Rent the Runway IPO Valuation: A Deep Dive

The Importance of Favorable Financials in an IPO

When a company prepares to become publicly traded, securing positive reception to its financial data is paramount. Negative perceptions of a company’s numbers can be detrimental to its initial public offering (IPO).

The most pronounced illustration of this principle occurred with WeWork’s initial attempt to enter the public markets. After scrutiny revealed unfavorable results, the IPO was ultimately withdrawn. A less dramatic, though still negative, response was experienced by Box during its first IPO endeavor.

Ultimately, both companies did achieve public debuts. Box successfully navigated the traditional IPO process, while WeWork required a special-purpose acquisition company (SPAC) to facilitate its entry. It’s important to note that there is a significant difference in business models and leadership between Box, a software company with stable management, and WeWork, a non-software business led by a figure considered less reliable than Aaron Levie.

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A recent case highlighting the significance of positive financial perception is Rent the Runway’s IPO filing. While possessing a viable business concept and a substantial user base, the company’s financial profile presents certain challenges.

Specifically, the depreciation expenses associated with the clothing rented to customers are substantial enough to create instability in the company’s overall financial standing. A detailed review of Rent the Runway’s IPO filing confirms these concerns.

In an attempt to address these concerns, Rent the Runway presented adjusted profitability figures that excluded depreciation of inventory. This approach was met with considerable skepticism.

Essentially, the company may be underpricing its services when considering the total costs associated with its operations and service delivery.

Despite these reservations, the company’s initial IPO price range places its valuation above $1 billion, marking it as a “unicorn” debut. Consequently, a thorough analysis is warranted. Let’s examine the IPO valuation range, relevant multiples, and compare Rent the Runway to a comparable entity to understand the market’s assessment of this fashion rental unicorn.

Rent the Runway: A Pricing Analysis

Let me begin with a clarification. I’ve historically underestimated the significance of investing in one’s presentation. This stemmed from a combination of social awkwardness and intellectual complacency, admittedly.

However, it’s clear that self-expression through appearance – encompassing both physical attire and digital representations – is a fundamental human drive. Individuals are willing to expend resources to achieve a desired aesthetic.

The motivations behind enhancing one’s appearance in the physical world and within digital environments are likely interconnected, if not identical. Therefore, the core mechanics driving revenue in businesses like League of Legends (through in-game cosmetic items) and Rent the Runway (via apparel rentals) deserve comparable scrutiny.

It’s important to state that any critique directed towards specific aspects of Rent the Runway’s financial performance isn’t intended as disparagement. We acknowledge the validity of their business model and the existing market demand they are addressing.

Rather, our assessment suggests that the company may be underpricing its services, leading to certain inconsistencies in their reported figures.

Valuation Considerations

Considering this, what is a reasonable valuation for the company? Rent the Runway has proposed an IPO price between $18 and $21 per share. Given the 63,118,585 shares outstanding following the IPO – including allocations for underwriters – the company’s potential valuation falls within this range:

• At $18 per share: $1.14 billion
• At $21 per share: $1.33 billion

Analysts at Renaissance Capital note that a $20 per share valuation equates to a fully diluted IPO valuation of $1.4 billion. This figure can be extended to $1.47 billion at the $21 per share mark.

Rent the Runway generated $46.7 million in revenue for the quarter ending July 31, 2021. This translates to an annualized run rate of $186.8 million.

At the higher end of its simple and fully diluted IPO price ranges, the company’s valuation represents a multiple of 7.3x and 7.9x its run rate, respectively. This equates to a valuation between 7 and 8 times the annual run rate.

Evaluating Rent the Runway's Potential Valuation

Determining a suitable comparative valuation for Rent the Runway presents a challenge. Identifying a company with sufficiently similar characteristics for a direct comparison proves difficult.

Stitch Fix emerges as the closest available parallel, though the resemblance is not particularly strong. Rent the Runway operates a clothing rental service, incorporating a subscription-based model. Conversely, Stitch Fix primarily focuses on selling apparel.

Stitch Fix's Recent Performance

During its latest quarter, Stitch Fix reported revenues totaling $571.2 million and achieved a net income of $21.5 million. The company demonstrated a 29% year-over-year revenue increase, alongside an adjusted EBITDA of $55.4 million.

These figures indicate a substantial company experiencing ongoing growth, albeit with a deceleration in top-line expansion as profitability becomes a more significant focus.

Rent the Runway's Revenue Trends

A year-over-year comparison of Rent the Runway’s July 31, 2021 quarter with the same period in the previous year appears favorable, largely due to the pandemic’s substantial impact on its 2020 performance.

However, analyzing Rent the Runway over a two-quarter timeframe provides a more insightful perspective. Over the six months ending July 31, 2021, the company experienced year-over-year revenue declines and relatively stable net losses.

Valuation Discrepancies

Despite these results, Stitch Fix currently holds a market capitalization of approximately $3.79 billion, according to Yahoo Finance. This equates to roughly 1.7 times its annualized revenue run rate from the most recent quarter.

This valuation is significantly lower than Rent the Runway’s anticipated valuation in its initial public offering (IPO), even considering Stitch Fix’s comparable performance.

Market Expectations for Rent the Runway

Should Rent the Runway proceed with its IPO within the proposed price range, it will benefit from a considerably higher revenue multiple than Stitch Fix. This suggests the market is assigning value to factors beyond the company’s recent financial results.

Perhaps the market is recognizing the potential of Rent the Runway’s consumer subscription business model?

Investor Confidence and Future Growth

If this is the case, investors likely anticipate improvements in the core economics of the Rent the Runway model driven by its subscription segment. While this outcome is plausible, the disparity in multiples raises questions about the level of confidence implied by the market.

Ultimately, market dynamics will dictate the outcome, but a clear understanding of these factors is crucial. We will continue to monitor Rent the Runway’s progress and the final pricing of its IPO.