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Rent the Rail‘s
(RENT
-2.44%
)

stock skyrocketed 74% on Dec. 8 after the high-end apparel rental market posted its latest quarterly report. For the third quarter of fiscal 2022, which ended on Oct. 31, its acquirement rose 31% year over twelvemonth to $77.4 million and shell analysts’ estimates by $four.1 million. Its net loss narrowed from $87.8 1000000 to $36.1 million, or $0.56 per share, which met the consensus forecast.

Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at positive $vi.vi million, compared to an adjusted EBTIDA loss of $five.6 1000000 a year ago and the consensus forecast of positive $1.three million. As a event, its adjusted EBITDA margin expanded from negative 9.5% to positive 8.5%.

A model wears an evening gown.

Prototype source: Getty Images.

Rent the Runway expects its acquirement to rise 12%-15% year over twelvemonth in the fourth quarter, and to increase 44%-45% for the full year. Both of those estimates hands exceeded Wall Street’s expectations. It also expects to mail service a positive adapted EBITDA margin of 1% for the full year, compared to its negative adapted EBITDA margin of nine.iv% in fiscal 2021. Those headline numbers were impressive, only is it too late to buy Rent the Rails’s stock after its post-earnings pop?

Slower but steadier growth

Hire the Runway lets customers either rent high-end designer apparel through 1-time rentals, which can cost around $30 to $150 on an a la carte basis, or purchase ane of three tiers of monthly subscriptions, which price between $94 to $235 and provide four to 16 clothing rentals each month. It likewise lets its customers direct buy those products from its marketplace.

The company generates most of its revenue from its subscriptions. Its number of active subscribers rose 110% to 115,240 at the cease of fiscal 2021 (which concluded in January 2022), but decelerated throughout the first three quarters of fiscal 2022. Every bit a result, its acquirement growth also cooled off.

Metric

Q1 2022

Q2 2022

Q3 2022

Active Subscribers

134,998

124,131

134,240

Growth (YOY)

82%

27%

fifteen%

Revenue

$67.one 1000000

$76.5 meg

$77.4 million

Growth (YOY)

100%

64%

31%

Data source: Rent the Runway. YOY = Year-over-year.

The visitor mainly blames that slowdown on inflation, which curbed the average consumer’southward appetite for high-stop apparel rentals. However, it partly commencement its slower growth in active subscribers by consistently boosting average revenue per user (ARPU) with add-on slots, which let its subscribers increase their monthly allotment of rentals, also as “moderate” price hikes. That’due south why the company even so expects its ARPU to rise about 7% for the total year.

Tighter spending and narrower losses

Rent the Track’due south net loss widened from $171 million in fiscal 2020 to $212 meg in fiscal 2021. Soaring fuel and logistics costs also generated fierce headwinds for the company this year, since it provides gratis shipping to all of its paid subscribers. As a consequence, the visitor posted a cyberspace loss of $113 million in the get-go nine months of 2022.

But past September, it recognized those challenges and announced it would lay off about 24% of its employees by the end of the fiscal yr. Those layoffs, along with its lower marketing, technology, and general and administrative expenses, finally lifted its adjusted EBITDA to positive territory over the past two quarters. CEO Jennifer Hyman believes its adjusted EBITDA margin could eventually rising to about xv% in the “medium term”.

Rent the Runway still looks cheap

Hire the Runway didn’t provide whatsoever guidance beyond the quaternary quarter, only analysts look its acquirement to ascension about 16% in fiscal 2023. All the same, those estimates will probable be revised upwards after its latest earnings trounce.

Based on those expectations and its enterprise value of $209 million, Rent the Track’s stock even so looks inexpensive at 0.six times next yr’s sales. It’s admittedly pricier than
Stitch Fix
(SFIX
ix.51%
)
, which trades at 0.2 times next year’s sales, but Sew together Gear up faces much tougher near-term headwinds and remains unprofitable on an adjusted EBITDA footing.

Still, Rent the Rail’s limited liquidity ($186 million in cash, cash equivalents, and restricted cash at the finish of the third quarter) and $275 meg in long-term debt notwithstanding brand it a wobbly investment. Its adjusted EBITDA might be improving, but its greenbacks flows won’t plow positive until it turns assisting on a GAAP (mostly accepted accounting principles) basis.

I believe Hire the Runway’s stock is worth nibbling on at these levels, since it dominates a niche market, it’due south fundamentally cheap, and its stock is nevertheless trading about 90% below its IPO price from concluding October. However, it probably won’t rally farther over the next few quarters as ascension interest rates cast a long shadow over out-of-favor growth stocks.

Leo Sun has no position in whatever of the stocks mentioned. The Motley Fool has positions in and recommends Sew together Fix. The Motley Fool has a disclosure policy.

Source: https://www.fool.com/investing/2022/12/10/is-it-too-late-to-buy-rent-the-runway-stock/

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