Working to understand Rent the Runway’s IPO valuation

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.