Stock Analysis & Ideas

Why RENT Stock’s Monstrous Rally Isn’t Over

Story Highlights

Rent the Runway stock has rallied hard recently, having more than tripled from its all-time low. Upbeat Q3 results and raised outlook on the back of successful restructuring initiatives attracted investors back to the stock.

It’s well known that consumer spending has taken a huge hit in recent months. Despite the grim scenario, one stock that has been a winner is Rent the Runway (NASDAQ: RENT). Its stock is up over 120% in the past month, thanks to upbeat Q3 results and a raised outlook. However, it has pulled back 28% in the past few trading sessions. Looking at the results from the company’s turnaround efforts, the goal of profitability may be around the corner. I will buy the stock, given its cheap valuation and strong growth outlook.

Rent the Runway’s Strong Q3 Results

Rent the Runway is a premier e-commerce platform that allows users to rent, subscribe, or buy stylish designer apparel and accessories.

As the world fears entering into recession, more and more people choose to rent expensive designer labels instead of paying high prices to own them.

Shares of the subscription-based fashion service platform surged after it reported impressive revenues for the third quarter and also raised its full-year guidance.

Q3 revenue of $77.4 million grew 31% year-over-year, easily beating $72.9 million consensus expectations. Positively, its loss per share also came down remarkably to $0.56 from $6.72 in the year-ago period.

Investors cheered the surprising 15% growth witnessed in active subscribers to 134,240. Total subscribers also increased by 17% to 176,167. What was even more enticing was the 28% growth registered in average revenue per user (ARPU).

On top of robust Q3 results, management raised its guidance for 2022. For the full year, total revenue is expected to range between $293 million – $295 million, higher than the prior guided range of $285 million – $290 million.

For Q4, total revenue is expected to range between $72 million – $74 million, while the consensus is pegged at $72 million. Moreover, its adjusted EBITDA margin is forecast to range between 4% and 5%.

Restructuring Initiatives Effectively Leading to a Turnaround

Earlier in September, the company announced a restructuring plan, including slashing 24% of its workforce. It was encouraging to see the results from this in its Q3 results.

During the Q3 earnings conference, the company reassured investors that it is working on numerous initiatives to further enhance its subscriber base, luring its customers with newly-added celebrity collections and exclusive designer brands. It’s also on track to achieve annual cost savings of $25 million – $27 million in Fiscal 2023. This should improve the company’s cash position.

Importantly, the company is yet to turn profitable. However, the most recent results indicate that RENT may be inching closer to profitability. The company has reported EBITDA profitability for two consecutive quarters, with a Q3 EBITDA margin of 8.5%.

CFO Scarlett O’Sullivan believes that the company’s “gross margin and fixed cost leverage improvements help to ensure RTR can navigate potentially rougher macro conditions, while improving our profitability and accelerating our path to free cash flow breakeven.”

She added, “Over the medium-term, we continue to believe we can generate 15% profitability on Adjusted EBITDA after product depreciation.”

Further, in terms of valuation, the RENT stock looks cheap, trading at a low EV/sales ratio of about 1.0x.

Is Rent the Runway Stock a Buy, According to Analysts?

The Wall Street community is cautiously optimistic about the stock. Overall, the RENT stock commands a Moderate Buy consensus rating based on four Buys and two Holds. RENT’s average price target of $5.30 implies 92.7% upside potential from current levels.

Conclusion: RENT Stock Looks Attractive

Wide-spread inflation and recessionary fears have made fashionistas weary of making big fashion buys. Behemoth retailers like Walmart (NYSE:WMT) and Target (NYSE:TGT) are showing concerns over consumers’ spending, especially on big-ticket items. Larger groups of customers are now making spending cuts, resorting to rental fashion instead.

The current scenario surely puts Rent the Runway in an advantageous position, fulfilling the fashion needs of customers despite high inflation and budgetary constraints.

The sharing economy in the apparel sector is a newer theme, and the industry is in a nascent stage. RENT has a strong competitive advantage being one of the first few players. Consumer spending trends are seeing a secular shift, and this can pave the way for long-term growth for companies like RENT.

I like the stock for the successful implementation of its restructuring initiatives that led to impressive Q3 results and a brighter outlook. The company is marching toward profitability and is confident that EBITDA will be in the green by the end of 2022. I will buy the stock for its winning streak and promising outlook despite the tough macro picture.

Disclosure

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