When you file to go public, you want folks to like the numbers. You do not want people to mock the numbers.
The most extreme version of this obvious truism was WeWork’s first run at the public markets. It filed, everyone found its results to be ridiculous, and the IPO eventually got yanked. A more modest — yet still negative — reaction can be found in Box’s first attempt at going public.
Both companies eventually did debut, with Box managing to do so via normal methods, while WeWork had to wait for a SPAC to chariot it to the public markets. And no, I am not trying to draw any sort of business similarity between Box (software company run by a sane person) and WeWork (non-software business run by a person slightly less trustworthy than Aaron Levie).
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A more recent example from the folks not liking the numbers much category is Rent the Runway’s IPO filing. The company — a good business idea that has engendered a large user base over time — is not entirely gorgeous from a business perspective.
In case you don’t want to read through Rent the Runway’s IPO filing or our notes on its numbers, the gist is that it appears that the depreciation costs relating to clothing that Rent the Runway rents to customers are sufficiently steep as to make the company’s overall business profile unsteady.
To combat that look, Rent the Runway provided adjusted profitability metrics that excluded inventory depreciation. It wasn’t a very popular move.
More simply, it appears that Rent the Runway is just undercharging for its product when we consider the full set of costs associated with providing its service and running its business.
Regardless of our concerns, however, the company’s first IPO price range values the company north of $1 billion, so its IPO will be a unicorn debut. As such, we have to take it seriously. This morning, let’s quickly calculate its IPO valuation range, its resulting multiples and compare the company to a related entity to get a grip on what the market is telling us about the fashion rental unicorn.
Pricing Rent the Runway
First, a bit of an apology. As an unfashionable slacker, I have too long dismissed investments in appearance. Mostly, this was my being both a boor and a bore, but it was also intellectually lazy.
In reality, humans love to express themselves through dress, both physical (clothing, makeup, etc.) and virtual (character skins, NFTs, etc.). And they will spend to look good.
I’d hazard that the impulse to look good physically and in digital realms are pretty related, if not the same thing. So, the beating heart of the League of Legends business model (in-game cosmetics) and Rent the Runway’s (renting fashionable attire) should get similar levels of care.
All that’s to say: If we make some critical remarks about certain elements of Rent the Runway’s business results, we’re not mocking what it wants to do or the market demand it is working to meet. Instead, we’re noting that Rent is perhaps undercharging for its products, which makes some numbers a bit wonky.
With that in mind, what’s the company worth? Rent the Runway anticipates an IPO price range of $18 to $21 per share. With 63,118,585 shares outstanding after its IPO — inclusive of a few million shares reserved for its underwriters — this is company’s simple valuation range:
- At $18 per share: $1.14 billion
- At $21 per share: $1.33 billion
IPO watchers at Renaissance Capital write that at $20 per share, the company’s fully diluted IPO valuation is $1.4 billion, which we can extrapolate to $1.47 billion at $21 per share.
With $46.7 million in the quarter ending July 31, 2021, Rent the Runway was on a $186.8 million run rate earlier this year. At the upper end of its simple and fully diluted IPO price ranges, Rent is worth 7.3x and 7.9x its run rate, respectively. Or between 7x and 8x, roughly.
Is that a lot? A little?
It’s a little hard to get a fair comp for Rent the Runway. What other company for which we have data is similar enough to be a comparison? Stitch Fix is about as close as I could get, and it’s not very close, frankly.
Rent rents clothing, with a subscription business model component. Stitch Fix is more focused on selling clothing. Still, the comp is better than nothing.
In its most recent quarter, Stitch Fix had revenues of $571.2 million and net income of $21.5 million. The company posted revenue growth of 29% during the quarter on a year-over-year basis and adjusted EBITDA of $55.4 million. From those figures, we can see a large company with continued growth, but one that has seen its top-line expansion slow as it moves into generating material profit.
Rent the Runway looks great on a year-over-year basis if we compare its July 31, 2021 quarter with the year-ago quarter because the pandemic greatly impacted its 2020 numbers during that slice of time. Looking at Rent over a two-quarter basis is more illustrative. In the six months concluding July 31, 2021, the company posted year-over-year revenue declines and essentially unchanging net losses.
And yet: Stitch Fix is worth just $3.79 billion, per Yahoo Finance. Or around 1.7x the annualized run rate set in its most recent quarter. That’s far less than what Rent anticipates in its own IPO, despite seemingly lesser results.
If Rent the Runway goes public inside of its current IPO price interval, it will enjoy a far superior revenue multiple than its loose comp, implying that the market will be giving it points for something that lands outside of its recent, raw numerical results. Perhaps its consumer subscription business?
If so, we’d have to expect that investors anticipate that its consumer subscription segment will improve the core economics of the Rent model. And it may! But the level of confidence implied, despite the disparate multiples, confounds me.
The market will do whatever it wants, but now we’re on the same page. Let’s see what comes next from Rent and how its IPO winds up pricing.