Class A common stock could decrease, which in turn could cause our trading price or trading volume to decline.

Future sales of our common stock in the public market could cause our share price to fall.

The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

We may issue additional securities following the closing of this offering. In the future, we may sell Class A common stock, other series of common stock, convertible securities, or other equity securities, including preferred securities, in one or more transactions at prices and in a manner we determine from time to time. We also expect to issue Class A common stock to employees, consultants, and directors pursuant to our equity incentive plans. If we sell Class A common stock, other series of common stock, convertible securities, or other equity securities in subsequent transactions, or Class A common stock or Class B common stock is issued pursuant to equity incentive plans, investors may be materially diluted. New investors in subsequent transactions could gain rights, preferences, and privileges senior to those of holders of our Class A common stock.

In addition, we may issue our capital stock or securities convertible into our capital stock from time to time in connection with a financing, acquisition, investments, or otherwise. Additional issuances of our stock will result in dilution to existing holders of our stock. Also, to the extent outstanding stock options to purchase our stock are exercised or RSUs settle, there will be further dilution. The amount of dilution could be substantial depending upon the size of the issuance or exercise. Any such issuances could result in substantial dilution to our existing stockholders and cause the trading price of our Class A common stock to decline.

Upon closing of this offering, based on the shares outstanding as of                 , 2021, we will have                shares of Class A common stock outstanding, assuming no exercise of the underwriters’ option to purchase additional shares and                 shares of Class B common stock outstanding. Of the outstanding shares, the                shares of Class A common stock sold or issued in this offering

 

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(or                shares if the underwriters exercise their over-allotment option in full) will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

The remaining outstanding shares of common stock held by our existing owners after this offering will be subject to certain restrictions on resale. We, our executive officers, directors and the holders of substantially all of our outstanding stock will sign lock-up agreements with the underwriters that will, subject to certain customary exceptions, restrict the sale of the shares of our common stock and certain other securities held by them for                days following the date of this prospectus.                 and                 may, in their sole discretion and at any time without notice, release all or any portion of the shares or securities subject to any such lock-up agreements. See “Underwriting” for a description of these lock-up agreements.

Upon the expiration of the lock-up agreements described above, all of such shares will be eligible for resale in a public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other described in “Shares Eligible for Future Sale.”

As restrictions on resale end, the market price of our shares of Class A common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of Class A common stock or other securities.

We do not intend to pay dividends for the foreseeable future. Consequently, any gains from an investment in our Class A common stock will likely depend on whether the price of our Class A common stock increases.

We have never declared or paid any cash dividends on our Class A common stock, and we do not intend to pay any cash dividends in the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business and for general corporate purposes. Any future determination to pay dividends on our capital stock will be at the discretion of our board of directors. Furthermore, our ability to pay dividends may also be restricted by the terms of our Credit Agreements or any future debt or preferred equity securities of us or our subsidiaries. Accordingly, you may need to sell your shares of our Class A common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. For more information, see the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Dividend Policy.”

If you purchase shares of our Class A common stock in this offering, you will incur immediate and substantial dilution.

The initial public offering price of $                 per share of our Class A common stock is substantially higher than the net tangible book value per share of our Class A common stock, which on a pro forma as adjusted basis was $                 per share of our common stock as of                 , 2021. As a result, you will incur immediate and substantial dilution in net tangible book value when you buy our Class A common stock in this offering. This means that you will pay a higher price per share than the amount of our total tangible assets, less our total liabilities, divided by the number of shares of all of our Class A common stock outstanding. In addition, you may also experience additional dilution if options, RSUs, or other rights to purchase our Class A common stock that are outstanding or that we may issue in the future are exercised, vest, or are converted or we issue additional shares of our Class A common stock at prices lower than our net tangible book value at such time. See “Dilution.”     

 

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Certain provisions in our corporate charter documents and under Delaware law may prevent or hinder attempts by our stockholders to change our management or to acquire a controlling interest in us, and the trading price of our Class A common stock may be lower as a result.

There are provisions in our Amended Charter and Amended Bylaws, as they will be in effect following the effectiveness of the registration statement of which this prospectus forms a part, that may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control were considered favorable by our stockholders. These anti-takeover provisions include:

 

   

authorization of the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

   

provide for a dual class common stock structure in which holders of our Class B common stock, which has                votes per share, have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our Class B and Class A common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;

 

   

a classified board of directors so that not all members of our board of directors are elected at one time;

 

   

a requirement that our directors may only be removed for cause;

 

   

a prohibition on stockholder actions by written consent, thereby requiring that all stockholder actions be taken at a meeting of our stockholders.

 

   

an inability of our stockholders to call special meetings of stockholders.

 

   

the requirement of a super-majority to amend some provisions in our Amended Charter and Amended Bylaws; and

 

   

a prohibition on cumulative voting for directors.

Although we will opt out of Section 203 of the General Corporation Law of the State of Delaware, or the DGCL, our Amended Charter will contain provisions that are similar to Section 203. Specifically, our Amended Charter will provide that, subject to certain exceptions, we will not be able to engage in a “business combination” with any “interested stockholder” for three years following the date that the person became an interested stockholder, unless the interested stockholder attained such status with the approval of our board of directors or unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger or consolidation involving us and the “interested stockholder” and the sale of more than 10% of our assets. In general, an “interested stockholder” is any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlled by such entity or person.

Any provision in our Amended Charter, Amended Bylaws, or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock, and could also affect the price that some investors are willing to pay for our Class A common stock.

 

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Our Amended Charter will designate the Court of Chancery of the State of Delaware and the federal district courts of the United States of America as the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our Amended Charter, as will be in effect following the effectiveness of the registration statement of which this prospectus forms a part, will provide that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising under the Delaware General Corporation Law, our Amended Charter, or our Amended Bylaws, and any action asserting a claim against us that is governed by the internal affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended, or Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our Amended Charter will further provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our Amended Charter. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.

These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find either exclusive-forum provision in our Amended Charter to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations or financial condition, business strategy, and plans and objectives of management for future operations are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “toward,” “will,” or “would,” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

   

our ability to manage our future growth effectively;

 

   

the effects of the COVID-19 pandemic;

 

   

our ability to compete successfully;

 

   

our ability to attract new, and retain existing, customers;

 

   

our ability to acquire and drive return on investment of our products;

 

   

our ability to manage operating and capital efficiencies in our business;

 

   

our ability to accurately estimate our market opportunity and forecast market growth;

 

   

our ability to anticipate and respond successfully to changing fashion trends and consumer preferences;

 

   

our ability to receive inbound products from brand partners and ship products to and from customers efficiently;

 

   

the ability of our brand partners to adequately and timely deliver products to us;

 

   

the effects of seasonal trends on our results of operations;

 

   

the increased expenses associated with being a public company;

 

   

our ability to remain in compliance with extensive laws and regulations that apply to our business and operations;

 

   

our ability to adequately maintain and protect our intellectual property and proprietary rights;

 

   

the future trading prices of our Class A common stock; and

 

   

other risks and uncertainties, including those described in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the sections titled “Risk Factors,” and Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements

 

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contained in this prospectus. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. While we believe such information provides a reasonable basis for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely on these statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information, actual results, revised expectations or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, performance and events and circumstances may be materially different from what we expect. See “Where You Can Find Additional Information.”

 

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MARKET, INDUSTRY AND OTHER DATA

This prospectus contains statistical data, estimates, forecasts and information concerning our industry, including market size and growth of the market in which we participate, that are based on independent industry publications and reports, including those published by Euromonitor International Limited, or Euromonitor, as well as our internal sources and general knowledge of, and expectations concerning, the industry.

The industry market and sales positions, shares, market sizes and growth estimates included in this prospectus are based on estimates using the foregoing independent industry publications and our internal data and estimates based on data from various industry analyses, our internal research and adjustments and assumptions that we believe to be reasonable. Although we have no reason to believe this industry information is not reliable, we have not independently verified data from industry publications and analyses and cannot guarantee their accuracy or completeness. In addition, we believe that the data regarding the industry and industry market and sales positions, shares, market sizes and growth provide general guidance but are inherently imprecise. Further, these estimates and assumptions involve risks and uncertainties and are subject to change based on various factors, including those discussed in the “Risk Factors” section of this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates and assumptions. Accordingly, investors should not place undue reliance on this information.

This prospectus also includes references to our April 2021 Rent the Runway Subscriber Survey, or the April 2021 Subscriber Survey, which we use to measure our subscriber preferences. Our methodology of conducting the subscriber survey measures responses from active subscribers who chose to respond to the survey questions from April 29, 2021 through May 6, 20201. Paused subscribers and subscribers who joined for the first time between February 22, 2021 and April 30, 2021 were not included. We give no weight to subscribers who decline to answer the survey question.

This prospectus also includes references to our June 2021 Rent the Runway Customer Survey, or the June 2021 Customer Survey, which we use to measure our customer preferences. Our methodology of conducting the Customer Survey measures responses from two pools of respondents, (A) all subscribers, from which we excluded our employees and subscribers who joined for the first time between May 7, 2021 and June 30, 2021, and (B) a random sample of 30% of our Reserve customers who placed a Reserve order in fiscal year 2019 or later, excluding employees, Reserve customers who placed their first order in June 2021, and Reserve customers with a reported order issue in the last 30 days before the conclusion of the survey. Both (A) and (B) respondents responded to the survey questions from June 28, 2021 through July 1, 2021. We give no weight to customers who decline to answer the survey question, and certain references to the June 2021 Customer Survey may isolate responses from group (A) (subscribers) or group (B) (Reserve customers) as specified.

This prospectus also includes references to our June 2021 Rent the Runway Brand Survey, which we use to measure brand partner engagement. Our methodology of conducting the Brand Survey measures responses from a pool of respondents we actively partnered with for the Spring 2021 season. Brand partners responded to the survey questions from June 24, 2021 through July 12, 2021.

Certain of the statistics and estimates related to our ESG efforts are derived from a life cycle assessment and addendum thereto, or LCA Study, of linear and rental systems (owning versus rental of apparel) conducted by third-party partners, SgT Group and Green Story Inc, which was commissioned by us. Certain management estimates are based on the LCA Study, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data, and our experience in, and knowledge of, the industry and linear and rental systems, which we believe to be reasonable.

 

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USE OF PROCEEDS

We estimate that we will receive approximately $                million from the sale of     shares of Class A common stock in this offering, or approximately $                million if the underwriters exercise in full their option to purchase additional shares, assuming an initial public offering price of $                per share (which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease, as applicable, in the assumed initial public offering price of $                per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $                million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Similarly, each 1,000,000 share increase or decrease, as applicable, in the number of shares offered in this offering would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $                million, assuming that the price per share for the offering remains at $                (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering for working capital, to fund growth and for other general corporate purposes. As of the date of this prospectus, we cannot specify with certainty all of the particular uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion in the application of these proceeds. We intend to invest the net proceeds to us from this offering that are not used as described above in investment-grade, interest-bearing instruments. See “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock—Our management has broad discretion in the use of the net proceeds from this offering and may not use the net proceeds effectively” for additional information.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all future earnings and do not anticipate declaring or paying any dividends in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors, subject to compliance with applicable law and contractual restrictions in the agreements governing our current and future indebtedness, and will depend on a number of then-existing factors, including our business prospects, results of operations, financial condition, cash requirements and availability and other factors that our board of directors may deem relevant.

See “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock— We do not intend to pay dividends for the foreseeable future. Consequently, any gains from an investment in our Class A common stock will likely depend on whether the price of our Class A common stock increases.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, and our capitalization as of January 31, 2021 as follows:

 

   

on an actual basis; and

 

   

on a pro forma basis to give effect to (i) the automatic conversion of all outstanding shares of our redeemable preferred stock into                shares of our Class A common stock, upon closing of this offering and (ii) the filing and effectiveness of our Amended Charter and the adoption of our Amended Bylaws, in each case as if such event had occurred on January 31, 2021; and

 

   

on a pro forma as adjusted basis to give effect to (1) the pro forma adjustments described in the preceding clause and (2) the issuance and sale of Class A common stock in this offering at an assumed initial public offering price of $                per share (which is the midpoint of the range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds therefrom as described under “Use of Proceeds.”

You should read this information together with our consolidated financial statements and the related notes included in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

     As of January 31 , 2021  
     Actual     Pro
Forma
     Pro Forma As
Adjusted
 
     (in thousands, except share and
per share data)
 

Cash and cash equivalents(1)

   $ 95,260     $                    $                
  

 

 

   

 

 

    

 

 

 

Indebtedness:

       

Long-term debt, net(2)

   $ 355,068     $        $    

Redeemable preferred stock, $0.001 par value per share; 35,236,646 shares authorized, 31,137,921 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma

   $ 388,072     $        $    
  

 

 

   

 

 

    

Total deficit:

       

Stockholders’ deficit:

       

Common stock, $0.001 par value per share; 60,000,000 shares authorized, 10,456,521 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma

     10       

Class A common stock, $         par value per share; no shares authorized, issued or outstanding, actual; shares authorized, shares issued and outstanding, pro forma

           

Class B common stock, $         par value per share; no shares authorized, issued or outstanding, actual; shares authorized, shares issued and outstanding, pro forma

           

Additional paid-in capital

     62,748       

Accumulated deficit

     (589,373     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ deficit

     (526,615     
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 216,525     $        $    
  

 

 

   

 

 

    

 

 

 

 

(1)

Excluding restricted cash, current, which was $3.4 million at January 31, 2021.

 

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(2)

Consists of our Ares Facility, which had an outstanding balance as of January 31, 2021 of $74.1 million of outstanding long-term principal, $1.6 million of payment-in-kind interest, netted with $11.0 million of unamortized debt discount, and our Temasek Facility, which had an outstanding balance as of January 31, 2021 of $230.0 million of outstanding principal, $62.2 million of payment-in-kind interest, netted with $1.9 million of unamortized debt discount.

Each $1.00 increase or decrease, as applicable, in the assumed initial public offering price of $                per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, each of cash and cash equivalents, additional paid in capital, total stockholders’ deficit and total capitalization on a pro forma as adjusted basis by approximately $                million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Similarly, each 1,000,000 share increase or decrease, as applicable, in the number of shares offered in this offering would increase or decrease, as applicable, each of cash and cash equivalents, additional paid in capital, total stockholders’ deficit and total capitalization on a pro forma as adjusted basis by approximately $                million, assuming that the price per share for the offering remains at $                (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of Class A common stock and Class B common stock to be outstanding after this offering is based on                    shares of our Class A common stock and                shares of our Class B common stock outstanding as of                , 2021, after giving effect to the automatic conversion of all outstanding shares of our redeemable preferred stock into                shares of our Class A common stock upon closing of this offering, and excludes:

 

   

            shares of Class A common stock issuable upon exercise of stock options outstanding as of                , 2021 under our 2009 Plan, at a weighted average exercise price of $                per share;

 

   

            shares of Class A common stock issuable upon exercise of stock options outstanding as of                , 2021 under our 2019 Plan, at a weighted average exercise price of $                per share;

 

   

            RSUs, covering                shares of Class A common stock as of                 , 2021, which are issuable upon satisfaction of service-based and liquidity-based vesting conditions;

 

   

            shares of Class A common stock issuable upon exercise of stock options outstanding as of                , 2021, granted as Designer Collective Grants, at a weighted average exercise price of $                per share;

 

   

             shares of Class A common stock reserved for future issuance under our 2021 Plan, which will become effective on the date immediately prior to the date our registration of which this prospectus forms a part becomes effective, as described in “Executive Compensation—Equity Compensation;”

 

   

the exercise of warrants to purchase                 shares of Class A common stock, which will result in the net issuance of             shares of Class A common stock in connection with this offering; and

 

   

            shares of Class A common stock issuable upon the exercise of warrants outstanding as of                 , 2021 with an exercise price of $                 per share.

 

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DILUTION

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our Class A common stock after this offering.

Our pro forma net tangible book value as of                , 2021 was $                million, or $                per share. Pro forma net tangible book value per share is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock and Class B common stock deemed to be outstanding, after giving effect to the automatic conversion of all outstanding shares of our redeemable preferred stock, in each case upon closing of this offering.

Our pro forma as adjusted net tangible book value as of                , 2021, after giving effect to this offering would have been approximately $                million, or $                per share of Class A common stock. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $                per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of approximately $                per share to new investors purchasing shares of Class A common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of Class A common stock. The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of , 2021 before this offering

   $                   
  

 

 

    

Increase in pro forma as adjusted net tangible book value per share attributable to investors in this offering

     

Pro forma as adjusted net tangible book value per share after this offering

      $    
     

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new Class A common stock investors in this offering

      $    
     

 

 

 

A $1.00 increase or decrease, as applicable, in the assumed initial public offering price of $                per share, which is the midpoint of the price range listed on the cover page of this prospectus, would increase or decrease, as applicable, the pro forma as adjusted net tangible book value per share after this offering by approximately $                , and dilution in pro forma as adjusted net tangible book value per share to new investors by approximately $                , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease, as applicable, of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase our pro forma as adjusted net tangible book value by $                per share and decrease the immediate dilution to new investors by $                per share, in each case assuming the assumed initial public offering price of $                per share of Class A common stock remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise in full their option to purchase additional shares of Class A common stock from us , the pro forma as adjusted net tangible book value after the offering would be $                per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $                per share and the dilution in pro forma as adjusted net tangible book value to new investors would be $                per share, in each case assuming an initial public offering price of $                per share, which is the midpoint of the price range listed on the cover page of this prospectus.

 

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The following table summarizes, as of                , 2021, after giving effect to this offering, the number of shares of Class A common stock purchased from us, the total consideration paid, or to be paid, to us and the average price per share paid, or to be paid, by existing stockholders and by the new investors. The calculation below is based on an assumed initial public offering price of $                per share, which is the midpoint of the price range listed on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares
Purchased
    Total
Consideration
    Average price  
     Number      Percent     Amount      Percent     per Share  

Existing stockholders

                   $                                 $                

New investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $          100   $    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Each $1.00 increase or decrease, as applicable, in the assumed initial public offering price of $                per share would increase (decrease) the total consideration paid by new investors and the total consideration paid by all stockholders by $                million, assuming the number of shares offered by us remains the same and after deducting estimated underwriting discounts and commissions but before estimated offering expenses. Similarly, each increase or decrease, as applicable, of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by $        million, assuming the assumed initial public offering price of $        per share of Class A common stock remains the same, and after deducting estimated underwriting discounts and commissions.

Except as otherwise indicated, the discussion and the tables above assume no exercise by the underwriters’ of their option to purchase additional shares of Class A common stock from us. The number of shares of our Class A common stock outstanding after this offering as shown in the tables above is based on the number of shares outstanding as of                    , 2021, after giving effect to the automatic conversion of all outstanding shares of our redeemable preferred stock, in each case upon closing of this offering, and excludes:

 

   

             shares of Class A common stock issuable upon exercise of stock options outstanding as of                    , 2021 under our 2009 Plan, at a weighted average exercise price of $                per share;

 

   

            shares of Class A common stock issuable upon exercise of stock options outstanding as of                    , 2021 under our 2019 Plan, at a weighted average exercise price of $                per share;

 

   

            RSUs, covering                shares of Class A common stock as of                 , 2021, which are issuable upon satisfaction of service-based and liquidity-based vesting conditions;

 

   

            shares of Class A common stock issuable upon exercise of stock options outstanding as of                    , 2021, granted as Designer Collective Grants, at a weighted average exercise price of $    per share;

 

   

            shares of Class A common stock reserved for future issuance under our 2021 Plan, which will become effective on the date immediately prior to the date our registration of which this prospectus forms a part becomes effective, as described in “Executive Compensation—Equity Compensation;”

 

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the exercise of warrants to purchase              shares of Class A common stock, which will result in the net issuance of             shares of Class A common stock in connection with this offering; and

 

   

            shares of Class A common stock issuable upon the exercise of warrants outstanding as of                 , 2021 with an exercise price of $                 per share.

To the extent any of these outstanding options are exercised, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised as of                    , 2021, the pro forma as adjusted net tangible book value per share after this offering would be $                , and total dilution per share to new investors would be $                .

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Summary Consolidated Financial and Other Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements, such as those relating to our plans, objectives, expectations, intentions, and beliefs, which involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this prospectus. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31, and January 31. References to fiscal years 2019 and 2020 in this prospectus refer to our fiscal years ended January 31, 2020 and 2021, respectively.

Overview

We built the world’s first and largest shared designer closet — that we call the Closet in the Cloud — with over 18,000 styles by over 750 designer brands. We give customers ongoing access to our “Unlimited Closet” through our Subscription offering or the ability to rent a-la-carte through our Reserve offering. We also give our subscribers and customers the ability to buy our products through our Resale offering. These offerings allow us to engage and serve our subscribers and customers across diverse use cases from everyday life to special occasions. We have served over 2.5 million lifetime customers across all of our offerings and we had     total subscribers (active and paused) as of         , 2021. In the first six months of fiscal year 2021,                % of our total revenue was generated by subscribers.

The variety, breadth and quantity of products we carry is important to our business, and we strategically manage the cost-effective acquisition of a high volume of items every year. We have successfully disproved the misconception that fashion apparel items and accessories only last one season as we are able to rent or “turn” our products multiple times over many years, and over 40% of our styles turn for three or more years. We price our items at a fraction of their retail value, creating an attractive price and value proposition for our subscribers and customers.

We launched our Reserve offering in 2009 and focused on normalizing shared closet behavior with consumers and designer brands by giving customers the ability to rent a-la-carte for special occasions. In 2016, we launched our Subscription offering. Today, we source all of our products, which includes apparel, accessories and home goods, directly from designer brands. Prior to 2018, we purchased nearly all of our products from our brand partners typically at a discount to wholesale cost, which we refer to as “Wholesale” items. In late 2018, we began to procure products through Share by RTR and Exclusive Designs. See “—Our Product Acquisition Strategy” below for a description of the three ways in which we procure products.

We have achieved the following operating and financial results:

 

   

We had 147,866 and 95,245 total subscribers at the end of fiscal year 2019 and fiscal year 2020, respectively, and 133,572 and 54,797 active subscribers (excluding paused subscribers), respectively;

 

   

Revenue was $256.9 million and $157.5 million in fiscal year 2019 and fiscal year 2020, respectively;

 

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Gross Profit was $53.6 million and $15.6 million in fiscal year 2019 and fiscal year 2020, respectively;

 

   

Gross Profit Excluding Product Depreciation was $129.2 million and $85.4 million in fiscal year 2019 and fiscal year 2020, respectively;

 

   

Net Loss was $(154.0) million and $(171.1) million in fiscal year 2019 and fiscal year 2020, respectively; and

 

   

Adjusted EBITDA was $(18.0) million and $(20.3) million in fiscal year 2019 and fiscal year 2020, respectively.

Our Business Model

The Power of Subscription

We operate an innovative subscription model with the following attributes:

 

   

We monetize our products over multiple years;

 

   

We acquire a large and broad assortment of products to provide variety to subscribers and customers; and

 

   

We incur fulfillment expense to ship items to/from subscribers and customers and restore products to excellent condition.

Our business model aligns the success and engagement of our subscribers, our customers, our brand partners and our business. Our success is a function of:

 

   

Our ability to grow revenue through growth and loyalty of subscribers and customers;

 

   

Our ability to acquire and drive return on investment of products; and

 

   

Our ability to manage operating and capital efficiencies in our business,

How We Make Money

We generate revenue when subscribers and customers access our Closet in the Cloud across subscription, a-la-carte rentals and resale. The majority of revenue is highly recurring and is generated by our subscribers, representing     % of total revenue in the first six months of fiscal year 2021. Our platform approach allows us to monetize subscribers across multiple offerings, including Reserve and Resale. Our Subscription offerings are structured so that subscribers pay for their usage - the more shipments and items a subscriber receives, the higher the monthly subscription price. We have priced each base subscription program to generate similar Gross Margins to our company.

Subscription and Reserve Rental Revenue: Subscription and Reserve rental revenue was $135.9 million in fiscal year 2020, representing 86.3% of total revenue.

 

   

Subscription

Subscription rental revenue consists of recurring subscription membership fees and related add-on revenue. Our Subscription offering allows members to receive a certain number of items (each item fills a “spot”) and shipments (which we call a “swap”) each month. We offer plans including 4, 8, 12 or 16 items. Membership prices include:

 

   

$89 for 4 items per month (max 1 swap, up to 4 spots; more limited assortment)

 

   

$135 for 8 items per month (max 2 swaps, up to 4 spots each) (our most popular plan)

 

   

$174 for 12 items per month (max 3 swaps, up to 4 spots each)

 

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$199 for 16 items per month (max 4 swaps, up to 4 spots each)

Our subscribers also generate add-on revenue as they are able to customize their subscription program by adding spots or swaps in any given month at a price of $25 per additional spot per month on the one-shipment plan, $29 per additional spot per month on all other plans, and $25 to $39 per swap per month depending on the plan. We also allow our subscribers to pause their memberships as their lifestyle evolves or changes.

 

   

Reserve

Reserve rental revenue consists of a-la-carte rentals, typically used for special occasions, which can be booked up to 4 months in advance. Customers, which include subscribers, have the option to rent items for four or eight days at rental rates per item which typically range from $5 to $525. Reserve customers receive one primary item and can select a complimentary backup size, as well as a backup style at a discounted price.

Other Revenue: Through our Resale offering, subscribers and customers can purchase pre-worn items they love from our closet—no subscription is required. Our Other revenue was $21.6 million in fiscal year 2020, representing 13.7% of total revenue.

Our Product Acquisition Strategy

Our ability to serve our subscribers and customers depends on the quantity and quality of our products. We acquire and monetize products in three ways: Wholesale, Share by RTR and Exclusive Designs, as described in the table below.

Our brand partnerships and customer data enable us to acquire and manage our products effectively. We have expanded the portion of our products acquired through Share by RTR and Exclusive Designs, which has reduced initial cash outlay and total spend. We have maintained nearly 100% retention of our brand partners over the life of our business. In fiscal year 2020, approximately 54% of new items were acquired through these more cost-effective channels, compared to approximately 26% in fiscal year 2019.

 

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Description

  

Consolidated
Statements of
Operations

  

Consolidated
Balance Sheets

  

Consolidated
Statements of
Cash Flows

  

Percent of
Items
Acquired
in Fiscal Year
2019 / Fiscal
Year 2020

Wholesale    Items are acquired directly from brand partners, typically at a discount to wholesale price    Cost is recognized through straight-line depreciation, with a three-year useful life and 20% salvage value, in the “Rental Product Depreciation and Revenue Share” line(1)    Total cost is capitalized as “Rental Products” in long-term assets    Total cost is recognized as a capital expenditure (“Purchases of Rental Product”) at time of acquisition    74% /46%
Share by RTR    Items are acquired directly from brand partners on consignment, at zero to low upfront cost, with performance- based revenue share payments to our brand partners over time    Upfront and performance- based revenue share payments are expensed as incurred in the “Rental Product Depreciation and Revenue Share” line    Items are not capitalized on the balance sheet as we do not own them    Upfront and revenue share payments flow through Net Income as incurred    15% /36%
Exclusive Designs(2)   

Items are designed using our data in collaboration with our brand partners

 

We manufacture items through third-party partners and pay the brand partner an upfront fee and minimal revenue share payments

  

Upfront and performance- based revenue share payments are expensed as incurred in the “Rental Product Depreciation and Revenue Share” line

 

Manufacturing cost is recognized through straight-line depreciation, with a three-year useful life and 20% salvage value, in the “Rental Product Depreciation and Revenue Share” line(1)

   Manufacturing cost is capitalized as “Rental Products” in long-term assets   

Upfront and revenue share payments flow through Net Income as incurred

 

Manufacturing cost is recognized as a capital expenditure (“Purchases of Rental Product”) at time of acquisition

   11% /18%

For additional details, refer to the section titled “Business—Our Unique Brand Partner Approach.”

 

(1)

The cost of accessory items, which made up less than 5% of the gross book value of rental product as of January 31, 2021, is recognized through straight-line depreciation with a two-year useful life and 30% salvage value.

(2)

Includes a small number of products bearing our trademarks, which are non-exclusive designs produced by third-party partners, or our owned brands. These products are purchased at a significantly lower average cost than Wholesale.

 

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Our product acquisition methods, Wholesale, Share by RTR and Exclusive Designs, are strategic levers to manage our capital efficiency, profitability and product risk. Our Exclusive Designs channel uses data insights to acquire items at a lower cost, which are designed to generate higher profitability over time. Share by RTR meaningfully reduces our upfront spend and de-risks our investment since we pay brands primarily based on item performance. Our Share by RTR arrangements with brands target delivering 85 to 100% of comparable wholesale cost to the brand in the first year; however there is no minimum commitment other than the upfront payment if applicable. Nearly all Share by RTR deals consummated after September 2020 include a cap on total potential payments to the brand partner.

We may strategically adjust our mix of product acquisition channels in the future. Both our purchasing power and the diversification into Share by RTR and Exclusive Designs have led to a decrease in average upfront cost per item, defined as total upfront spend in a period divided by all items acquired in that period. Our average upfront cost per item has decreased by     % per item in the first half of fiscal year 2021 compared to fiscal year 2019, and decreased                % in fiscal year 2019 compared to fiscal year 2014. We define total upfront spend as all cash costs incurred at the time of acquisition of product, including total cost for Wholesale items, upfront payments to brand partners for Share by RTR and Exclusive Designs, third party manufacturing costs for Exclusive Designs, and freight. Our total upfront spend was $119.1 million in fiscal year 2019 and $                 million in the                  of fiscal year 2021.

Our Financial Model

The below chart illustrates the economics of our business from total revenue and ending at Contribution Profit for fiscal year 2020, both in dollars and as a percentage of total revenue:

 

LOGO

 

   

Fulfillment Profit. We define Fulfillment Profit as total revenue less fulfillment expense. Fulfillment expense has typically been our largest variable expense and includes our outbound shipping and labor costs to send items to customers, as well as inbound shipping, labor and product restoration costs when customers return their items. We use Fulfillment Profit and Fulfillment Profit as a percentage of revenue, or Fulfillment Margin, to measure the efficiency of inbound, outbound and processing costs. See the section titled “—Non-GAAP Financial Metrics” below for a reconciliation of Fulfillment Profit to the most relevant GAAP measure.

 

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Gross Profit Excluding Product Depreciation. We define Gross Profit Excluding Product Depreciation as total revenue less fulfillment expense and revenue share. Revenue share includes upfront payments and performance-based revenue share for items we acquire through Share by RTR and Exclusive Designs. We use Gross Profit Excluding Product Depreciation and Gross Profit Excluding Product Depreciation as a percentage of revenue, or Gross Margin Excluding Product Depreciation, to measure our total variable profit excluding non-cash expenses as an indicator of the cash gross profit available to cover our costs and expenses and capital expenditures. See the section titled “—Non-GAAP Financial Metrics” below for a reconciliation of Gross Profit Excluding Product Depreciation to the most relevant GAAP measure.

 

   

Gross Profit. We define Gross Profit as total revenue less fulfillment expense, revenue share and rental product depreciation. We depreciate owned apparel assets over three years and owned accessory assets over two years net of 20% and 30% salvage values, respectively, and recognize the depreciation and remaining cost of items when sold or retired on our statement of operations. Rental product depreciation expense is time-based and reflects all items we own. We use Gross Profit and Gross Profit as a percentage of revenue, or Gross Margin, to measure the continued efficiency of our business after the total cost of our products are included.

 

   

Contribution Profit: We define Contribution Profit as total revenue, less fulfillment expense, revenue share, rental product depreciation and credit card processing fees. We measure Contribution Profit and Contribution Profit as a percentage of revenue, or Contribution Margin, as a key measure of our overall efficiency, including fulfillment expense, total product costs and credit card fees. See the section titled “—Non-GAAP Financial Metrics” below for a reconciliation of Contribution Profit to the most relevant GAAP measure.

The below graph depicts Fulfillment Margin, Gross Margin Excluding Product Depreciation, Gross Margin and Contribution Margin in fiscal years 2019 and 2020. As we scale and continue to invest in our infrastructure, technology and platform, we expect our margins to improve over time.

 

LOGO

 

   

Fulfillment Margin. Fulfillment Margin improved from 54% in fiscal year 2019 to 66% in fiscal year 2020 due to a lower average number of monthly shipments per subscriber in fiscal year 2020, partly due to the phase out of our unlimited swaps program and partly due to lower engagement during the COVID-19 pandemic. Historically, our unlimited swaps program allowed subscribers to receive as many shipments per month as desired, driving higher

 

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fulfillment expense as a percentage of revenue. Today, all of our memberships are structured around subscriber usage and priced to achieve similar target Gross Margins, such that subscribers pay for their desired number of items and shipments per month. In fiscal year 2020, we implemented additional labor automation, process efficiencies and transportation network diversification, and expect to continue to improve our Fulfillment Margin.

 

   

Gross Margin Excluding Product Depreciation. Gross Margin Excluding Product Depreciation improved from 50% in fiscal year 2019 to 54% in fiscal year 2020 due to an improvement in our Fulfillment Margin, partially offset by higher revenue share expense as a percentage of total revenue. We have focused on reducing our upfront cash outlay for product acquisition by acquiring a greater portion of our product through Share by RTR, which has increased revenue share expense. Our revenue share expense increased from 4% of total revenue in fiscal year 2019 to 12% of total revenue in fiscal year 2020. The mix of channels we use to acquire products will impact our Gross Margin Excluding Product Depreciation.

 

   

Gross Margin. Gross Margin decreased from 21% in fiscal year 2019 to 10% in fiscal year 2020. Due to a decrease in active subscribers caused by COVID-19, the level of product on hand during fiscal year 2020 was over-sized relative to our average active subscriber base in the period. Since depreciation is recognized on a time-basis for all of our owned assets, rental product depreciation in fiscal year 2020 reflected costs associated with a level of product that had been acquired to support the higher number of active subscribers experienced in fiscal years 2018 and 2019 and planned growth in fiscal year 2020 prior to the COVID-19 pandemic. As a result, rental product depreciation increased from 29% of total revenue in fiscal year 2019 to 44% of total revenue in fiscal year 2020, as our total revenue and active subscribers decreased relative to fiscal year 2019 due to the COVID-19 pandemic. The mix of channels we use to acquire products will impact our Gross Margin.

 

   

Contribution Margin. Contribution Margin decreased from 18% in fiscal year 2019 to 7% in fiscal year 2020, driven by the same trends that led to a decrease in Gross Margin.

 

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The below graphic depicts our unit economics, or the economics of a weighted average subscription month and Reserve order (based on the proportion of Subscription and Reserve transactions in each period), in fiscal year 2019 and 2020. Revenue, Fulfillment Profit, Gross Profit Excluding Product Depreciation, Gross Profit and Contribution Profit include revenue and profit from all of our offerings.

 

LOGO

In addition to the profitability trends mentioned above, the increase in unit economics revenue from $127 in fiscal year 2019 to $150 in fiscal year 2020 was driven by a greater portion of our business coming from our Subscription offering.

Our business model and margins were impacted by COVID-19, refer to the section titled “Impact of COVID-19 on Our Business” for more information.

Key Factors Affecting Our Performance

We believe that our performance and future success depend on a variety of factors that present significant opportunities for our business, but also present risks and challenges that could adversely impact our growth and profitability, including those discussed below and in the section titled “Risk Factors.”

Subscribers and Customers

Our Attractive Cohort Trends.    We believe that we have a significant market opportunity ahead of us to increase our base of subscribers and customers, and our long-term growth depends in large part on our continued ability to acquire new subscribers and retain existing subscribers. We attract new subscribers directly into our Subscription offering, and through conversions of customers into subscribers from our Reserve and Resale offerings. Reserve has historically been a productive funnel into our Subscription offering, and we believe our Resale offering could provide a similar opportunity to drive acquisition into our Subscription offering.

 

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We assess the strong retention of our subscribers and customers by analyzing the individual performance of our historical customer cohorts over time. We believe that the performance of our historical customer cohorts supports our strategy of investing in subscriber and customer acquisition and enhancing the scale of our platform.

Customer Cohorts.    The chart below indicates cumulative revenue per customer by customer cohort, which is defined as cumulative total revenue generated by a cohort across all of our product offerings, divided by the original number of customers in the cohort. Customers are placed in cohorts based on the fiscal year in which they first transacted with RTR. Due to varying customer behavior throughout fiscal year 2020, we have divided the 2020 cohort into two sub-cohorts, each of which includes smaller monthly cohorts than those of fiscal year 2018 and 2019. We define the FY 2020 Early COVID cohort as new customers who joined from February 2020 to May 2020, and this cohort is characterized by broad shelter-in-place restrictions during their initial customer months. We define the FY 2020 Late COVID cohort as new customers who joined from June 2020 to January 2021, and this cohort is characterized by a partial return-to-work, special events and social events through social distancing requirements. Our customer cohorts demonstrate the continued spend and expansion of our customers:

 

   

Each successive cohort has higher spending patterns, except for the FY 2020 Early COVID cohort, which was most impacted by COVID-19. Higher spending is driven by increased customer loyalty and customers renting for more days per year, particularly through our Subscription offering.

 

   

A significant portion of our total revenue in each year is generated from customers acquired in previous years.

 

   

Our FY 2020 Late COVID cohort, which is less impacted by COVID-19, is exhibiting better trends than our 2019 cohort.

 

   

Over the last two years, we have become better at directing customers to higher revenue offerings, particularly our subscriptions, which has driven a year-over-year improvement in cumulative revenue per customer by cohort as a greater percentage of our customers are subscribers. After the first six months as a customer, we see an inflection in spending as our most loyal customers remain on the platform.

 

LOGO

 

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Subscriber Cohorts.    In addition to evaluating the behavior of our entire customer base, we also focus specifically on the behavior of subscribers given they contribute to the majority of our revenue. For the first six months of fiscal year 2021,         % of our total revenue was generated by subscribers. This makes understanding their continued spend, expansion and potential lifetime value relative to customer acquisition cost particularly important.

The table below presents cumulative revenue per subscriber by cohort. Cumulative revenue per subscriber by cohort is defined as cumulative total revenue generated across all of our product offerings (including Subscription, Reserve or Resale) by customers who are current or previous subscribers, divided by the original number of subscribers in the cohort. Subscribers are placed in cohorts based on the fiscal year in which they first joined a subscription program.

 

   

Within 3, 6 and 12 months, subscribers from our fiscal year 2018 and 2019 cohorts generated an average of $286, $460 and $691 in cumulative revenue, respectively.

 

   

Our FY 2020 Late COVID cohort is exhibiting similar trends to our FY 2018 and FY 2019 cohorts.

 

LOGO

We provide a flexible offering that allows our subscribers to pause their membership. We have seen historically that many subscribers customize their subscription as their everyday life changes, choosing to pause and reactivate their membership as needed.

We acquire subscribers efficiently as evidenced by 88% of our lifetime customers having joined organically. Historically, our cost to acquire a customer, or CAC, has remained below $55 and we define our CAC as total marketing expense, other than employee expenses, during a period divided by the number of new customers acquired in that period. Contribution Margins of 18% and        % in fiscal year 2019 and the first half of fiscal year 2021, respectively, drive our efficient payback.

Brands and Products

Ability to Acquire and Monetize Products Efficiently.    Our ability to deliver an elevated experience for our customers relies on our deep partnerships with brand partners. We have demonstrated the ability to deepen our assortment with brands and have diversified our access to products across Wholesale, Share by RTR and Exclusive Designs, driving high overall product return on investment, while reducing the working capital needs of the business.

We monitor our ability to acquire, monetize and make a return on a product over its lifetime. Based on the average lifetime turns as of June 2021 of all items we acquired in fiscal years 2015, 2016 and 2017, we have determined that an item can turn a minimum of 20 times on average over its lifetime. Our historical average for lifetime turns is inclusive of items that have been taken out of

 

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circulation due to damage, deactivation or resale, and we expect turns for these historical cohorts to increase as a portion of these items are still in circulation. The number of times we turn an item, combined with our highly innovative product acquisition strategy and increasing margins, drives an attractive return on investment on our products.

Our Business

Ability to Achieve Leverage in our Cost Structure.    Improving operational efficiency of our platform is imperative to maintaining or increasing profitability. As we continue to grow, we expect our operating costs to increase but do not expect these costs to grow at the same pace as our total revenue.

We use technology and customer data to drive efficiency across products, fulfillment expenses and operating costs. Our data has allowed us to build a differentiated and proprietary rental reverse logistics platform with a vertically integrated cleaning and restoration process. We have invested in technology and automation in order to drive operating leverage and higher margins as we grow and scale our business.

Over time, we have improved our margins, profitability and cash flow, and we believe we will continue to benefit from economies of scale and are focused on driving additional efficiencies in our operating expenses. We monitor profitability by assessing Fulfillment Margin, Gross Margin Excluding Product Depreciation, Gross Margin and Contribution Margin.

Seasonality.    We experience seasonality in our business, which may change due to the effects of the COVID-19 pandemic. For our Subscription offering, we typically acquire the highest number of subscribers in the third and fourth fiscal quarters, and we generally see a greater number of paused subscriptions in the winter and summer months. We typically realize a higher portion of revenue from Reserve rentals during our third and fourth fiscal quarters as a result of increased wedding and holiday events.

Impact of COVID-19 on Our Business

The COVID-19 pandemic materially adversely affected our fiscal year 2020 operating and financial results. Beginning in March 2020, positivity rates and shelter-in-place restrictions significantly reduced consumer demand for our Subscription and Reserve offerings due to a sharp decrease in interactions outside the home, social gatherings, special events and in-office work. Unlike the retail model where a customer can invest in an article of clothing to wear in the future, we primarily operate a “rent now, wear now” subscription model where subscribers are picking items for immediate use. Throughout 2020, we observed that consumer demand decreases were closely tied to COVID-19 positivity rates and social distancing/shelter-at-home restrictions. As COVID-19 restrictions have been relaxed and virus positivity rates have declined, we have seen increased demand for our offerings.

Immediate Response to COVID-19

Our first priority was to protect the health and safety of our employees. In February 2020, we created a cross-functional taskforce to lead our COVID-19-related employee initiatives and we have instituted numerous health and safety measures throughout the pandemic based on public health guidelines and recommended best practices. For example, in our fulfillment centers, we instituted numerous health and safety measures including social distancing, on-site medical services, and enhanced cleaning, and we relaxed attendance policies. We shifted nearly all of our corporate and customer service employees to a remote work model in March 2020 and implemented additional measures to better enable them to work remotely.

 

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We took immediate financial actions to withstand COVID-19. We paused paid advertising and marketing activities and implemented other cost-saving measures to reduce operating and capital expenditures in the short term. In April 2020, we reduced salaries for the large majority of corporate employees for three months, and temporarily paused all recruiting efforts. After being temporarily closed since March 2020, we announced the permanent closure of our brick and mortar retail stores in July and August 2020. Both of our fulfillment centers remained open throughout the pandemic, however we resized our workforce to better align labor to demand and managed our fulfillment expense through releases, furloughs, and shift schedule adjustments. Overall, during fiscal year 2020, we laid off 31% and furloughed 34% of all employees. In addition, the financial actions we took resulted in a 53% percent reduction in operating expenses, capital expenditures and product costs, as compared to our pre-COVID-19 budget for April 2020 through January 2021, the remainder of fiscal year 2020 that we had the opportunity to impact.

Agility and Resilience During COVID-19

In addition to cost cutting, we took a number of steps to emerge from COVID-19 as a stronger business financially and strategically. We believed that the pandemic would shift consumer values and behaviors. With that goal in mind, we took the following actions:

 

  1.

Transformed product acquisition from a majority Wholesale model to more Share by RTR. We increased the penetration of Share by RTR from 32% of units acquired in our original pre-COVID-19 plan to 54% for the second half of fiscal year 2020. Through Share by RTR, we allowed our brand partners to participate in revenue generated during COVID-19 and potential financial upside post-pandemic. By April 2020, we reduced upfront product spend for the second half of fiscal 2020 by over 80% as compared to our original budget.

 

  2.

Phased out our “unlimited swaps” program and transitioned towards customizable subscription plans that are intended to better meet customer needs, and drive higher margins than our previous subscription offering. Our belief was that multiple subscription programs and more diverse price points would offer a lower entry price point into subscription during COVID-19 and help attract and retain a more diversified subscriber base as a go-forward strategy.

 

  3.

Launched Resale for subscribers and then expanded it to all customers to better monetize our active subscribers during COVID-19 and to broaden our funnel for the future. Our belief was that resale could be a new growth engine and customer acquisition funnel for RTR.

 

  4.

While volume in our fulfillment centers was lower, we implemented significant process changes and technological innovation, such as increased automation, radio-frequency identification tags, or RFID tags, machine vision and new garment science processes to continue to improve our operational efficiencies and processing capacity.

 

  5.

Encouraged new use cases, including at-home casual wear, loungewear, knits and activewear, which went from being 25% of items at home in May 2019 to 46% in May 2020, expanding how subscribers think about our business. As subscribers are resuming more normal lives in 2021, we are seeing an expansion in the diversity of use cases for which they think of using Rent the Runway.

 

  6.

Launched new features such as cross-ship and expanded our drop-off box network and inbound customer return options, providing subscribers with more flexibility and immediacy in their swapping experience and removing friction from the experience in order to increase retention of subscribers.

 

  7.

Made it easy for customers to pause, rather than cancel, their subscriptions to encourage retention during the COVID-19 pandemic. As of the end of fiscal year 2020, our total

 

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  subscriber base (active and paused) represented 64% of our pre-COVID-19 total subscriber base (as measured on March 8, 2020).

 

  8.

Focused on sustainability, including conducting a Life Cycle Assessment, or LCA Study, to further understand the impact of Rent the Runway’s rental platform compared to existing linear models in the fashion industry. We also launched an internal taskforce dedicated to driving our sustainability efforts internally.

 

  9.

Focused on employee experience and providing high-touch, transparent, real-time communication. Throughout 2020, our employees at every level of the organization exemplified our Core Values of passion, innovation and resiliency by acting like founders, helping the business to withstand the COVID-19 pandemic and creating opportunities to make the business better.

Financial Impact

As a result of decreased demand related to COVID-19, our total revenue was $157.5 million in fiscal year 2020 and decreased 38.7% compared to fiscal year 2019. Shipment volume decreased as a result of lower subscriber levels, less frequent swapping behavior, and lower demand for a-la-carte rentals. These dynamics, combined with our operational response and cost-saving actions, resulted in a decrease of fulfillment expenses as a percentage of total revenue to 33.6% in fiscal year 2020, compared to 46.0% in fiscal year 2019.

Product depreciation and revenue share increased as a percentage of total revenue to 56.5% in fiscal year 2020, as compared to 33.2% in fiscal year 2019, due to a significant oversupply of rental items on hand relative to reduced subscriber levels. We anticipate product depreciation and revenue share to decrease meaningfully as a percentage of total revenue as we see COVID-19 recovery and increases in active subscriber levels and Reserve orders.

Marketing expense as a percentage of total revenue decreased from 8.9% in fiscal year 2019 to 5.2% in fiscal year 2020 as a result of intentional reductions in paid marketing due to COVID-19. The cost-saving initiatives decreased technology and general and administrative expenses from $40.2 million for technology and $98.9 million for general and administrative in fiscal year 2019 to $37.7 million and $77.2 million in fiscal year 2020, respectively, but increased as a percentage of total revenue due to the decline in total revenue.

Ongoing Impact

Since March 2021, we have seen early indications of COVID-19 recovery, with a significant number of paused subscribers resuming their subscriptions, new subscribers joining our platform, and an increased level of Reserve orders. In response to the growth in demand, we are increasing hiring for customer service and fulfillment labor, adjusting shift structures at our fulfillment centers to increase throughput capacity, investing in additional products to support future subscriber growth, and investing in capital expenditures to support operational efficiencies. We have also accelerated corporate hiring to support increased levels of growth and operations and to support our plans to become a public company, and we have begun to resume marketing activities and increase other operating expenses.

We expect the effects of the COVID-19 pandemic to have a continued impact on our business, results of operations, and financial condition through at least the end of fiscal year 2021, and we continue to take actions to adjust to the changing COVID-19 business environment. For example, we are increasing wage rates to attract and retain talent at our fulfillment centers, diversifying our transportation network to mitigate the negative impact of nationwide shipping carrier delays, resuming corporate recruiting efforts, and managing longer lead times for products from brand partners.

 

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The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. Given the uncertainty, we cannot estimate the financial impact of the pandemic on our future results of operations, cash flows, or financial condition. For additional details, refer to the section titled “Risk Factors.”

Key Business and Financial Metrics

In addition to the measures presented in our consolidated financial statements, we use the following key business and financial metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. The calculation of the key business and financial metrics discussed below may differ from similarly titled metrics used by other companies, securities analysts or investors. Each key business and financial metric should be considered in conjunction with other metrics and components of our results of operations, such as each of the other key business and financial metrics and our revenue, fulfillment and net loss.

 

     Year Ended January 31,  
     2020     2021  
     ($ in thousands)  

Active subscribers (at the end of period)

     133,572       54,797  

Gross profit

   $ 53,570     $ 15,573  

Gross profit excluding product depreciation(1)

   $ 129,249     $ 85,408  

Adjusted EBITDA(1)

   $ (18,033   $ (20,338

 

(1)

Each of Gross Profit Excluding Product Depreciation and Adjusted EBITDA is a non-GAAP financial measure; for a reconciliation to each of their most directly comparable GAAP financial measures, gross profit and net loss, respectively, and why we consider Gross Profit Excluding Product Depreciation and Adjusted EBITDA to be useful metrics, see “—Non-GAAP Financial Metrics” below.

Key Business Metrics

Active Subscribers: Active Subscribers represent the number of subscribers with an active membership as of the last day of any given period and excludes paused subscribers. In fiscal year 2020, we saw our active subscriber count decrease due to the COVID-19 pandemic. However, a significant number of our subscribers put their membership on pause rather than canceling. As of July 31, 2021, we had                active subscribers, up                % from the end of fiscal year 2020.

Gross Profit and Gross Margin: In fiscal year 2020, Gross Profit was $15.6 million compared to $53.6 million in fiscal year 2019 representing Gross Margins of 9.9% and 20.9%, respectively. The decrease in Gross Profit and Gross Margin in fiscal year 2020 was driven by lower total revenue and relatively constant rental product depreciation and revenue share, which represented a larger percentage of total revenue due to the impact of the COVID-19 pandemic. We expect to have the opportunity to improve Gross Profit by driving growth in total revenue, fulfillment and operational efficiency gains, and strategically evolving our mix of product acquisition.

Gross Profit Excluding Product Depreciation and Gross Margin Excluding Product Depreciation: Gross Profit Excluding Product Depreciation and Gross Margin Excluding Product Depreciation indicate the total variable profit of our offerings excluding non-cash expenses and reflect the cash profit available to cover our operating expenses and capital expenditures. In fiscal year 2020, Gross Profit Excluding Product Depreciation was $85.4 million compared to $129.2 million in fiscal year 2019, representing margins of 54.2% and 50.3%, respectively. Gross Profit Excluding Product Depreciation has improved as we have reduced our fulfillment expense, partially offset by increased

 

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revenue share expense, as we have shifted to acquiring a greater portion of our products through Share by RTR. Our Gross Margin Excluding Product Depreciation will continue to vary based on our fulfillment expense efficiency and resulting Fulfillment Margin, and the mix of channels through which we acquire product.

Adjusted EBITDA and Adjusted EBITDA Margin: We define Adjusted EBITDA as net loss, adjusted to exclude interest expense, rental product depreciation, other depreciation and amortization, stock-based compensation expense, write-off of liquidated assets, certain non-recurring, one-time, costs (see above footnotes), income taxes, other income and expense, and other gains / losses. We define Adjusted EBITDA Margin as Adjusted EBITDA calculated as a percentage of total revenue, net for a period. In fiscal year 2020, Adjusted EBITDA was $(20.3) million compared to $(18.0) million in fiscal year 2019, representing margins of (12.9)% and (7.0)% respectively. Adjusted EBITDA has decreased due to the decrease in profitability and net loss. We have the opportunity to improve Adjusted EBITDA as we drive operating expense leverage.

Components of Results of Operations

Total Revenue, Net

Our total revenue, net consists of Subscription and Reserve rental revenue and Other revenue. Total revenue is presented net of promotional discounts, credits and refunds, and taxes.

Subscription and Reserve Rental Revenue.    We generate Subscription and Reserve rental revenue from subscription and a-la-carte (through our Reserve offering) rental fees. We recognize subscription fees ratably over the subscription period, commencing on the date the subscriber enrolls in the subscription program. These fees are collected upon enrollment and any revenue from an unrecognized portion of the subscription period is deferred to the following fiscal period. We recognize a-la-carte rental fees over the rental period, which starts on the date of delivery of the product to the customer. A-la-carte rental orders can be placed up to four months prior to the rental start date and the customer’s payment form is charged upon order confirmation. We defer recognizing the rental fees and any related promotions for a-la-carte rentals until the date of delivery, and then recognize those fees evenly over the four- or eight-day rental period.

Other Revenue.    We generate Other revenue primarily from the sale of products while they are in rental condition. We offer the ability for subscribers and customers to purchase products at a discount to retail price. Payment for the sale of products occurs upon order confirmation while the associated revenue is recognized either at the time the sold product is delivered to the customer or when purchased, if the item is already at home with the customer.

Costs and Expenses

Fulfillment.    Fulfillment expenses consist of all variable costs to receive, process and fulfill customer orders. This primarily includes shipping costs to/from customers and personnel and related costs, which includes salaries and bonuses, and employee benefit costs. Personnel and related costs are related to processing inbound and outbound customer orders, cleaning, restoring and repairing items received from customers, tracking and managing items within our fulfillment center network and ingesting new items received from brands. Fulfillment expenses also include costs of packing materials, cleaning supplies, and other fulfillment-related expenses. We expect fulfillment expense to increase in absolute dollars in future periods to support our growth, especially due to competitive pressures in the labor market which could lead to higher wage rates, and as costs to ship and process orders to/from customers will increase as order volume increases. We expect to continue to invest in automation and other process improvements to support and drive efficiencies in our operations. To the extent we are successful in becoming more efficient in fulfilling orders, and at a magnitude that is able

 

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to offset increasing shipping costs, wage rates and cleaning/packing supply price increases, we would expect these expenses to decrease as a percentage of total revenue over the longer term.

Technology.    Technology expenses consist of personnel and related costs for employees engaged in software development and engineering, quality assurance, product, user experience, data science, analytics and information technology-related efforts, net of personnel costs associated with capitalized software. Technology expenses also include professional services, third-party hosting expenses, site monitoring costs, and software and license fees. We expect to increase technology expenses as we continue to invest in our technology stack and grow our infrastructure to support overall growth in our business and distribution network. While these expenses may vary from period to period as a percentage of total revenue, we expect them to decrease as a percentage of total revenue over the longer term.

Marketing.    Marketing expenses include online and mobile marketing, search engine optimization and email costs, marketing personnel and related costs, agency fees, brand marketing, printed collateral, consumer research, and other related costs. We expect marketing expenses to increase as we intend to increase marketing spend to drive the growth of our business and increase our brand awareness. The trend and timing of our brand marketing expenses will depend in part on the timing of marketing campaigns.

General and Administrative.    General and administrative expenses consist of all other personnel and related costs, including customer service, finance, tax, legal, human resources, fashion and photography and fixed operations costs. General and administrative expenses also include occupancy costs (including warehouse-related), photography costs, professional services, credit card fees, general corporate and warehouse expenses, other administrative costs, gains and losses associated with consolidating our foreign subsidiary at each period end, and gains and losses associated with asset disposals and operating lease terminations. We expect to increase general and administrative expenses as we grow our infrastructure to support operating as a public company and the overall growth of the business. We also expect rent expense and other facilities-related costs to increase in the future as we expand our distribution network to support overall business growth and fulfillment cost-reduction initiatives. While these expenses may vary from period to period as a percentage of total revenue, we expect them to decrease as a percentage of total revenue over the longer term.

Rental Product Depreciation and Revenue Share.    Rental product depreciation and revenue share expenses consist of depreciation and write-offs of rental products, and payments under revenue share arrangements with brand partners. We depreciate the cost, less an estimated salvage value, of our owned products (Wholesale and Exclusive Designs items), over the estimated useful lives of these items and, if applicable, accelerate depreciation of the items when they are no longer in rental condition. We recognize the cost of items acquired under Share by RTR, as incurred, through upfront payments and performance-based revenue share payments. We expect rental product depreciation and revenue share expenses to increase in absolute dollars as we continue to support subscriber and customer growth. The amount and proportion of rental product depreciation and revenue share will vary from period to period based on how we acquire items.

Other Depreciation and Amortization.    Other depreciation and amortization expenses consist of depreciation and amortization amounts for fixed assets, intangible assets including capitalized software, and financing right-of-use assets.

Interest Income / (Expense)

Interest income / (expense) consists primarily of accrued paid-in-kind interest, cash interest and debt issuance cost amortization associated with our Ares Facility and Temasek Facility (each as defined below).

 

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Other Income / (Expense)

Other income / (expense) consists primarily of changes in fair value of warrants associated with debt and equity issuances, debt extinguishment costs, proceeds from previous insurance claims and proceeds from monetizing tax credits associated with growth.

Benefit from Income Taxes

Income taxes consist primarily of state minimum taxes. We have established a valuation allowance for our deferred tax assets, including federal and state NOLs. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income in the United States.

Results of Operations

The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in the prospectus. The following tables set forth our results of operations for the periods presented:

 

     Year Ended January 31,  
     2020     2021  
     (in thousands)  

Consolidated Statements of Operations Data:

    

Revenue:

    

Subscription and Reserve rental revenue

   $ 235,417     $ 135,895  

Other revenue

     21,449       21,604  
  

 

 

   

 

 

 

Total revenue, net

     256,866       157,499  

Costs and expenses:

    

Fulfillment

     118,111       52,951  

Technology

     40,186       37,657  

Marketing

     22,913       8,146  

General and administrative

     98,876       77,229  

Rental product depreciation and revenue share

     85,185       88,975  

Other depreciation and amortization

     21,580       23,036  
  

 

 

   

 

 

 

Total costs and expenses

     386,851       287,994  
  

 

 

   

 

 

 

Operating loss

     (129,985     (130,495

Interest income / (expense), net

     (24,048     (46,621

Other income / (expense), net

     (74     6,035  
  

 

 

   

 

 

 

Net loss before benefit from income taxes

     (154,107     (171,081

Benefit from income taxes

     151       1  
  

 

 

   

 

 

 

Net loss

   $ (153,956   $ (171,080
  

 

 

   

 

 

 

Comparison of the Years Ended January 31, 2020 and 2021

Total Revenue, Net.    Total revenue, net was $157.5 million for fiscal year 2020, a decrease of $99.4 million, or 38.7%, compared to $256.9 million for fiscal year 2019. This decrease was primarily driven by the reduction in overall demand directly attributable to the COVID-19 pandemic.

Subscription and Reserve Rental Revenue.    Subscription and Reserve rental revenue was $135.9 million for fiscal year 2020, a decrease of $99.5 million, or 42.3%, compared to $235.4 million

 

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for fiscal year 2019. This decrease was primarily driven by the 59% year over year decrease in active subscriber counts as a result of the COVID-19 pandemic.

Other Revenue.    Other revenue was $21.6 million for fiscal year 2020, an increase of $0.2 million, or 0.7%, compared to $21.4 million for fiscal year 2019. This increase was primarily driven by a temporary mix shift from Subscription and Reserve rental revenue to Other revenue during the COVID-19 pandemic. We launched additional resale initiatives and increased promotional activities for resale items in order to increase revenue from subscribers, which resulted in Other revenue representing 13.7% of our total revenue in fiscal year 2020, up from 8.4% in fiscal year 2019.

Costs and Expenses.    Total costs and expenses were $288.0 million for fiscal year 2020, a decrease of $98.9 million, or 25.6%, compared to $386.9 million in fiscal year 2019. This decrease was primarily driven by reduced total shipments to be fulfilled as a result of the COVID-19 pandemic, as well as cost saving initiatives put in place as a direct response to the COVID-19 pandemic’s impact on the overall business.

Fulfillment.    Fulfillment expenses were $53.0 million for fiscal year 2020, a decrease of $65.2 million, or 55.2%, compared to $118.1 million in fiscal year 2019. This decrease was primarily driven by the reduction in total shipments to be fulfilled as a result of the reduced number of active subscribers during the COVID-19 pandemic and the lower number of shipments received by such subscribers. Fulfillment expenses as a percentage of revenue also decreased as a result of efficiencies in transportation rates and fulfillment labor.

Technology.    Technology expenses were $37.7 million for fiscal year 2020, a decrease of $2.5 million, or 6.3%, compared to $40.2 million in fiscal year 2019. This decrease was primarily driven by cost saving initiatives put in place as a result of the impact of the COVID-19 pandemic, including contract renegotiations and technology personnel cost reductions.

Marketing.    Marketing expenses were $8.1 million for fiscal year 2020, a decrease of $14.8 million, or 64.4%, compared to $22.9 million in fiscal year 2019. This decrease was primarily driven by the decision to reduce paid and brand marketing spend during the COVID-19 pandemic in addition to marketing personnel cost reductions. Marketing expenses unrelated to personnel costs were $18.1 million in fiscal year 2019 and $4.2 million in fiscal year 2020, representing 7.0% and 2.7% of total revenue, respectively.

General and Administrative.    General and administrative expenses were $77.2 million for fiscal year 2020, a decrease of $21.6 million, or 21.9%, compared to $98.9 million in fiscal year 2019. This decrease was primarily driven by cost saving initiatives put in place as a result of the impact of the COVID-19 pandemic, including retail store closures and associated personnel and operating expense reductions, contract renegotiations, and other general and administrative personnel cost reductions, partially offset by operating lease disposals as a result of the COVID-19 pandemic. Occupancy expenses (including warehouse-related expenses) contributed to the increase in general and administrative expenses as a percentage of total revenue, increasing from 7.9% in fiscal year 2019 to 11.7% in fiscal year 2020.

Rental Product Depreciation and Revenue Share.    Rental product depreciation and revenue share was $89.0 million for fiscal year 2020, an increase of $3.8 million, or 4.4%, compared to $85.2 million in fiscal year 2019. This increase was primarily driven by increased performance based and upfront revenue share payments related to a higher penetration of items acquired through Share by RTR in fiscal year 2020. Rental product depreciation and revenue share increased to 56.5% of total revenue in fiscal year 2020, compared to 33.2% in fiscal year 2019. This increase was primarily driven by a higher level of product on hand relative to depressed active subscriber and revenue levels due to COVID-19.

 

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Other Depreciation and Amortization.    Other depreciation and amortization was $23.0 million for fiscal year 2020, an increase of $1.5 million, or 6.7%, compared to $21.6 million in fiscal year 2019. This increase was primarily driven by an increase in capitalized software amortization and the timing of depreciation expense associated with assets related to the build out of our new corporate HQ office in Brooklyn, NY put in use in fiscal year 2020.

Interest Income / (Expense), Net.    Interest expense, net was $46.6 million for fiscal year 2020, an increase of $22.6 million, or 93.9%, compared to $24.0 million for fiscal year 2019. This increase was primarily driven by the incremental accrued payment-in-kind interest and cash interest related to the additional draw downs on our Temasek Facility and payment-in-kind interest, or PIK, related to the addition of our Ares Facility. Of the $46.6 million total interest expense in fiscal year 2020, $37.0 million was PIK interest, $4.4 million was cash and financing lease interest and $5.1 million was debt discount amortization, compared with $19.9 million PIK interest, $1.0 million cash and financing lease interest and $3.2 million debt amortization in fiscal year 2019.

Other Income / (Expense), Net.    Other income / (expense), net was $6.0 million for fiscal year 2020, an increase of $6.1 million, compared to $(0.1) million for the fiscal year 2019. This increase was primarily driven by the receipt of insurance claim proceeds and monetization of a tax credit, partially offset by a loss on debt extinguishment, all of which did not occur in the prior year.

Non-GAAP Financial Metrics

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial metrics are useful in evaluating our performance. These non-GAAP financial metrics are not meant to be considered as indicators of our financial performance in isolation from or as a substitute for our financial information prepared in accordance with GAAP and should be read only in conjunction with financial information presented on a GAAP basis. There are limitations to the use of the non-GAAP financial metrics presented in this prospectus. For example, our non-GAAP financial metrics may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial metrics differently than we do, limiting the usefulness of those measures for comparative purposes.

Reconciliations of each of the below non-GAAP financial metrics to its most directly comparable GAAP financial measure are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial metrics for each of the periods presented. In future periods, we may exclude similar items, may incur income and expenses similar to these excluded items, and may include other expenses, costs and non-recurring items.

Fulfillment Profit, Gross Profit Excluding Product Depreciation and Contribution Profit.    We use Fulfillment Profit to measure the efficiency of the inbound, outbound and processing cost of each shipment. We use Gross Profit Excluding Product Depreciation to measure our total variable profit excluding non-cash expenses as an indicator of the cash gross profit available to cover our operating expenses and capital expenditures. We use Contribution Profit to measure the overall efficiency of our business model, including fulfillment expense, total product costs and credit card fees. See “—Our Financial Model” for how we define each of Fulfillment Profit, Gross Profit Excluding Product Depreciation and Contribution Profit and related terms.

 

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The following table presents a reconciliation of Total revenue, net, the most comparable GAAP financial measure, to each of Fulfillment Profit, Gross Profit Excluding Product Depreciation, and Contribution Profit, respectively, for the years ended January 31, 2020 and 2021:

 

     Year Ended January 31,  
     2020     2021  
     (in thousands)  

Total revenue, net

   $ 256,866     $ 157,499  

Fulfillment

     118,111       52,951  
  

 

 

   

 

 

 

Fulfillment profit

     138,755       104,548  

Revenue share

     9,506       19,140  
  

 

 

   

 

 

 

Gross profit excluding product depreciation

     129,249       85,408  

Rental product depreciation

     75,679       69,835  
  

 

 

   

 

 

 

Gross profit

     53,570       15,573  

Credit card processing fees

     8,208       4,404  
  

 

 

   

 

 

 

Contribution profit

     45,362       11,169  

Technology

     40,186       37,657  

Marketing

     22,913       8,146  

General and administrative (excluding credit card processing fees)

     90,668       72,825  

Other depreciation and amortization

     21,580       23,036  
  

 

 

   

 

 

 

Operating loss

   $ (129,985   $ (130,495

Adjusted EBITDA.    Adjusted EBITDA is included in this prospectus because it is a key performance measure used by management to assess our operating performance and the operating leverage of our business.

The following table presents a reconciliation of net loss, the most comparable GAAP financial measure, to Adjusted EBITDA for the years ended January 31, 2020 and 2021:

 

     Year Ended January 31,  
     2020     2021  
     (in thousands)  

Net loss

   $ (153,956   $ (171,080

Interest (income) / expense, net (1)

     24,048       46,621  

Rental product depreciation

     75,679       69,835  

Other depreciation and amortization (2)

     21,580       23,036  

Stock compensation (3)

     6,766       8,190  

Write-off of liquidated assets (4)

     4,121       3,287  

Non-recurring adjustments (5)

     3,781       4,169  

Benefit from income taxes

     (151     (1

Other (income) / expense, net

     74       (6,035

Other (gains) / losses (6)

     25       1,640  
  

 

 

   

 

 

 

Adjusted EBITDA

   $ (18,033   $ (20,338
  

 

 

   

 

 

 

 

(1)

Includes debt discount amortization of $3.2 million in fiscal year 2019 and $5.1 million in fiscal year 2020.

(2)

Includes non-rental product depreciation and capitalized software amortization.

(3)

Reflects the non-cash expense for stock-based compensation.

(4)

Reflects the write-off of the remaining book value of liquidated products that had previously been held for sale.

(5)

Fiscal year 2019 Non-recurring adjustments includes $2.8 million of costs related to a September 2019 software outage and $1.0 million related to legal costs and settlements. Fiscal year 2020 Non-recurring adjustments includes $3.2 million of costs

 

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  associated with COVID-19-related matters including severance, furlough benefits, one-time bonuses and related legal fees and $0.5 million of shipping carrier transition costs.
(6)

Includes costs associated with the write-off of asset disposals, operating lease termination and foreign exchange.

Liquidity and Capital Resources

Since our founding, we have financed our operations primarily from net proceeds from the sale of redeemable preferred stock, common stock and debt financings. As of January 31, 2021, we had cash and cash equivalents of $95.3 million and restricted cash of $13.9 million ($3.4 million current and $10.5 million noncurrent), which were primarily held for working capital purposes, and an accumulated deficit of $589.4 million.

We expect that operating losses and negative cash flows from operations could continue in the foreseeable future as we continue to acquire products and increase other investments in our business. We believe our existing cash and cash equivalents and available access to equity and debt financing will be sufficient to meet our working capital and capital expenditures needs and allow us to comply with our debt covenants for at least the next 12 months from the date of this prospectus.

Our future capital requirements will depend on many factors, including, but not limited to, growth in the number of customers and active subscribers and the timing of investments in technology and personnel to support the overall growth in our business. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all. In particular, the recent COVID-19 pandemic has caused disruption in the global financial markets, which could reduce our ability to access capital and negatively affect our liquidity in the future. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, financial condition, and cash flows would be adversely affected.

Cash Flows

The following table summarizes our cash flows for the periods presented:

 

     Year Ended January 31,  
     2020     2021  
     (in thousands)  

Net cash used in operating activities

   $ (37,602   $ (42,816

Net cash used in investing activities

     (138,596     (58,468

Net cash provided by financing activities

     177,902       168,506  
  

 

 

   

 

 

 

Net increase in cash and cash equivalents and restricted cash

     1,704       67,222  

Cash and cash equivalents and restricted cash at beginning of year

     40,244       41,948  
  

 

 

   

 

 

 

Cash and cash equivalents and restricted cash at end of year

   $ 41,948     $ 109,170  
  

 

 

   

 

 

 

Cash Flows from Operating Activities.    For fiscal year 2020, net cash used in operating activities was $42.8 million, which consisted of a net loss of $(171.1) million, partially offset by

 

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non-cash charges of $145.2 million, proceeds from rental product sold of $17.9 million and a net change of $1.0 million in our operating assets and liabilities. The non-cash charges were primarily comprised of $70.8 million of rental product depreciation and write-off expenses, $36.9 million of payment-in-kind interest, $8.2 million of stock-based compensation, $5.2 million of debt and warrant discount amortization and debt extinguishment costs and $24.1 million of other property and equipment and software depreciation and amortization. Cash flow from operating activities excludes proceeds received from sales of owned rental products that are still in rentable condition; such proceeds are included in cash flow from investing activities.    

For fiscal year 2019, net cash used in operating activities was $37.6 million, which consisted of a net loss of $(154.0) million, partially offset by non-cash charges of $127.6 million, proceeds of sale of rental product of $19.3 million and a net change of $8.1 million in our operating assets and liabilities. The non-cash charges were primarily comprised of $76.2 million of rental product depreciation and write-off expenses, $19.0 million of payment-in-kind interest, $6.8 million of stock-based compensation, $4.1 million of debt discount amortization and $21.6 million of other PPE and software depreciation and amortization.

Cash Flows from Investing Activities.    For fiscal year 2020, net cash used in investing activities was $58.5 million, consisting of $54.9 million of purchases of rental product and $23.8 million of purchases of property and equipment. Both types of spend were materially reduced from their initial planned spend at the onset of the COVID-19 pandemic. The majority of the investment in rental product was to support the planned demand growth prior to the onset of COVID-19, of which $38.8 million was purchased prior to COVID-19. The majority of the investment in property and equipment is related to the investment in automation assets and additional processing machinery and equipment for our warehouses in addition to the buildout of our new headquarters in Brooklyn, NY and capitalized technology labor for multi-warehouse operations processing, site reliability and new membership site functionality. The cash used in investing activities was partially offset by $17.9 million of proceeds from sale of owned rental products and $2.4 million of proceeds from sales of liquidated rental products.

For fiscal year 2019, net cash used in investing activities was $138.6 million, consisting of $117.7 million of purchases of rental product and $43.8 million of purchases of property and equipment. The investment in rental product was to support our growth in customer demand. The majority of the investment in property and equipment is related to the buildout of the Arlington warehouse which opened during fiscal year 2019 and investment in automation assets and additional processing machinery and equipment for our Secaucus warehouse. The cash used in investing activities was partially offset by $19.3 million of proceeds from sale of owned rental products and $3.6 million of proceeds from sales of liquidated rental products.

Cash Flows from Financing Activities.    During fiscal year 2020, net cash provided by financing activities was $168.5 million, consisting of net proceeds from issuance of debt of $107.6 million and $60.4 million from the issuance of redeemable preferred stock.

During fiscal year 2019, net cash provided in financing activities was $177.9 million, consisting of net proceeds from issuance of debt of $42.7 million and $133.8 million from the issuance of redeemable preferred stock.

Indebtedness

Bank of America Credit Facility.    We entered into a revolving credit facility in April 2019, as subsequently amended in June 2020, with Bank of America as agent and lender, and Barclays Bank PLC and Goldman Sachs Bank USA as additional lenders, which we refer to as our Bank of America

 

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Credit Facility. In October 2020, we entered into the Ares Facility (as defined below) and repaid in full the outstanding balance of the Bank of America Facility in the amount of $29.5 million, and terminated the credit commitments. The outstanding balance on the Bank of America Credit Facility as of January 31, 2020 and 2021, was $44.0 million and $0, respectively.

Temasek Credit Facility.    We entered into a subordinated, junior lien loan agreement in July 2018, as subsequently amended in December 2018, April 2019, November 2019, June 2020, August 2020 and October 2020, with Double Helix Pte Ltd. as administrative agent for Temasek Holdings, which we refer to as our Temasek Facility. We drew $100.0 million of the initial commitments on the closing date and another $50.0 million in November 2019. We drew the remaining $50.0 million of the initial commitments and $30.0 million subsequent commitments in March 2020. The initial commitments bear an interest rate of 15% per annum that accrue as non-cash interest and, after the third anniversary of the loan, we can elect to pay cash interest at 13% per annum in lieu of the 15% non-cash interest. The subsequent commitments bear a cash interest rate of 13% per annum, payable quarterly. If the initial commitments are prepaid or accelerated prior to the fourth anniversary of the loan, we are subject to a prepayment premium. If the subsequent commitments are prepaid or accelerated prior to the 18-month anniversary of the loan, we are subject to prepayment premium amounts. The Temasek Facility contains various events of default, the occurrence of which could result in the acceleration of obligations under the Temasek Facility.

The Temasek Facility matures in July 2023. The outstanding balance on the Temasek Facility as of January 31, 2021 consisted of $230.0 million of outstanding principal, $62.2 million of payment-in-kind interest, netted with $1.9 million of unamortized debt discount.

Ares Credit Facility.    We entered into a first lien facility in October 2020, as subsequently amended in April 2021, with Alter Domus (US) LLC as administrative agent for Ares Corporate Opportunities Fund V, L.P., or Ares, which we call the Ares Facility. In conjunction with the incurrence of the Ares Facility, we issued 1,695,955 shares of our Series G preferred stock to Ares for $25.0 million in aggregate proceeds. The Ares Facility bears an interest rate of 8% per annum to be accrued as non-cash interest, or we can elect to pay cash interest at 6.5% per annum, and the facility is secured by substantially all of our assets. The Ares Facility requires the original principal to begin to be repaid quarterly at 0.25% starting January 31, 2021 and an exit payment of $1.5 million to be paid once the facility matures or the original principal of $75.0 million is paid in full. The Ares Facility also requires we meet specified financial covenants that are measured based on pre-defined consolidated EBITDA thresholds starting in the second quarter of fiscal year 2021. The consolidated EBITDA covenant allows for an equity cure under certain circumstances. The April and May 2021 Series G proceeds may be applied cumulatively as an equity cure for the quarters ending July 31, 2021 through October 31, 2022. The consolidated EBITDA covenant applies through the quarter ending July 31, 2023. After October 31, 2022, the consolidated EBITDA covenant thresholds increase in each successive quarterly period and continue to allow for an equity cure; however, the proceeds from the April and May 2021 Series G issuances are no longer permitted to be applied. See Note 7 to our audited consolidated financial statements included elsewhere in this prospectus. The Ares Facility requires mandatory prepayment upon defined triggering events as well as permitting optional prepayments and certain of the mandatory prepayment triggering items are subject to a prepayment premium. The Ares Facility contains various events of default, the occurrence of which could result in the acceleration of obligations under the Ares Facility.                

The Ares Facility matures at the earlier of October 2023 or 91 days prior to the maturity of the Temasek Facility. The outstanding balance on the Ares Facility as of January 31, 2021 consisted of $75.0 million of outstanding principal, $1.6 million of payment-in-kind interest, netted with $11.0 million of unamortized debt discount and debt issuance costs.

 

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of January 31, 2021:

 

     Payments Due by Period  
     Total      Less than 1
year
     1 to 3
years
     3 to 5
years
     More than 5
years
 
     (in thousands)  

Financing lease liabilities

   $ 360      $ 170      $ 190      $      $  

Operating lease liabilities

     117,780        15,692        24,799        19,503        57,786  

Long term debt(1)

     368,864        938        367,926                
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 487,004      $ 16,800      $ 392,915      $ 19,503      $ 57,786  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Consists of our Ares Facility, which had an outstanding balance as of January 31, 2021 of $75.0 million of outstanding principal, $1.6 million of payment-in-kind interest, and our Temasek Facility, which had an outstanding balance as of January 31, 2021 of $230.0 million of outstanding principal, $62.2 million of payment-in-kind interest.

For additional discussion on our financing lease liabilities, operating lease liabilities and long term debt, see Notes 4 and 7 to our audited consolidated financial statements included elsewhere in this prospectus.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial position because of adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure resulting from potential changes in interest rates or inflation.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs with increased revenue. Our inability or failure to do so could harm our business, financial condition, and results of operations.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods, as well as related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and the amount of revenue and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under

 

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different assumptions or conditions, and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

We recognize rental revenue from subscription and on-demand rental fees in accordance with ASC 842. Subscription fees are recognized ratably over the subscription period, commencing on the date the subscriber enrolls in the rental program. We also recognize fees for on-demand rentals ratably over the rental period, which starts with the date of delivery of rental product to the customer.

We recognize revenue from the sale of rental product to our customers in accordance with ASC 606. Sale of rental product occurs in two forms: (i) liquidation at the end of the useful life and (ii) customer purchase of rental product at a discounted price, calculated as a percentage of retail value. The single performance obligation associated with rental product sales is generally satisfied upon delivery of the rental product to the customer.

Revenue is presented net of promotional discounts, customer credits and returns. Promotional discounts are recognized in accordance with either ASC 842 or ASC 606, based on the revenue recognition guidance applied to the rental fees or product sales to which the promotional discounts are related. Revenue is presented net of taxes that are collected from customers and remitted to governmental authorities.

A liability is recognized at the time a customer credit or a gift card is issued, and revenue is recognized upon redemption of the credit or gift card. Customer credits and gift cards do not have expiration dates. Over time, a portion of these instruments is not redeemed. We recognize breakage income based on the redemption pattern method. We continue to maintain the full liability for the unredeemed portion of the credits and gift cards for any legal obligation to remit such credits to government authorities in relevant jurisdictions.

Rental Product

We consider rental product to be a long-term productive asset and, as such, classify it as a noncurrent asset on the consolidated balance sheets. Rental product is stated at cost, less accumulated depreciation. We depreciate rental product, less an estimated salvage value, over the estimated useful lives of the assets using the straight-line method. The useful life is determined based on historical trends and an assessment of any future changes. The salvage value considers the historical trends and projected liquidation proceeds for the assets.

Right of Use Assets

Right-of-use assets and lease liabilities are measured and recognized at the lease commencement date based on the present value of lease payments over the expected lease term. The estimated incremental borrowing rate, used to determine the present value of future minimum lease payments, is determined at the lease effective date or lease commencement date, whichever is later, and is subsequently reassessed upon modification to the lease arrangement. The determination of the estimated incremental borrowing rate requires judgement and is primarily based on publicly available information for companies within the same industry and with similar credit profiles.

 

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Share-Based Compensation

We measure share-based compensation expense for all equity classified awards based on the estimated fair value of the awards on the date of grant. The fair value of stock options is recognized as compensation expense on a straight-line basis over the requisite service period of the award. We estimate grant date fair value of stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the following:

 

   

Fair value of common stock. Because our common stock is not yet publicly traded, we are required to estimate the fair value of its common stock. The fair value of the shares of common stock underlying the stock options has historically been determined by a third-party valuation firm and approved by our Board of Directors. The fair value of our common stock is determined by considering a number of objective and subjective factors, including: the valuation of comparable companies, sales of preferred stock to unrelated third parties, our operating and financial performance, the lack of liquidity of common stock and general and industry specific economic outlook, among other factors.

 

   

Expected volatility. As a result of the lack of historical and implied volatility data of our common stock, the expected stock price volatility has been estimated based on the historical volatilities of a specified group of companies in its industry for a period equal to the expected life of the option. We selected companies with comparable characteristics to it, including enterprise value, risk profiles, and position within the industry, and with historical share price information sufficient to meet the expected term of the stock options. The historical volatility data has been computed using the daily closing prices for the selected companies.

 

   

Expected term. The expected term of stock options represents the weighted-average period the stock options are expected to remain outstanding and is based on the stock options’ vesting terms and contractual terms, estimated employee termination behavior, and potential future stock price outcomes.

 

   

Risk-free interest rate. The expected risk-free rate assumption is based on the U.S. Treasury instruments whose term is consistent with the expected term of the stock options.

 

   

Expected dividend yield. The expected dividend assumption is based on our history and expectation of dividend. We have not paid dividends and do not expect to do so in the foreseeable future.

Upon grant of awards, we also estimate an amount of forfeitures that will occur prior to vesting. We estimate forfeitures based on the dynamic forfeiture model based on our historical forfeitures of stock options adjusted to reflect future changes in facts and circumstances, if any.

We have also granted RSUs which vest only upon satisfaction of both time-based service and performance-based conditions. As of January 31, 2021, we have not recognized share-based compensation expense for awards with performance-based conditions which include a qualifying event because the qualifying event is not probable. In the period in which the qualifying event, such as an initial public offering, becomes probable, we will record a cumulative one-time share-based compensation expense determined using grant-date fair values. Share-based compensation related to any remaining time-based service after the qualifying event will be recorded over the remaining requisite service period. We will record share-based compensation expense for RSUs on an accelerated attribution method over the requisite service period, which is generally 4 years, and only if performance-based conditions are considered probable to be satisfied. The total unrecorded share-based compensation expense relating to RSUs which were partially vested at January 31, 2021 was $7.6 million. This amount relates to awards for which the service-based vesting condition had been satisfied or partially satisfied at January 31, 2021.

 

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Warrants

Our warrants that do not meet the criteria for equity treatment must be recorded as liabilities. Accordingly, we classify the warrants as liabilities at their fair value and adjust the warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statements of operations. The warrants are valued using a Black-Scholes option pricing model. The assumptions used in preparing the model include estimates such as fair value of the underlying shares, expected volatility, expected term, risk-free interest rate and expected dividend yield. This valuation model uses unobservable market share price input on a recurring basis, and therefore the liability is classified as Level 3.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this prospectus for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.

JOBS Act

We currently qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, we are provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have elected to adopt new or revised accounting guidance within the same time period as private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period. Accordingly, our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.

 

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BUSINESS

Our Mission

Our mission is to power women to feel their best every day.

Since our founding, we have disrupted the trillion-dollar fashion industry and changed the way women get dressed by creating the world’s first Closet in the Cloud: a dream closet filled with a massive selection of designer styles to rent, wear and return (or keep!).

Overview

We built the world’s first and largest shared designer rental closet — what we call the Closet in the Cloud — with over 18,000 styles by over 750 designer brands. We give customers ongoing access to our “Unlimited Closet” through our Subscription offerings or the ability to rent a-la-carte through our Reserve offering. We also give our subscribers and customers the ability to buy our products through our Resale offering. Our Closet in the Cloud offers a wide assortment of items for every occasion, from evening wear and accessories to ready-to-wear, workwear, denim, casual, maternity, outerwear, blouses, knitwear, loungewear, jewelry, handbags, activewear, ski wear, home goods and kidswear. We have served over 2.5 million lifetime customers across all of our offerings and we had total subscribers (active and paused) as of                 , 2021. In the first six months of fiscal year 2021,                % of our total revenue was generated by subscribers.

We have created a two-sided discovery engine: customers are finding new brands they love and brand partners are finding new customers they need. For customers, we unlock freedom of self-expression through access to our “Unlimited Closet” that has a constantly rotating supply of styles for all occasions, seasons, moods and price points. For brand partners, we enable them to grow their customer bases, their access to data and their businesses.

When our customers use Rent the Runway, they experience the magic of accessing an “Unlimited Closet” while saving money and time and reducing clothing waste. We deliver significant financial value to customers, with our average subscriber wearing clothes worth more than 20 times what she pays for a monthly RTR subscription on an annualized basis (approximately $47,000 in designer retail value in fiscal year 2019 and more than $37,000 annualized for the first five months of fiscal year 2021).16 We have become an everyday utility; our most engaged subscribers wear Rent the Runway more than 100 days per year. We believe that the convenience and access to a broad assortment of designer brands, categories and styles helps drive our strong customer engagement.

Our tremendous selection is enabled by our designer brand partnerships. We source our products directly from over 750 brand partners that include many of the most renowned and relevant names in the fashion industry. Our platform continues to be a valued launching pad for new and emerging brands and a business builder for existing brands. The transformative nature of our customer value proposition means our customers are different from other audiences our brands are exposed to. Approximately 91% of our brand partners work with us because we introduce them to new, desirable customers and deepen awareness of their brands. Over the last 12 years, we have fostered strong relationships with our brand partners and we have retained nearly 100% of our brand partners.

 

16 

We calculate designer retail values using original retail and/or comparable value prices. An original retail price is the price at which the manufacturer suggested that retailers in the marketplace, including department stores and specialty retailers, sell the item in new condition. A comparable value price is used for our Exclusive Designs and is based on an evaluation of prices for new comparable merchandise sold elsewhere in the marketplace.

 

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Our Closet in the Cloud connects our deeply engaged customers and our differentiated brand partners on a powerful platform built around our brand, data, logistics and technology advantages.

 

   

Brand Partner Advantage. Our assortment contains thousands of new, current season styles procured from our brand partners that luxury competitors simultaneously carry - all available for subscription, a-la-carte rental, and resale at much lower prices. We believe our engaged and loyal customer base paired with the data that we provide to our brand partners makes us an essential destination for many of the world’s most important brands. As we have grown, our commercial relationships with brands have evolved to balance our margins and the capital needs of our business.

 

   

Data Advantage. We capture a vast amount of quality, actionable data on our customers and products. We leverage this data to create benefits for our customers (deep personalization of styles and fit), brand partners (understanding of customer demand patterns and garment lifecycle) and our business (higher subscriber lifetime value and better product return on investment).

 

   

Technology and Logistics Advantage. We have developed a proprietary operating system for the sharing economy of physical goods that pairs proprietary intelligent software with differentiated infrastructure and hardware. Our expertise in vertically integrated just-in-time reverse logistics and garment science allows us to achieve multi-year monetization on our garments. We have also built a custom front-end platform that supports all of our offerings in one easy experience for the customer.

Since our inception, organic growth, or word-of-mouth marketing, has been a key advantage for RTR. Many of our customers publicly share their love of the Rent the Runway experience on social media and in their personal lives, which helps drive brand awareness and new customer acquisition. Because of how customers use Rent the Runway, renting bold dynamic pieces, and the confidence they feel, our clothing becomes a visual billboard and advertising for the platform. As a result, since our founding, we have spent less than 10% of total revenue on marketing, and our growth has been mostly organic. More than 88% of our customers over the last 12 years have been acquired via word-of-mouth. Our brand and deeply engaged community have allowed us to acquire customers efficiently even as we have scaled.

We generate revenue from our Subscription, Reserve and Resale offerings. The majority of revenue comes from our Subscription offering, which is highly recurring and drives customer engagement.

We have achieved the following operating and financial results:

 

   

We had 147,866 and 95,245 total subscribers at the end of fiscal year 2019 and fiscal year 2020, respectively, and 133,572 and 54,797 active subscribers (excluding paused subscribers), respectively;

 

   

Revenue was $256.9 million and $157.5 million in fiscal year 2019 and fiscal year 2020, respectively;

 

   

Gross Profit was $53.6 million and $15.6 million in fiscal year 2019 and fiscal year 2020, respectively;

 

   

Gross Profit Excluding Product Depreciation was $129.2 million and $85.4 million in fiscal year 2019 and fiscal year 2020, respectively;

 

   

Net Loss was $(154.0) million and $(171.1) million in fiscal year 2019 and fiscal year 2020, respectively; and

 

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Adjusted EBITDA was $(18.0) million and $(20.3) million in fiscal year 2019 and fiscal year 2020, respectively.

Trends in Our Favor

We are witnessing trends that are driving consumer and brand behavior in our favor.

Consumer Trends

Some of the key trends impacting consumers in our industry include:

 

   

Shift from Ownership to Access: The shift from ownership to access has been rapid across many categories and has expanded the total addressable market opportunity by reducing barriers to entry from music to media to homes. In 2020, access models represented 64% of the U.S. recorded music market, 71% of the U.S. home entertainment market and 17% of the U.S. hospitality market. Businesses such as Spotify, Netflix and Airbnb have been built in the transition to access and we believe that the apparel industry is ripe for this same disruption. We are at the beginning of a revolution of how people choose to dress and express themselves. Across the retail landscape, many customers are acting in a manner that already mirrors an access/rental model, by returning items more frequently, through buying and reselling secondhand clothing, and by purchasing and disposing of fast fashion, often within 12 months.

 

   

Desire for Variety and Newness: Consumers are increasingly seeking variety and newness in their wardrobes. Closets are growing and, according to the Wall Street Journal, the average consumer buys approximately 70 items of clothing per year as compared to 40 items per year in 1990. While closets have expanded in quantity, items are worn less and discarded faster. The average consumer already operates with a rental mentality seeking variety, rotation and newness: 33% of women consider an outfit to be “old” after wearing it fewer than three times.17

 

   

Growth of Online Shopping: Despite the fact that closets are growing, online sales represent the fastest growing part of the apparel market. U.S. online apparel grew at a 17% CAGR between 2015 and 2020 while the broader apparel sector declined, according to Euromonitor. Mobile has seen even faster growth as consumers increasingly use their smartphones to discover and shop. According to Euromonitor, U.S. mobile e-Commerce grew at a 35% CAGR between 2015 and 2020.18 These trends have been accelerated by the COVID-19 crisis as consumers have moved their shopping online.

 

   

Social Media Driving Fashion: Consumers are spending a significant amount of time on social media, a medium driving fashion awareness and influencing purchasing behavior. Millennials post nine selfies a week, according to Now Sourcing, and one in seven women considers it a fashion faux-pas to be photographed in an outfit twice, according to McKinsey.19 The ubiquity of fashion on social media has meant that consumers have a higher awareness of aspirational brands outside their income level and are taking fashion cues from their friends and influencers as opposed to industry experts.

 

   

An Increasingly Female Workforce: As of January 2021, women represented 47% of the workforce, up from 38% in 1970, according to the U.S. Bureau for Labor Statistics and U.S. Census, but control 70 to 80% of household spending (according to Forbes).20 This

 

17 

Hubbub, Inc.

18 

Euromonitor, Retailing 2020. Retail Value RSP excludes sales tax, current prices and year-over-year exchange rates.

19 

Workforce representation according to McKinsey & Co., The State of Fashion, 2019.

20 

U.S. Census Bureau, Women Are Nearly Half of U.S. Workforce But Only 27% of STEM Workers, January 2021. Control of household spending according to Forbes, 20 Facts and Figures to Know When Marketing to Women, May 2019.

 

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increasingly female workforce is spending 3x more than their male counterparts on workwear, with 50% of women feeling pressure to be “put together” at work and 41% believing how they dress impacts how they are perceived as leaders according to a Refinery29 study. There are many unspoken (and sometimes spoken) rules around how professional women should dress including appropriate outfits, preferred designers, and suitable professional styles. Half of the women surveyed say they have nothing to wear at least a few times a week, but still spend three hours a week getting dressed.21

 

   

Importance of Sustainability: Consumers are increasingly aware of the impact their choices are making on the environment, seeking more sustainable alternatives, and holding brands accountable. According to McKinsey, internet searches for “sustainable fashion” grew 3x between 2016 and 2019 and hits on the Instagram hashtag #sustainablefashion grew 5x between 2016 and 2019 in the U.S. and Europe.

 

   

Normalization of Secondhand: Secondhand fashion has become more mainstream, driven by its affordability, uniqueness, selection and alignment with environmental consciousness.

All designer brands, whether accessible or prestige, face challenges to grow their businesses and serve their consumers. Those challenges include:

 

   

Decline of Traditional Wholesale Channels: Customers are shopping less in wholesale channels such as physical stores, where new customers were traditionally introduced to new brands. Declining foot traffic and discovery in traditional wholesale channels is leading to bankruptcies and store closures. It is estimated that 80,000 retailers, or 9% of the 878,000 stores in the U.S. will close their doors in the next five years. Department stores, one-fifth of which have closed since 2018, have traditionally represented a majority of brands’ revenue, making a decline in traffic a headwind on revenue.

 

   

Direct-to-Consumer, or DTC, as an Essential Channel for Every Brand: Given the growth in online and the challenges associated with traditional wholesale channels, brands are increasingly seeking DTC channels but often lack the financial or human capital to build them.

 

   

Larger, More Fractured Discovery Landscape: It is increasingly important for brands to innovate their approach to customer acquisition. According to Publicis Sapient, 87% of shoppers today begin product searches online, meaning that younger customers are missing from the traditional in-store brand discovery funnel and instead focused on direct search for brands they already know. Additionally, new brands emerge each year, providing customers with an endless aisle of choices yet leaving brands with a customer discovery challenge.

 

   

Aging Consumer Base: The combination of a decline in traditional offline channels, the difficulty for brands in moving online and the fractured discovery landscape has left brands with

  an aging consumer base from traditional retail outlets. The average age of a luxury department store customer is 51 years old, meaning it is more difficult for brand partners to reach younger customers through traditional channels.

 

   

Heightened Competition from Mass and Fast Fashion: The desire for newness has led to enormous competition in the apparel industry from mass and fast fashion brands who can quickly manufacture and copy styles at lower prices than designer brands. In 2020, mass market and fast fashion comprised 42% of the U.S. apparel market up from 31% ten years ago. It has also forced brands to create bigger collections more frequently. For example, according to McKinsey, among European apparel companies, the average number of clothing collections per year more than doubled between 2000 and 2011, increasing brand costs and impacting their profitability.22

 

21 

Refinery29 Survey.

22 

McKinsey & Co., Style That’s Sustainable: A New Fast-Fashion Formula, October 2016.

 

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Growing Importance of Data: Data is critical to helping brands assess their product and efficiently acquire customers. Brands need information about trends, products quality and fit and need data to help them fuel customer acquisition and loyalty. Through traditional wholesale channels, brands receive very minimal data, and the data they do receive is often a season old.

Our Platform: The Closet in the Cloud

We built the world’s first and largest designer rental closet that we call the Closet in the Cloud. We give customers the ability to subscribe, rent a-la-carte through our Reserve offering, or buy from over 18,000 styles by over 750 designer brands. We started with a-la-carte rentals of evening wear and accessories for special occasions, and have grown our assortment to include products for subscription across multiple use cases including ready-to-wear, workwear, denim, casual, outerwear, blouses, knitwear, loungewear, jewelry, handbags, activewear, maternity, ski wear, home goods and kidswear amongst other categories. We have served over 2.5 million lifetime customers across all of our offerings and in the first six months of fiscal year 2021                % of our total revenue came from subscribers.

We have created a two-sided discovery engine: customers are finding new brands they love and brands are finding new customers they need. For customers, we unlock freedom of self-expression through access to our “Unlimited Closet” that has a constantly rotating supply of styles for all occasions, seasons, moods and price points. For brand partners, we enable them to grow their customer bases, their access to data and their businesses. Our Closet in the Cloud connects our deeply engaged customers and our differentiated brand partners on a powerful platform built around our brand, data, logistics and technology advantages.

 

   

Our Customers: In fiscal year 2019, approximately 700,000 unique customers discovered and engaged with brands on our platform. We deliver significant financial value to customers, with our average subscriber wearing clothes worth more than 20 times what she pays for a monthly RTR subscription on an annualized basis (approximately $47,000 in designer retail value in fiscal year 2019 and more than $37,000 annualized for the first five months of fiscal year 2021).23 We have become an everyday utility, with our most engaged subscribers wearing Rent the Runway more than 100 days per year.

Our Closet in the Cloud provides customers boundless opportunities for self-expression and fun. Our focus has been on democratizing fashion and bringing in new customers who are driven by the ability to find new brands and take fashion risks without the commitment of purchasing. We have become a brand discovery engine for our customers with 98% of our subscribers trying new brands on Rent the Runway they have never owned before and subscribers interacting with an average of 54 brands in their first year with us.

 

   

Our Brand Partners: We source our products directly from over 750 brand partners. Our partners include many of the most renowned and relevant names in the fashion industry, from iconic designers such as Tory Burch, Diane Von Furstenberg and Ralph Lauren, contemporary designers such as ALC, Ganni and Veronica Beard, rising stars such as Rosie ıAssouline and Paco Rabanne, and fashion darlings such as Proenza Schouler, Maison Margiela, Altuzarra and JW Anderson. Our platform continues to be a valued launching pad for new and emerging brands and a business builder for existing brands. Over the past six years, we were launch partners with 80% of the LVMH prize winners, a leading award for young designers, in line with luxury destinations including Bergdorf Goodman and Matches Fashion.

 

23 

We calculate designer retail values using original retail and/or comparable value prices. An original retail price is the price at which the manufacturer suggested that retailers in the marketplace, including department stores and specialty retailers, sell the item in new condition. A comparable value price is used for our Exclusive Designs and is based on an evaluation of prices for new comparable merchandise sold elsewhere in the marketplace.

 

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Approximately 91% of our brand partners say they work with us because we introduce them to new, desirable customers and deepen awareness of their brands. This new customer base coupled with our curated selection and sustainable business model attracts brand partners such as Cecilie Bahnsen, Khaite, Sandy Liang, Thebe Magugu and Pyer Moss who have achieved cult status in the fashion industry and are extremely selective about their distribution. We have fostered strong relationships with our brand partners and we have retained nearly 100% of our brand partners.

Our two-sided discovery engine sits at the center of Rent the Runway and creates our flywheel. As customers experience the magic of wearing whatever they want from an “Unlimited Closet” at a great price, they discover new brands. Brands gain new customers through our platform and significant data insights. The unparalleled value we provide to our brand partners leads them to engage with us more deeply, broaden their assortment on Rent the Runway and work with us in designing exclusive products. As we increase categories and styles available on our platform, we see higher engagement from current customers as they use us more days per year and across more diverse use cases. We saw that our average subscriber went from using Rent the Runway to get dressed 51 days in 2017 to 83 days in 2019.24 Compared to 2016, our subscribers in fiscal year 2019 rented from 58% more brands and from 39% more aesthetics in their first 30 days as a subscriber. Our deep customer engagement further fuels our data advantage and our value proposition to new and existing brand partners.

Our platform and business model are driven by three core advantages:

 

   

Our Brand Partner Advantage: Unlike most other players in the secondhand economy, we procure our assortment directly from brands, as opposed to customers’ closets. We control what items we have on our platform. Our assortment contains thousands of new, current season styles that our luxury competitors simultaneously carry - all available for subscription, a-la-carte rental, and sale at much lower prices. We believe our engaged and loyal customer base paired with the data and business insights that we provide to our brand partners, typically quarterly, makes us an essential destination for many of the world’s most important brands. 91% of our brand partners state that “RTR enables my brand to reach a new and/or different customer compared to other wholesale accounts that are essential to my business success.” As we have grown, our commercial relationships with our brand partners have evolved to balance our margins and the capital needs of our business. We work with brands through a combination of Wholesale,

  revenue share arrangements through our “Share by RTR” capability and co-manufacturing of “Exclusive Designs” driven by RTR’s data platform. 91% of our brand partners say that they see RTR as part of the future of fashion.

 

   

Our Data Advantage: Our ability to best serve customers and brand partners stems from our deep understanding of both sides of our platform. Our data is one-of-a-kind and propels our customer value proposition, our relationship with our brands and our financial model. Our data enables us to increase customer lifetime value and return on investment of our products. We collect a variety of data, and, given the frequency of use of our subscribers, we are able to capture more than 6,200 unique data points per active subscriber per year and up to 27 unique rental product data points per item each time it is rented.

 

   

Our Technology and Logistics Advantage: Over the last 12 years, we have developed a proprietary operating system for the sharing economy of physical goods. Our operating system is extensible, allowing us to be the backbone for a business model that gives the customer full flexibility to subscribe, rent a-la-carte or buy. Our operating system consists of distributed reverse logistics infrastructure, proprietary and third-party software, and data products and algorithms. Given that much of our operating system had to be developed from scratch, we have acquired significant data and process know-how over the years that help us scale efficiently. We are experts in vertically-integrated just-in-time reverse logistics and garment

 

24 

Average subscriber wears calculated based on subscriber engagement in calendar year 2019 on an annualized basis.

 

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science allowing us to achieve multi-year monetization on our garments and maximize utilization of our products. Our vertical integration has allowed us to better control our customer and brand partner experience while creating efficiencies of scale throughout the business. We have processed over 40 million units over the past decade and $15.8 billion in GMV.

How It Works

We offer customers three ways to access our closet: subscription, a-la-carte rentals and resale.

Browse

Customers access thousands of styles from more than 750 brands as they use our filters, site navigation and search functionality to find pieces that suit their needs. Before selecting a style to order, customers can use the 1.7 million free-form customer reviews, including nearly 700,000 photo reviews, posted by our community, to understand the size and fit of different items.

Once customers find a style they love, they choose to access it through our monthly subscription offering or an a-la-carte rental, or purchase the item.

Subscription

Pick a Plan. While our subscription plans are customizable, when customers subscribe to the Closet in the Cloud, they select from a menu of entry plans. Each plan starts with four items, or “spots,” per shipment, and varies based on how often the subscriber wishes to receive new shipments, each a “swap.” Today, the majority of our subscribers onboard into plans that offer one, two or four shipments per month for $89, $135 or $199 per month, respectively.

Customize. Subscribers can customize their plans to adapt to their changing lifestyles, needs and budgets by adding or removing spots for $25 or $29 per item per month and shipments for $25 - $39 per shipment per month, as they see fit.

Choose Items. After picking a plan, subscribers browse our broad assortment of items to build their first shipment. Our subscribers typically visit our app five times per week.

We use personalization algorithms that leverage style, size and fit preferences to deliver a personalized storefront for each subscriber and provide personalized size recommendations to each customer at the item level. Subscribers “heart” items they love and create “shortlists” to organize and save styles as they browse our selection, making styles easily accessible when they are ready to rent. When subscribers “heart” styles as they browse, the interactions are recorded by our personalization algorithm, which helps us further refine and improve each subscriber’s personalized recommendations.

Wear, Repeat. When subscribers place an order, we aim to deliver their order within two days of shipping from our fulfillment centers in our patented, reusable garment bags, cleaned and ready to wear.

Subscribers wear items for as long as they would like and choose to return some or all of their items with each new shipment. When subscribers select the items they want to return on our app, we allow them to immediately start building their next shipment, maximizing their time with items at home.

Subscribers give us real-time feedback on the size, fit and quality of the items they are returning every time they rent. The structured data we collect through our “happiness survey” allows us to both

 

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improve her experience as well as optimize our care and therefore return on investment of the items returned. As of June 2021, we’ve collected over 20 million happiness surveys since this feedback collection feature launched in June 2017.

Once subscribers confirm their new shipment, they return their items to the nearest preferred shipping partner location or any Rent the Runway drop-off point in RTR’s reusable garment bag. To maximize convenience, all shipments arrive with a prepaid return label, allowing subscribers to easily send their rentals back.

Reserve

When customers want to rent items a-la-carte for an upcoming event, they book styles for four or eight days through our Reserve offering. Approximately 93% of our Reserve rentals are priced below $100. After selecting pieces, they typically select a delivery date one to two days before their event.

To make sure our customers are prepared, we provide a free backup size of the customer’s choosing and the option to rent a backup style at a discount. At the end of the four- or eight-day rental period, customers simply return their items in the reusable garment bag using the prepaid shipping label included with their rental. Just like our subscription offering, we clean and care for items on behalf of our customers when they are returned.

Resale

In addition to renting, customers also shop pre-loved styles from our closet at a discount to retail price, ranging from 10-85% off of designer retail value (which we calculate using original retail and/or comparable value prices). Customers can purchase any styles they love; no subscription is required. Our subscribers have the option to purchase items they already have at home, opening a spot in their next shipment. As of June 2021, approximately 50% of our currently active subscribers had purchased at least one item on RTR.

Prices for our resale items are dynamically calculated by our pricing algorithm which takes in data on rental history, customer trends and the impact of removing an item from rental circulation to optimize for lifetime return on investment on each product.

Our Customer Value Proposition

Through our platform, we have helped more than 2.5 million lifetime customers discover the transformative power of utilizing our Closet in the Cloud across all of our offerings. Our customer base is diverse and spans age, household income distribution and U.S. geography. As of June 2021, approximately 35% of our customers lived in the Top 100 U.S. cities by population, and approximately 65% lived outside the Top 100 U.S. cities. Our customers lead busy lives: over 90% of our customers are working women and over 90% have at least a bachelor’s degree. One third of our customers have kids or are pregnant, and over 75% of our customers socialize two or more times per week. Likely as a result of these busy lives, 75% of them feel “time-starved.”

A portion of our customers are subscribers and for fiscal year 2020, they accounted for 89% of our revenue and    % in the first six months of fiscal year 2021. Subscribers are customers who have ongoing access to our Closet in the Cloud via our monthly subscription offering. While our subscribers are increasingly diversifying across geography and age, they are slightly wealthier than our Reserve customers with 82% having household income of $100,000 or more, as compared to 66% of our Reserve customers. As of June 2021, approximately 47% of our subscribers lived in the Top 100 U.S.

 

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cities by population, and approximately 53% lived outside the Top 100 U.S. cities. As of July 31, 2021, we had     active subscribers on Rent the Runway and         total subscribers including paused subscribers. Many of our subscribers started as customers in Reserve and Resale and we continue to see activation from Reserve and Resale customers into subscribers for many years.

The Magic of Rent the Runway

When our customers use Rent the Runway, they experience the magic of accessing an “Unlimited Closet” of constantly rotating styles while saving money and time and reducing clothing waste.

 

   

Variety and Discovery. With over 18,000 styles across over 750 brands and hundreds of categories available in our Closet in the Cloud, Rent the Runway gives customers the ability to always wear something new to them and encourages customers to expand their fashion tastes. Broad assortment, coupled with curation and personalization that is driven by our proprietary data, enables us to provide our customers with the most relevant styles for them. According to our April 2021 Subscriber Survey, 92% of our subscribers have experimented more with their personal style since joining Rent the Runway, and 85% have discovered a new favorite brand. We are a brand discovery engine, as our subscribers wear 54 brands in their first year, on average.

 

   

Value. Rent the Runway makes thousands of designer styles accessible to all through our Subscription offering for a flat monthly price or through our Reserve offering on a per item basis. For instance, in our most popular $135 per month eight-item subscription plan, the effective cost to the customer per item is approximately $17, for an item that would typically retail for above $350, making Rent the Runway comparable to or cheaper than many mass-market and fast fashion players while offering access to authentic designer items. The majority of our a-la-carte rentals are priced between 15% and 18% of an item’s retail price. In our June 2021 Customer Survey, 87% of our customers noted that RTR gives them more access to brands they cannot afford to buy. Whether it is through expanding access to affordable designer fashion for aspirational luxury customers or providing a more rational way for today’s luxury customer to experiment with the latest fashion trends, Rent the Runway offers economic value to all customers. 60% of our subscribers report spending between $100 and $500 less per month on clothes and at least $25 less on dry cleaning per month when they have a subscription to RTR.

 

   

Self-Confidence. 83% of our subscribers say RTR makes them the most confident version of themselves at work or in social settings. Because there is no commitment to keep an item on RTR, we fuel greater self-expression for our customers. Our average subscriber receives four compliments each time she wears RTR. 91% of our subscribers love the fashion freedom they get from RTR affirming that they can wear a wardrobe that is commitment-free and changes as they do, whether that’s their style or their size.

 

   

Personalization and Convenience. We use our rich customer data to create a personalized storefront for customers based on their style preferences, browsing history and past rentals. Our understanding of our customer improves with each interaction, and we use our personalization algorithm to provide personalized size recommendations to each customer at the item level. 30% of items rented in fiscal year to date through June 2021 were a result of our personalized recommendations. By showing customers designs they will love and items that are likely to fit, we continue to drive strong loyalty and monetization. In fiscal year 2019, subscribers who used our personalized recommendations had 2.7x longer tenure. We purpose-built the Rent the Runway customer experience to be highly convenient and mobile, enabling customers to potentially select and order items within one minute.

 

   

Customer Experience and Community. Our customers are deeply engaged, as evidenced by the 22 million customer reviews submitted through June 2021. As of June 2021, 20% of our

 

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customers in the past six months have provided a photo with their review on RTR without financial incentive from us. Our customers use the millions of reviews posted by our community to make smarter choices and feel good about their selections. As our community has grown, Rent the Runway has also benefited from powerful virality and word-of-mouth marketing. 81% of subscribers have shared RTR with at least five people; 32% have shared with over 20 people and 78% of our customers posted themselves wearing Rent the Runway on social media, as indicated by our April 2021 Subscriber Survey.

 

   

Sustainability. Our business model aims to teach customers a rent versus buy mindset when it comes to building their wardrobes: that they should invest in purchasing high-quality pieces that they will wear with frequency over many years, and that they should rent the 81% of items that they would have only worn a few times. Our success in building a rent versus buy mindset is evidenced by the fact that 83% of our subscribers have bought less fast fashion since using RTR and 89% buy fewer clothes than they used to prior to joining RTR.

Our Brand Value Proposition

We designed our platform with the intent of creating deep partnerships with designer brands, enabling them to broaden their customer base and grow their businesses. Today, we partner with more than 750 brands, including many of the most renowned and relevant names in fashion. As of January 31, 2021, no single brand partner accounted for more than 2% of active units available on the RTR platform.

We procure virtually 100% of our products directly from brand partners with their explicit permission, and our business model has been built on shared success with brands. As they deepen their relationship with us, they get access to more data and more customers. Our partnerships with brands have created a significant product and cost advantage, in contrast to other secondhand resellers, and allows brands to control how they appear to a new and critical customer segment. Because we source directly from brands, we can control our assortment and acquire styles in the depths and sizes we want, we have access to current season items and all of our items are guaranteed authentic without the cost or infrastructure of traditional authentication platforms.

Brands that were on the RTR platform for five years from fiscal year 2014 through fiscal year 2019 saw the GMV of their products acquired by RTR increase by 293% over that time. We are widely recognized by the brand community as an important and growing distribution channel for their businesses.

Benefits for Brands

When our brand partners join Rent the Runway, they trust that our platform will grow their customer base, build their brand awareness and enable them to innovate their business.

 

   

Our Brand. Rent the Runway is a trusted platform for discovery and access, and we present our brand partners in an aspirational way. Brand partners appreciate that we are often a customer’s first exposure to their brand and so they trust us to provide an elevated customer experience. We are proud that we’ve retained nearly 100% of our brand relationships.

 

   

Customer Discovery and Acquisition. With over 2.5 million lifetime customers as of June 2021 across all offerings, we provide our brand partners with a new way to reach both current luxury consumers and aspirational luxury consumers. 91% of our brand partners say that RTR introduces them to new, desirable customers and deepens awareness of their brand. The value

 

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of our customers to brands is driven not only by their demographics, but also by the reason they come to Rent the Runway, which is to discover new brands and trends. 87% of our subscribers use RTR to explore fashion that takes them out of their comfort zone and 82% of our subscribers purchased one or more brands they discovered on Rent the Runway (either from RTR or elsewhere). This often means we are helping brands expand their wallet share with consumers.

 

   

Grow Their Business. We serve as an important channel for over 750 brands that see us as essential to their future business success. In fiscal year 2019, we were in the top 30% of distribution partners, by revenue, for 64% of our brands. Of our brand partners, approximately 85% believe that RTR is a growing distribution channel for their business. We have proven that we can help brands grow their businesses by attracting new customer segments like we’ve done for Badgley Mischka, Vince and Jason Wu, building brand awareness like we’ve done for MSGM, Monse and Bash or helping brands create new product lines like we’ve done with Thakoon, Peter Som, Marchesa and Tanya Taylor. As brands expand their reach through our platform, they are also able to develop and bring to market a broader assortment of designs. Products that have lower sell-through rates or are not picked up by wholesale channels could be attractive for rental and typically see more success on Rent the Runway, allowing brands to monetize a higher diversity of product. Rent the Runway sees high success in fashion styles that are colorful, printed and embellished—styles that according to our brand partners, are very different from those other retailers are purchasing from them.

 

   

More Profitable Partnership. We are a more profitable partner to brands than legacy retailers because we do not require brands to sign margin agreements with us or return-to-vendor agreements, which have historically levied brands with higher inventory risk than their retail partners.

 

   

Ability to Compete with Mass and Fast Fashion. We enable brands to compete with wear-it-once, mass and fast fashion by offering their premium products at a more accessible price point, enabling brands to connect with a broad customer base without diluting their brand. Historically, to connect with mass or aspirational customers, designers would have to partner with mass retailers to design low price point collections that used lower quality materials and different designs than their main lines.

 

   

Data. We provide our brand partners with actionable data and customer feedback that is not available via traditional wholesale channels and is differentiated from what they collect through their own DTC channels. For brands, we provide real-time, data-based feedback on wear rate, durability, quality, fit and customer demand on a detailed, quarterly dashboard. This data allows them to adjust their designs in order to grow and optimize their businesses and manufacture styles that are more durable and sustainable.

 

   

Sustainability. Our platform allows brands to participate in the circular economy and provides a way for them to address the secondhand market. As of June 2021, 80.6% of our brand partners believed that sustainability is important to their brand’s customer and 67% believed that RTR is an important part of their business’s sustainability strategy.

Our Unique Brand Partner Approach

We have been able to innovate how we work with brands to grow our customer base and continue to efficiently acquire products. Over time, we have built durable and profitable partner models with brands to bring new styles into our existing assortment. Today, we acquire our products through three channels: Wholesale, Share by RTR and Exclusive Designs. The portion of our products sourced

through Share by RTR and Exclusive Designs - our more asset-light sources - has grown from approximately 26% in fiscal year 2019 to approximately 54% in fiscal year 2020. Due to the strength of

 

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our partnerships we are able to customize some of the styles we acquire, whether it is changing fabrics used or the way an item is manufactured to extend its longevity. Customization represents 28% of all styles acquired in fiscal year 2020.

We work closely with our brands and leverage our data and garment science expertise to maximize durability and quality, and, therefore, longevity. Our agreements with vendors give us the ability to test styles before we purchase the items for these qualities. No other retail players are performing such durability testing in advance of procuring garments from brand partners.

Wholesale

Wholesale includes products we acquire directly from our brand partners, typically at a discount to wholesale price based on our scale. We have observed that the original retail prices set by the brands are often at a 2.5x mark-up to the wholesale price. As we continue to expand our selection and grow the share of our assortment acquired from a designer, we benefit from greater discounts on product acquisition. Wholesale represented 46% of our product acquisition in fiscal year 2020.

Share by RTR

Through Share by RTR, we acquire items directly from brand partners on consignment, at zero to low upfront cost and revenue share with our brands each time an item is rented. Brands also pay us a logistics expense for each rental. If a piece is in greater demand, it will drive higher revenue, which could result in brands earning more on the item than if it had been sold through Wholesale. Share by RTR aligns incentives between brands and RTR and alleviates product risk as it is a pay-for-performance model. Share by RTR represented 36% of our product acquisition in fiscal year 2020, and of the over 130 brands we partner with through this channel, 35% also work with us via Wholesale.

Exclusive Designs

We leverage our data to create highly desirable Exclusive Designs in collaboration with select brand partners that we manufacture through third-party partners to be more durable and at significantly lower cost. Similar to Netflix’s custom content, this model allows us to scale our acquisition of prestigious designer products in a highly efficient way. We provide a data blueprint to brands and they design new collections for us based on this data that carry their brand name.

We currently have Exclusive Designs with eleven designers and three influencers. Four new designers and one influencer have signed with us for future collections. For our brand partners, these exclusive collections enable them to innovate their businesses into new product lines at little cost to them. All of the styles are exclusive to RTR for a period of time, after which brands may monetize these exclusive designs through other channels, typically subject to a royalty fee payment to Rent the Runway, which we have not begun to earn to date. We also have a small number of products bearing our trademarks, which are non-exclusive designs produced by third party partners at a significantly lower average cost than Wholesale to strategically fill assortment gaps, or our owned brands. Exclusive Designs accounted for 18% of our product acquisition in fiscal year 2020.

Rent the Runway Virality and Marketing Strategy

Our brand and deeply engaged consumer base have allowed us to acquire customers efficiently. Since our founding, we have spent less than 10% of total revenue on marketing, and our growth has been mostly organic. More than 88% of our customers over the last 12 years have been acquired via word of mouth. As of June 2021, we have had close to 3 trillion earned media impressions since 2018.

 

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As we have scaled, we have seen the value of the Rent the Runway brand grow and increasingly become a significant point of differentiation with consumers and brand partners. We have an opportunity to continue to increase brand awareness and as of June 2021, our unaided brand awareness is 20% among U.S. women ages 18 - 45 with a household income of $50,000 or more.

Many of our customers share a love of the Rent the Runway experience and value proposition, which starts conversations both online and offline and leads to word of mouth adoption. Because of how customers use Rent the Runway, renting bold dynamic pieces, our clothing becomes a visual billboard and advertisement for our platform. When women wear Rent the Runway, they feel confident and often want to share their experience on social media and in their personal lives, which drives brand awareness. This means that when our customers are wearing RTR and someone compliments them or asks about what they are wearing, 96% of our customers share that it’s Rent the Runway as opposed to the designer brand name. The majority of our subscribers have posted themselves wearing RTR on their social media over five times. Renting from us is an inherently social behavior: 86% of our subscribers rent along with a friend or colleague. Our high level of continued organic growth has also been driven by the strong press coverage that we have generated.

While a majority of our new customers have historically come to Rent the Runway organically, we view paid marketing as a way to supplement our organic growth. Our paid efforts have included both middle-of-the funnel prospecting and bottom-of-the funnel direct response campaigns which also benefit from our top-of-the-funnel brand marketing efforts that drive awareness. To date, our primary channels for paid marketing have been focused on social media marketing, influencers and our 10,000 brand ambassadors, programmatic directed spend and affiliate marketing.

Our Data Advantage

One of our significant differentiators is the vast amount of quality, actionable data that we are able to collect on our customers and our products. We leverage this data to create benefits for our customers, our brand partners and our business.

We capture more than 6,200 unique data points per subscriber per year and up to 27 unique data points per item each time it is rented across four channels including site data, post-wear data, operations data and customer data. We also identify and tag over 60 detailed attributes per style. By mapping our interactions with our products’ inherent attributes, we create a strong feedback loop which allows us to optimize the supply of products in ways we believe that would be difficult for traditional retailers to achieve or replicate. This is one of our biggest competitive advantages.

We gather insights from the following:

 

   

Site Data: Site activity, including hearts and dislikes, shortlists, clicks, browse time, and add to carts.

 

   

Post-Rental Feedback Loop: Overall happiness with experience, single-SKU usage including how many times she wears each item, fit across many dimensions (for example, if the item is too small in her waist), quality of the item, and occasion she wore it.

 

   

Operations: Unit-level wears, cleans, repairs and customer damage data, and insight on fabrics and garment specs.

 

   

Customer Data: Photo reviews, events, preferences, size and body dimensions, life stage, and profession.

 

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The way we collect data also differentiates us:

 

   

Depth of Data: Given the frequency of subscriber engagement with RTR (our average subscribers visit our app 20 times per month and wear RTR 83 days per year), we have a deeper understanding of the fashion preferences and lifestyles of our subscribers and how they evolve over time compared to our peers.25 We also have 12 years of aggregating this data.

 

   

Speed of Data: Our real-time feedback from customers enables faster feedback for our brand partners, our buying team and the way we manage our overall business. The same is true in our fulfillment centers operations - we track every interaction through an item’s lifecycle including cleaning, quality inspection and repairs, and we use this data to improve each item’s longevity.

 

   

Explicit Data: The vast majority of our data is voluntarily provided by our customers in the form of structured post-rental surveys, free form photos and text reviews. While all feedback is optional, customer engagement is very high (94% response rate on post-rental surveys and 71% of subscribers provide free-form reviews of their experience, which are visible and valuable to other customers) given that our customers trust that the data they provide improves their experience over time.

 

   

SKU-level: We track our items at the SKU level, mapping every interaction with customers and our operations over its lifetime. This enables us to note any issues at the item level, and perform specific garment restoration to maximize product return on investment.

We use our data to create what we believe are the most relevant assortment and personalized experience for our customers, which in turn drives loyalty. As we learn more about a customer, our personalized features give us greater ability to direct her towards the items that optimize both customer lifetime value and rental product return on investment for us. Our differentiated capabilities include:

 

   

Relevant Assortment: Our goal is to create the most relevant assortment of products for each customer so that we can retain her as long as possible. By leveraging our knowledge of an individual customer’s preferences, we calculate “relevancy scores” for each possible combination of items and customers, which is a composite metric to quantify how well suited our assortment is for a given customer. These scores and our retention predictive model allow us to understand for which customers we already have the right product selection, for which customers we could improve, and which types of styles and at what depth we would have to acquire these styles to increase the probability of customer retention. Our ability to leverage this data improves dramatically as we scale.

 

   

Personalized Storefront: We personalize the storefront for each of our subscribers; no two subscribers see the same storefront. We make data actionable for our subscribers by showing them the items that are most relevant for their life, body and style. Our personalized storefront is updated daily as we gather more information on each of our customers. 30% of units rented in fiscal year to date through June 2021 were a result of our personalized recommendations. In fiscal year 2019, customers who used our personalized recommendations had 2.7x longer tenure. We use personalization to broaden our customers’ relationship with fashion in the same way that Spotify and Netflix broadens customers’ relationship with music and entertainment, respectively. In fiscal year 2019, on average, our customers rented nine brands in their first month with us.

 

   

Fit: We make personalized size recommendations to each customer at the item level. Since we launched our fit recommendation tool nearly two years ago, we have improved customer fit rate by 24%. We also leverage fit scores at the style level in our personalization algorithms so every customer is more likely to see styles that are a great fit for her body.

 

25 

Average subscriber wears calculated based on subscriber engagement in calendar year 2019 on an annualized basis.

 

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Review Data: We surface the most relevant product reviews to each customer so she sees how women with similar height, weight and body dimensions to her look in each style. Conversion on items with eight or more reviews is 264% higher than on items with less than eight reviews.

Our data advantage benefits brand partners in numerous ways:

 

   

Understanding the Garment Life Cycle: We help partners grow their business through the data we provide. Every brand partner gets a detailed and personalized dashboard, including deep aggregate insights that help them improve their product offering in terms of quality, fit, fashion trends, product longevity and assortment gaps. Product longevity data often help our brands increase the life of their garments, which can support their sustainability goals.

 

   

Understanding Customer Demand: As our customers wear (or don’t wear) and review items, we can determine demand for trend, category, season, style, color, size, etc. due to our robust attribution of products (over 60 attributes) paired with customer interaction data. This data highlights growth opportunities for brands as well as areas for improvement. Brands also get a clear picture of who their true customer is versus their perceived or desired customer, which in turn allows them to design the most relevant offering.

Our data also allows us to continually optimize the return on investment on products and customer lifetime value, which are dependent on the following inputs, all of which continuously improve as our business scales.

 

   

Scientific Product Acquisition: Our data provides a comprehensive picture of our products by bringing together customer feedback, operations data and inherent product attributes. Our analytics teams utilize this data to optimize the styles we need and the quantity per style. In addition, we are able to strategically select which acquisition structure is best suited to which product type - Wholesale, Share by RTR or Exclusive Designs. We have improved at selecting our assortment over time, evidenced by the fact that the utilization of our seasonally-relevant products has increased from 55% utilized in fiscal year 2015 to 70% utilized in fiscal year 2019. We track the demand arc of styles over time and have disproved the misconception that fashion quickly goes out of style. Over 40% of our styles continue to turn for three or more years.

 

   

Price Optimization: Our dynamic pricing algorithm optimizes how our products are consumed across Subscription, Reserve rentals and Resale by taking into account demand signals and the expected useful life and turns of each item. We have the flexibility to optimize prices for revenue, margin and product return on investment based on the business needs.

 

   

Lower Cost Product: We leverage our data to create highly desirable Exclusive Designs in collaboration with our brand partners that we manufacture to be more durable at significantly lower cost.

 

   

Longer Product Life: Our feedback to brands helps us customize for higher longevity of our products - we understand how to clean and care for garments to maximize multi-year monetization and incremental turns per unit.

Data Science Capabilities and Algorithms

Data is the fabric of Rent the Runway and powers our technology, logistics and data science efforts across all parts of our business, from recommender systems to pricing algorithms and forecasting. Experimentation and algorithm development are deeply embedded in all parts of our business. As our data sets grow, our algorithms become more powerful and gain leverage.

 

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Some of our most impactful proprietary algorithms include:

 

   

Deep 1:1 Personalization: For each customer and item, we compute several scores that measure the affinity of item and customer through factorization machines and deep learning. We leverage these personalization scores across the business to: rank products on our subscriber personalized storefront and in search results, recommend a specific size within a style on product pages, compute general product relevance at the subscriber level and inform product acquisition, inform sizing of new apparel designs with our brand partners and more.

 

   

Retention Predictive Model: We leverage a retention predictive model to understand the relative importance of more than 180 drivers of loyalty and LTV, at the single customer level to understand which interventions have the highest probability of improving customer retention. We regularly leverage this data to experiment with different approaches to retain customers based on this model in a targeted and personalized way.

 

   

Computer Vision for Products: For each style in our assortment, we generate over 2,000 visual style embeddings using deep learning that capture color, pattern shape, sleeve length, etc. We leverage this data as a feature in our recommender systems, to cluster styles to inform product acquisition and provide product attributes in our product catalog amongst other uses.

Our Technology and Logistics Advantage

We have built a cohesive platform that pairs proprietary and third-party intelligent software with differentiated infrastructure and hardware all tailored to the sharing economy of physical goods. Our proprietary software leverages our vast and unique dataset to optimize key outcomes for RTR.

Proprietary Software and Systems

Because our product offering is highly innovative, we have purpose-built a technology stack to support three key areas of our business:

 

   

2-Way e-Commerce

 

   

Rental Reverse Logistics

 

   

Merchandising & Products Control

2-Way e-Commerce

We have a 2-way relationship with our customers — in that nearly every item is returned and the customer provides feedback. We have built a custom frontend platform that supports Subscription, Reserve and Resale in one easy experience for the customer. This allows us to optimize the product offering for the customer based on her needs.

 

   

Membership Platform: Provides flexibility of creating new subscription offerings and collects detailed feedback from subscribers during every action. Subscribers control their membership and can customize based on their current needs or schedule changes in advance.

 

   

Rapid Iteration and Experimentation: Our custom frontend platform is built from the ground up to enable rapid iteration and experimentation across all components, from site layout to product placement, product recommendations and conversion funnel.

 

   

Reservation Calendar: Our booking engine manages a single pool of products across our three offerings and maximizes product availability utilization by calculating current and projected product needs.

 

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Flexible Referrals and Promotions: We utilize dynamic and highly targeted marketing incentives to stimulate customer acquisition and conversion.

 

   

Customer Service: We service our customers through both self-service tools as well as live support via chat, email and phone. Our customer service team is powered by an internally built platform that manages all elements of our customers’ experience, and connects to best-in-class third party software.

Rental Reverse Logistics

We designed our patented technology to support the processes in our fulfilment centers and ensure that we can process orders efficiently and extend the useful life of our products.

 

   

Garment Science:

 

   

Cleaning Intelligence: We have over a decade of data and expertise in optimizing the life of a garment by leveraging different cleaning and care methods. Our cleaning equipment is fully networked, allowing us to monitor water temperature, cycle time and cleaning programs to maximize usage of our machines.

 

   

Cleaning Automation: Automation supports dynamic sorting of items into as many as 26 different cleaning programs.

 

   

Garment Care and Restoration: All units undergo one or more quality audits before being available to rent for the next customer. We surface customer feedback data to our associates to ensure units are properly treated. Units that need repair are tracked through every step in the restoration process.

 

   

Intelligent Fulfillment Network: Our unified booking engine, the “brain” of our distribution capabilities, dynamically manages decisions such as which fulfillment center to ship a unit from or which transportation type to select to reduce cost. We are therefore able to maintain uptime throughout the year, such as during snowstorms or power outages by moving demand to another facility.

 

   

Optimized Storage: Garments and accessories are stored in multi-story pick modules that utilize both on-hanger and flat pack storage solutions. All items are stored randomly, maximizing the utilization of cubic storage space. Random storage allows for efficient putaway of garments and dynamically created pick paths that save labor cost.

 

   

RFID: We tag each unit and all reusable garment bags with RFID tags, which increases throughput, reduces cost, improves inventory control and enables new forms of automation.

 

   

Fulfilment Efficiency: We have automated various parts of the fulfilment process including picking, order consolidation and packing. Our fulfilment engine dynamically prioritizes customer orders based on promised delivery date, transportation departure schedules and available capacity.

 

   

Transportation Innovation: Convenient places to return your rental are an important part of our customer experience. We have invested in an inbound network that allows our customers to select from national returns logistics providers and Rent the Runway designed and managed return methods including physical drop-off points, mobile trucks and RTR drop-off boxes strategically positioned in retail stores or corporate offices.

Merchandising and Product Control

Our proprietary product catalog system is the backbone of our inventory management. A flexible taxonomy supports myriad types of products which goes well beyond women’s fashion, and allows us

 

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to ingest and manage items at the SKU level, functionality that does not typically exist in off-the-shelf inventory management systems. This system uses a combination of manual and dynamic image algorithm driven attribution to assign over 60 product attributes per style, making the ingestion of new styles into the Rent the Runway catalog fast and easy without sacrificing valuable data collection. This system supports the many ways we acquire products, including Wholesale, Share by RTR and Exclusive Designs. The catalog serves as the starting point for products at RTR, and drives many areas of the Rent the Runway site and operation including quality control, search, navigation, and filtering.

While we have built the majority of our circular platform, we strategically leverage third-party software for commodity functionality where our problems are not unique. These include pieces of the customer experience, customer service tools and ERP capabilities.

Logistics Infrastructure

Our warehouses are more than just facilities - they are Dream Fulfillment Centers, or DFCs, that aim to deliver a Cinderella experience to every customer every time. Within these facilities, we have integrated best-in-class garment care equipment, internally and externally developed fulfillment software and proprietary cleaning programs to deliver high-end garment processing at massive scale. We have also built large-scale, innovative automation and other processes for garment storage, picking, shipping, receiving and restoration of garments to excellent condition. These processes result in labor and other cost savings, while increasing our total shipment capacity and increasing the total lifetime of products, our biggest asset.

 

   

Strategic Distribution: We have two fulfilment centers, in Arlington, Texas and Secaucus, New Jersey totaling 540,000 square feet. We have the capacity to store more than two million garments and accessories on multiple floors across our fulfillment centers. These strategically located fulfillment centers cover 67% of our subscriber base as of June 2021 within two days of ground transportation. Customers view selection in their closest distribution center allowing for minimum transit time and the lowest shipping costs. We aim to deliver industry leading fulfillment promises with a goal of delivering orders within two business days in most markets. For 50% of subscribers that reside in the geographies near our fulfillment centers, such as Manhattan, we aim to deliver within one business day. Since inception, we have shipped over 40 million units ($15.8 billion GMV).

 

   

Garment Care Hardware: Our facilities are equipped with a curated set of 470 pieces of digitally integrated garment care hardware including wet cleaning, dry cleaning and spray cleaning machines; dryers, steam tunnels, pressers, spotting boards, auto-baggers and commercial sewing machines.

 

   

Processing: Garments flow through the facility on both rail and belt-driven conveyance guided by RFID tags linked to a massive array of cleaning instructions set by our proprietary operating system. A variety of item types are sorted based on cleaning, storage and repair methods. After discrete processing, they fall back into continuous flow and random storage, which drives labor efficiency and maximizes use of physical space in our DFCs.

 

   

Proven Scalability: Our infrastructure is highly scalable. Our existing facilities have the physical capacity to process over two million units per week and we expect our weekly processing capacity to increase over time. We believe that the process improvements we made over COVID-19 enable us to expand our capacity to handle approximately 4x what our maximum subscriber count was in fiscal year 2019 in our two current facilities.

 

   

Transportation Management: We partner with a wide variety of national, regional and local last mile service providers in order to close the loop between our Dream Fulfillment Centers

 

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and our customers. Our transportation management system allows us to rate shop across these providers and opt into the best shipping method based upon cost and capacity.

Total Addressable Market

Apparel is a large market that is rapidly shifting online. According to Euromonitor, the U.S. apparel market was $286 billion in 2020 of which 37% or $107 billion is online. The online U.S. apparel market is expected to grow at a 12% CAGR compared to the overall apparel market, which is expected to grow at a 3% CAGR between 2020 and 2025. In 2025, the U.S. apparel market is expected to be $395 billion of which 49% or $192 billion is expected to be online.26

We address the secondhand market, which is the fastest growing portion of the apparel market today. According to GlobalData, this market is at $27 billion in 2020 and is expected to increase to $77 billion in 2025, growing at a 23% CAGR. We are changing consumer purchasing behavior by creating a sharing economy for fashion and believe we will contribute to the growth of this market.

We believe we are in the early innings of this opportunity. As of the end of fiscal year 2019 and 2020, we had 147,866 and 95,245 total subscribers (which includes both active and paused), respectively. Since 2009, we have had over 2.5 million lifetime customers across all of our offerings, and as of July 31, 2021, we had over                total subscribers, representing less than                % of the total population of women aged 18 and above in the U.S.

Our Growth Strategies

The key elements of our growth strategy are:

 

   

Grow our Subscribers: We have experienced success growing our subscriber base and as of July 31, 2021, we had total subscribers. We believe we have significant runway ahead of us given our customers span broad geographic and age ranges. With our differentiated brand and organic virality, strong funnel of new customers through Reserve and Resale and our continued focus on marketing efficiency, we are focused on growing our subscriber base.

 

   

Expand our Assortment by Adding New Brand Partners and Deepening Existing Brand Partner Relationships: We are focused on expanding our product assortment and in particular, we intend to accelerate our capex-light partnerships via Share by RTR and Exclusive Designs. Having a broader assortment choice for our customers has the potential to increase both the engagement and loyalty of our current subscribers and accelerate growth of new subscribers. We also have the opportunity to carry broader assortments from the more than 750 brand partners on our platform as we typically bring in less than 10% of a brand partner’s total available styles initially.

 

   

Continue to Invest in the Customer Experience: By continuing to improve our customer experience, we aim to improve subscriber retention and engagement. Our customer experience includes interactions online and the experience customers have offline wearing Rent the Runway. We are focused on driving continuous improvements in both areas, particularly on personalization, social features and transportation innovation.

 

   

Launch New Categories and Offerings: Our flexible membership platform and physical logistical infrastructure means that we can launch new categories and offerings that resonate with our customers and their lifestyles. For example, over 30% of our customers have children or are pregnant. In fiscal year 2019, our test launch for our kids category was successful and

 

26 

Euromonitor Apparel & Footwear 2021.

 

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we continue to carry kids products on our platform. Having a broader selection of categories for our customers increases both the engagement and loyalty of our current subscribers and accelerates growth of new subscribers. We plan to continue to invest in these categories, expanding with existing and new brand partners, and growing our offerings within rental and resale. We may also choose to expand our platform through partnerships, joint ventures or acquisitions.

 

   

Deepen our Brand Partner Marketplace Enablement Tools: Our goal is to help our brands build bigger businesses both on and off our platform. We intend to continue to expand Share by RTR and provide more tools to our brand partners to grow their businesses and assortments across subscription, rental and resale. This includes building upon the quarterly data packs already provided to each brand partner. Additionally, as consumers and brands become more comfortable with our platform, the opportunity exists to leverage the operating system we have built to power rental, resale and subscription for our brand partners in their own DTC channels.

 

   

Drive Leverage in Operational Efficiency: We plan to continue to leverage our treasure trove of data through increased automation of our operations. We are focused on using our data to drive actionable insights and improve key operations such as item longevity, fulfillment and garment science while optimizing our return on investment for each individual SKU.

 

   

Expand Internationally: Our brand partners are focused on ways to grow with us and continue to approach us to help them grow their customer bases internationally. Similarly, our research indicates there are large potential customer segments internationally. We may invest in creating a sharing economy of physical goods around the world. We may choose to do this organically or through partnerships and acquisitions.

Our ESG (Environmental, Social, and Governance) Impact Summary

Our mission has remained the same since our founding: powering women to feel their best every day. We believe our platform is powering a new frontier for fashion, one in which women buy less and wear more, disrupting a centuries old industry and contributing to a more sustainable future.

Our Environmental Impact

Driving A Paradigm Shift in Consumption to Protect Our Planet: The negative environmental impacts of the fashion industry are well documented and raise concerns that business-as-usual linear models, which generate significant waste and require substantial natural resources, cannot be sustained.

According to the Ellen MacArthur Foundation, or EMF, from 2002 to 2017, global clothing production approximately doubled but utilization decreased by 36%.27 EMF estimates that in a business-as-usual scenario, more than 150 million tons of clothing would be landfilled or burned in 2050 - with the weight of clothing produced between 2015 and 2050 accumulating to more than ten times that of the aggregate weight of the world’s population in 2017.28

Textile production is energy- and water-intensive, and EMF estimates that textile production resulted in 1.2 billion tons of carbon dioxide (CO2) equivalent in 2015, more than the emissions from all international flights and maritime shipping combined that year, and uses around 93 billion cubic meters of water annually, contributing to water scarcity in many regions of the world.29

 

27 

Ellen MacArthur Foundation, A New Textiles Economy: Redesigning Fashion’s Future, 2017.

28 

Based on an estimated weight of the 2017 world’s population of 300 million tons.

29 

EMF estimate includes cotton farming.

 

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These realities have accelerated the need for change, and specifically for innovative business models that curb the environmental impacts of the industry. According to a 2020 study published by McKinsey & Co. and the Global Fashion Agenda (GFA), circular business models including rental, re-commerce, repair and refurbishment could enable the industry to cut approximately 143 million tons of Greenhouse Gas (GHG) emissions by 2030 (out of the estimated 2.1 billion tons the industry generates).30 Their analysis also found that one in five garments will need to be traded through circular business models in order for the industry to achieve a 1.5 degree pathway by 2030 (limiting global warming to less than 1.5 degrees Celsius above pre-industrial levels), a goal set forth by the United Nations Paris Climate Accord.31

We believe that our scalable platform, which distinctly offers the options to rent a-la-carte, subscribe and purchase resale, holds significant potential as a key contributor to reducing waste and natural resource consumption. Our ultimate goal is displacement of new clothing, meaning that rental and purchase of “pre-loved” clothing ultimately replaces production of new clothing. We have seen that renting through our shared Closet in the Cloud creates less overall clothing consumption amongst our customer base. Our subscribers consistently indicate that they purchase less new clothing because of our business; as of June 2021, 89% of our subscribers said they buy fewer clothes than they used to prior to joining RTR, with close to one-third of our subscribers saying they buy six to over 20 fewer items of clothing per month since signing up for RTR. Our subscribers also spend less on buying clothes: approximately 60% of our subscribers report spending between $100 and $500 less per month on clothes and at least $25 less on dry cleaning per month when they have a subscription to RTR.

Our business model aims to teach customers a rent versus buy mindset when it comes to building and maximizing their wardrobes: that they should invest in purchasing high-quality pieces that they will wear with frequency over many years, and that they should rent pieces they will wear less. Notably, 83% of our subscribers have bought less fast fashion since using RTR. We believe the substitution of Rent the Runway for fast fashion has positive sustainability impact as it is estimated that more than half of fast fashion produced is disposed of each year.32

Additionally, we commissioned a first of its kind study in the U.S. with Green Story and SgT, third-party consultants specializing in apparel Life Cycle Assessments, or LCA Study, to assess the environmental impacts of business-as-usual linear models compared to the Rent the Runway rental platform.

Displacement of New Garment Production