AMDP Final

TO: Clark Hansen, CEO, Anima Mundi Development Partners 

FROM: Naomie Di Martino, Research & Development AMDP

DATE: March 10, 2023

SUBJECT: Investment Opportunity: Rent the Runway

As a part of AMDP's Research and Development Team, you asked that I identify a socially responsible, environmentally sustainable, and profitable company for AMDP to invest in. After extensive research, Rent the Runway, an e-commerce platform that allows users to rent, subscribe, or buy designer apparel and accessories, sounds like a great company to consider investing in; however, I will expand on why RTR doesn't align with AMDP's core standards. In this memo, you will find the following:

  • AMDP Standards

  • Overview of Rent the Runway

  • Analysis of Rent the Runway

    • Financial

    • Sustainability

  • Expert Opinions

  • Recommendations   

AMDP Standards

Triple Bottom Line

The Triple Bottom Line is a business concept that states firms should commit to measuring their social and environmental impact in addition to their financial performance rather than solely focusing on generating profit or the standard "bottom line." It is the three "P's" (Miller):

  1. Profit: an organization's positive and negative impact on the local, national, and international economy. This includes creating employment, generating innovation, paying taxes, wealth creation, and any other economic impact an organization has. (Kraaijenbrink)

  2. People: an organization's positive and negative impact on its stakeholders. These include employees, families, customers, suppliers, communities, and any other person influencing or being affected by the organization. (Kraaijenbrink)

  3. Planet: an organization's positive and negative impact on its natural environment. This includes reducing its carbon footprint, using natural resources, toxic materials, etc. (Kraaijenbrink)

Corporate Social Responsibility

Corporate social responsibility is curating a business that aims to increase a company's social impact while meeting business objectives such as growth and revenue goals. Corporate social responsibility includes economic, environmental, ethical, and philanthropic responsibility. (Fernando)

Social Enterprise

A social enterprise or social business is a business with specific social objectives that serve its primary purpose. Social enterprises seek to maximize profits while maximizing benefits to society and the environment, and the profits are principally used to fund social programs. (Barone)

Carbon Footprint

A company's carbon footprint is the total amount of greenhouse gas emissions directly or indirectly caused by a company's activities and can be measured in tonnes of carbon dioxide equivalent (CO2e). The three scopes are:

  1. Scope 1: Direct emissions from sources controlled or owned by your company (e.g., vehicles, furnaces, boilers, equipment) (Sheehan)

  2. Scope 2: Indirect emissions from energy bought by your company (e.g., electricity, heat, cooling) (Sheehan)

  3. Scope 3: All other indirect emissions (e.g., material use, waste, business travel, staff commuting with vehicles not owned or controlled by your company) (Sheehan) 

Reducing carbon footprint is important because it mitigates the effects of climate change, which positively affects public health and plant and animal diversity. In addition, this boosts the global economy and leads to innovative, more environmental-friendly solutions. (Smoot)


Overview of Rent the Runway

Established in 2009, Rent The Runway, an online platform that offers designer clothing rentals through subscription plans or for one-time events, has emerged as a prominent figure in the FashionTech industry. With 134,240 active subscribers, the company offers services through its website, mobile app, and multiple physical stores. The primary revenue source for Rent The Runway is its monthly subscription fee, but customers also have the option to buy clothes directly from its online store. (Hendelmann)

There are three tiers of subscriptions to the company:

  1. Basic: Up to 5 items in one shipment per month ($69 for one month and then $89/month thereafter). This plan has access to a basic closet containing casual and workwear-oriented items up to a retail value of $350. (Cuofano)

  2. Standard: Up to 10 items in two shipments per month ($99/month for two months, $135/month thereafter) – this plan is better suited for updated outfits, special occasions, and work and weekend looks. Users can access the full closet incorporating premium clothing up to a retail value of $3500. (Cuofano)

  3. Premium: Up to 15 items in four shipments per month ($139/month for two months, $199/month thereafter) – ideal for those who need a consistently fresh look for work, weekends, or special events. Users can also access the full closet incorporating premium clothing up to a retail value of $3500. (Cuofano)


Analysis of Rent the Runway 

Financial 

When Rent the Runway originally debuted in 2009, it was a private company for approximately 12 years before it went public through an IPO in October 2021 (Coll). Some reasons for the decision to go IPO were to increase brand visibility, liquidity for early investors, and, most importantly, access to additional capital. However, the company has struggled to make a profit over the past few years, especially during the COVID-19 pandemic. The COVID-19 pandemic negatively affected Rent the Runway's business in 2020, as it had to temporarily shut down its physical stores and adjust its operations to comply with safety measures. As a result, Rent the Runway's revenue shrank from $257M to 158M in 2020, and losses grew from $154M in 2020 to $171M in 2021. This loss does not even include product depreciation, representing around 30% of revenues (Pagano). Overall, RTR historically has had an uphill battle when it comes to being profitable. 


The company announced a restructuring plan to counteract these losses in 2020 and 2021, including cutting 24% of corporate employees and an estimated annual operating expense savings of $2 million in fiscal 2023 (Coll). As to its most recent financial results, total revenue rose 64% year-over-year, and operating losses, while still unacceptably large, have lessened in the most recent quarters (Jones). However, despite this promising growth, the primary risk to the company's outlook is a looming recession in 2023 which may reduce consumer discretionary spending and lower the firm's revenue growth rate and intent to generate adjusted EBITDA (Jones).

Sustainability

As a luxury apparel rental platform, sustainability is at the core of its brand image. Some sustainable efforts the company has outlined are:

  • Commitment to reducing carbon emissions throughout the business and operating with net zero emissions by 2040.

  • Purchasing carbon offsets to compensate for 100% of the estimated carbon emissions created by shipments to and from our customers beginning February 1, 2022.

  • Diverting 90% of waste from landfills from warehouse operations means diverting nearly 100% of unusable clothing from landfills.

  • 24% less water, 6% less energy, and 3% fewer emissions on average per garment when renting through RTR platform versus purchasing new.

  • Production of 1.3 million estimated new garments displaced through RTR's rental model in the past decade.

(Rappaport)


Expert Opinions

In a new partnership with Amazon in January 2023, Rent the Runway will sell new clothing through a third-party retailer for the first time. The move, designed to lift Rent the Runway's brand awareness and inject Amazon with more designer inventory, has raised concerns from sustainability experts, who warn this could fuel overproduction and overconsumption (Shoaib). Fair fashion campaigner, Venetia La Manna, highlights, "Amazon has single-handedly destroyed and altered how we consume things and how fast we expect things to come and in some ways. When you have a company like Rent the Runway, which was supposed to be about sustainability, this just makes absolutely no sense." (Shoaib)

In a study conducted in the journal Environmental Research Letters, researchers calculated the greenhouse gas emissions connected to different ways of owning and disposing of clothing, including renting. Their findings were sadly disturbing. Renting clothes had the highest climate impact—even higher than just throwing them away due to the emissions produced by transporting and shipping them. According to the researchers, the study's biggest takeaway was if rental companies drastically change their shipping and handling logistics to make them more climate-friendly, such as only using modes of transport that have zero-emissions or low-emissions, then renting would become on par with reselling, from a climate perspective (Segran). 


Recommendations 

Through reviewing Rent the Runway's business practices, I was disappointed by the lack of importance placed on profitability and sustainability. The company's financial stability is still uncertain, given the ongoing financial challenges that Rent the Runway has faced due to the pandemic. In addition, although renting luxury clothing presents a promising approach to the sustainable fashion industry, the recent partnership with Amazon has raised concerns about increasing emissions through packaging and transportation. While the company may be purchasing carbon offsets to mitigate these environmental impacts, it is more of a band-aid solution than a meaningful effort toward sustainability. As a result of my findings, it is clear that Rent the Runway does not align with AMDP's core values and objectives. Consequently, we should redirect our investment efforts toward companies that share our commitment to sustainability and profitability.









Works Cited

Barone, Adam. “The Aims of Social Enterprises.” Investopedia, Investopedia, 8 July 2022, https://www.investopedia.com/terms/s/social-enterprise.asp. 

Coll, Barbara. “Not a Good Buy: Rent the Runway, Exactly One-Year after IPO, Is down Nearly 90%.” CNBC, CNBC, 27 Oct. 2022, https://www.cnbc.com/2022/10/27/buyers-remorse-rent-the-runway-one-year-after-ipo-is-down-90percent.html. 

Cuofano, Gennaro. “Rent the Runway Business Model in a Nutshell.” FourWeekMBA, What Is The FourWeekMBA, 28 Oct. 2021, https://fourweekmba.com/rent-the-runway-business-model/. 

Fernando, Jason. “Corporate Social Responsibility (CSR) Explained with Examples.” Investopedia, Investopedia, 19 Dec. 2022, https://www.investopedia.com/terms/c/corp-social-responsibility.asp. 

Hendelmann, Viktor, and AffiliateLabz. “Rent the Runway Business Model – How Does Rent the Runway Make Money?” Productmint, 5 Jan. 2023, https://productmint.com/rent-the-runway-business-model-how-does-rent-the-runway-make-money/#:~:text=Executive%20Summary%3A&text=The%20company%20allows%20users%20to,directly%20via%20its%20online%20store. 

Jones, Donovan. “Despite Growth, Rent the Runway Faces Myriad Risks (NASDAQ:Rent).” Seeking Alpha, 7 Nov. 2022, https://seekingalpha.com/article/4554339-despite-growth-rent-the-runway-faces-myriad-risks. 

Kraaijenbrink, Jeroen. “What the 3PS of the Triple Bottom Line Really Mean.” Forbes, Forbes Magazine, 12 Oct. 2022, https://www.forbes.com/sites/jeroenkraaijenbrink/2019/12/10/what-the-3ps-of-the-triple-bottom-line-really-mean/?sh=5af3ca085143. 

Miller, Kelsey. “The Triple Bottom Line: What It Is & Why It's Important.” Business Insights Blog, 8 Dec. 2020, https://online.hbs.edu/blog/post/what-is-the-triple-bottom-line. 

Pagano, Aubrie. “Rent the Runway's IPO: The Good, the Bad, the Ugly.” Forbes, Forbes Magazine, 9 Nov. 2022, https://www.forbes.com/sites/aubriepagano/2021/10/28/rent-the-runways-ipo-the-good-the-bad-the-ugly/?sh=466995fd5231. 

Rappaport, Alison. “Impact Statement on Rent the Runway.” Rent the Runway, Rent the Runway, https://www.renttherunway.com/impact?action_type=footer_link. 

Segran, Elizabeth. Renting Clothing Is Worse than Throwing It Away - Fast Company. https://www.fastcompany.com/90651753/renting-clothing-is-worse-for-the-planet-than-just-throwing-it-away-study-shows. 

Sheehan, Elizabeth. “How to Measure Your Carbon Footprint.” BDC.ca, 6 Feb. 2023, https://www.bdc.ca/en/articles-tools/sustainability/environment/how-measure-your-carbon-footprint. 

Shoaib, Maliha. “With Amazon Tie-up, Rent the Runway Faces Sustainability Questions.” Vogue Business, 19 Jan. 2023, https://www.voguebusiness.com/sustainability/with-amazon-tie-up-rent-the-runway-faces-sustainability-questions. 

Smoot, Grace. “4 Main Reasons Why Reducing Your Carbon Footprint Is Important.” Impactful Ninja, https://impactful.ninja/why-reducing-your-carbon-footprint-is-important/. 

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