Rent The Runway S-1 IPO
sec.gov
sec.gov
The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 20 votes per share and is convertible into one share of Class A common stock at any time. Jennifer Y. Hyman, our Co-Founder, Chief Executive Officer and the Chair of our board of directors, and Jennifer Fleiss, our Co-Founder and a member of our board of directors, together, the Co-Founders, and their affiliates, will together hold all of the outstanding shares of Class B common stock.
That used to be prohibited on the NYSE, except for Ford Motor Company, which predated the NYSE and was grandfathered in. Then Google got away with it on the NASDAQ. Then Zuckerberg, with Facebook. It used to take a CEO who had already pulled off a miracle, or investors would laugh off the IPO. Now, bottom-feeder companies like this think they qualify.
Consider that if this works, you now have the logistics problems of Netflix. Plus dry cleaning.
Now please turn to page F-4 and read the numbers.
Total revenue: $157.5M. Net loss: $171.1. Which means they need to be about 3x better at this to break even.
It doesn't matter that they're growing. This thing is expensive to run and, since it depends on physical product handling, does not get hugely cheaper at scale.
The present value of the asset's free cash flow. Classically, this was distributed via dividends. In modern finance, for all but the largest companies, it's distributed through M&A.
Control doesn't alleviate the duties, fiduciary and of loyalty, the controlling person has to its shareholders. An acquirer who only bought the votes would still need to act in all shareholders' interests (or face litigation). To have a free hand, and full access to those cash flows, an acquirer thus must purchase the whole company.
In most cases, the target company's stock rises because the acquiring company pays a premium for the acquisition, in order to provide an incentive for the target company's shareholders to approve the takeover. Simply put, there's no motive for shareholders to greenlight such action if the takeover bid equates to a lower stock price than the current price of the target company. [1]
If the buying firm doesn’t need approval from the Class A shareholders, what would be their incentive to buy those Class A stocks at a premium?
Supervoting stock usually converts into regular stock on transfer. For example, Rent the Runway says "future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes" [0].
Delaware law is also developed in protecting minority investors' rights [1]. (The situation varies from state to state [2].)
[0] https://www.sec.gov/Archives/edgar/data/1468327/000119312521... S-1, page 59
[1] https://corpgov.law.harvard.edu/2018/04/26/controlling-share...
[2] https://www.stimmel-law.com/en/articles/corporate-struggles-...
You, as an investor, want to save money for longer than one quarter. You want to save money for 20 years. So you'd like to avoid 80 taxable events in those twenty years, especially as you are just going to be reinvesting those dividends anyway. You want the law of compound interest working in your favor and then you pay taxes when you actually sell.
E.g. at a 20% tax rate say a stock pays a 4% dividend once per period and has no capital gain. Suppose you invest $1 and want to hold that for 2 periods, reinvesting the dividend and then selling.
Then after the first period you get 3.2 cents (after taxes) and you now own $1 and 3.2 cents. After period 2 you get $1.065024. Then you sell for a profit of 6.5024 cents (there are no capital gains)
But if the stock pays no dividend and has a 4% capital gain, and you hold for two periods, sell, and then pay the 20%, you will make 6.528 cents.
[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3006669
If there were no 401k, and all there was were IRA for everyone, this would not be an issue.
> Our ROI calculation assumes an average of 20 lifetime turns per unit. Based on the average lifetime turns as of June 2021 of all items we acquired in fiscal years 2015, 2016 and 2017, we have determined that an item can turn a minimum of 20 times on average over its lifetime.
>When we multiply the item economics from fiscal year 2019 and the first six months of fiscal year 2021 by 20 turns, this implies total lifetime revenue of $445 and $536, respectively, and total lifetime profit of $212 and $324, respectively.
>Therefore, our product ROI has improved from 4.0x to 5.9x on a revenue basis, and from 1.9x to 3.6x on a profit basis based on item economics in fiscal year 2019 and the first six months of fiscal year 2021 applied over the expected lifetime of units, respectively. We believe we have the ability to drive improvements in product ROI over time as we continue to decrease our fulfillment expenses to improve profitability per item and use more efficient product acquisition channels to reduce upfront product cost.
[1] https://www.worldbank.org/en/news/feature/2019/09/23/costo-m...
Although, this number seems wrong. Is the entire fashion industry only valued at 2.4B?
> The fashion industry is key for economic development: it is valued at some USD 2.4 billion globally and directly employees 75 million people throughout its value chain.
Me, on the other hand, bought 10 shirts from H&M of various colors and I wore them until the threads fell apart and you could see my skin. The shirts still lasted for a few years.
Both of our shirts ended up lasting about the same amount of time, but were used way differently
That 1 article you like, you’re lucky if it lasts a full year
But this is an example of extremely bad/misleading financial modelling which has also been typical with B2C IPOs/IR...so it doesn't really reflect how they make money...because they aren't actually making any money doing this.
There are, to be frank, so many errors that it would take multiple blog posts to go through...some classics from one read through:
* "Product ROI - Revenue" - this will go down for me as a real DTC classic...I had to check if the CFO perhaps did stand-up comedy on the side, this is surely indicative of great comedic talent? But no, just a neck made of solid brass.
* "Product ROI - Profit" - after deducting almost no costs. Again, if this company doesn't work out then the executive team should surely consider comedy.
* The big issue with all these analyses is that they are very sensitive to the recent past. You are not getting a random sample of history, you are getting the sample where everything works out, and all the metrics (whether fictional or not) produce the right outcomes. That is fine, but it is worth understanding that over the long-term, it will go wrong eventually and the estimate for turn will drop significantly. So whatever number they produce sounds great but it is best case. You see this over and over (turn, churn...it is usually some measure like this that is clearly very favourable and unrepresentative).
* With this company specifically, another big problem is that management controls D&A...they are saying clothes will last three years...okay...my feeling here is extreme doubt. Burberry used to literally set fire to clothes that were more than a year old...my view is that management have (somehow they convinced their auditor to go along with this) turned an immediate business cost into something they can depreciate over three years so their "financial model" doesn't look like total dog shit. Btw, you can actually back this out, I am not going to bother because I can see the "model" is unprofitable once you do this...obviously.
* If I was inclined to analyse this business (I am not, it looks like a dumpster fire), I would need to really interrogate the claim of 20 turns per unit and exactly when those turns are occurring. I could be convinced this model works. But if management is depreciating over three years...all I am clear of is that management are up to something.
* No deduction of marketing costs in ROI calculation? They have gone for "Product ROI"...okay but the business model depends very heavily on efficiency of marketing spend. I understand what the game is with IPOs but is this a real example of their "financial model"? No, it is fictional.
* Their G&A is crazy. I don't know how this is possible (the other thing I would look carefully at would be their Linkedin, it is so large that one wonders if costs aren't also being moved here from somewhere else)...again, I understand why this isn't "Product ROI"...but they are spending huge amounts here, which really should be taken into account in any analysis.
* Fulfilment is part of the model but I didn't see a real explanation for that cost. They are obviously having to clean/repair clothes but where are they in their capital cycle (this is very important for DTC because it is something the market frequently gets wrong)? It looks to me like they invested heavily pre-Covid, haven't really seen things recover...so I would guess they lever costs quite quickly on fulfilment when they recover (which is good: simply, their cap utilization is probably low so revenue can go much higher with little marginal costs...I do wonder why the selling shareholders are so generous) but, again, I would question the value of their inventory...and if they don't recover then those fulfilment costs can sink them too.
Yep...so I would be cautious about reading too much into this. The stuff about "Product ROI - Revenue" and depreciation are real classics though...when you think you have seen it all, the investment bankers will continue to give (I have no idea how they got KPMG to sign off on their depreciation policy). Very generous.
EDIT: would love to see more two years financials too...like that is highly, highly, highly sus...is that just the norm now (I don't do this kind of thing professionally anymore). You have to look at cash flow with these businesses to see "real" profitability, and capital is just pouring into the business with very little in the way of return...it just makes me wonder whether they weren't also losing tons of money in 2019, and realise that no-one will buy the Covid turnaround tale if they were also losing crazy money in 2019. I notice that one of the first search terms for the company name on Google is "...are they still in business?"...which isn't encouraging.
you should figure out a way to monetize your content
It is extremely hard to monetise. I tried doing this once: the first time I made $250k for someone, and I got $50 of that...you really reconsider whether it is a good business.
Tbf, it would probably be much easier to do today but the easiest way to monetise is to just work in investment research (and I did that too, didn't care for that either...so am a dev).
Also, you can't write what I wrote above using your real identity (and it is very hard to build credibility without using your name, imo). Companies are extremely litigious, and it isn't worth the flak from people who don't want to know (again, been there...I spent a long period in the mid-2010s trying to stop people investing in a fraud...didn't work, just made people angry).
Maybe I will give it another shot this year though. The market has changed. And I have had a few people ask me for a newsletter when I do long answers.
I don't understand this, can anyone help me out? Is it min or avg?
Interesting that they consider 20 uses to be the average. It would be nice if they kept a public list of best value fashion that was durable and long lasting, that would be good for the environment.
They might have been quite larger than my startup at the time but since it’s a company very outside my general interests it was very new to me at the time :)
In theory it helps by reducing the need for people to own the latest fashion and that could lead to a reduction in waste. But I'm assuming that they also have to bulk purchase the latest trends.
It could be a bit premium service too, I'm sure some of the highly paid professionals would be totally on board to try it as it scales.
All in one platform, I'll help code it. If it already exists, let me know the name.
Be careful, as we saw with plastic, all this effort into recycling can be even more expensive/environmentally damaging than using virgin materials.
Personally, I like https://theconsistencyproject.com/ (used to be in SF, now in NYC, also ships)
- Once you deduct marketing costs, contribution profit goes from 11% to 2%
- G&A is $77MM, which seems like a lot when you consider fulfillment is only $53MM. I wonder how G&A will increase as revenue increases. Even if 5% of G&A is variable (proportional to revenue), this results in 0% contribution profit.
Of course, we can also wonder what the 'other depreciation and amortization' is.
Presumably a dress has a much higher LTV in future implied subscription income then its inherent accounting liquidation value.
That used to be the case, but not really anymore. They do more rental of “work” or “simple night out” clothing than they do higher formality clothing.
I can understand renting something for date night, but why would anyone would rent clothes just to go into the office? Is the HN/programmer bubble messing with my perception of what's normal?
I’m going to take a guess and assume you don’t wear the gender of clothing that they target?
> Is the HN/programmer bubble messing with my perception of what's normal?
Or maybe that’s the issue. Either way, many women who work in an office want a freshly changing attire that they can conveniently have with a monthly subscription.
Like I’d probably wear a button up shirt and slacks more often if I:
1) had fresh new looks sent regularly
2) that I never had to wash or dry clean
3) and usually don’t have to iron (although that wasn’t full proof with RTR’s delivery)
The real culprit is the financial printer, Donnelley Financial, and to a lesser extent the filer. They could have made a better looking, more designed document but for a S-1 there is no motivation since the only consumers of this will be analysts. Future 8-K and 10-Q filings will likely be better designed. Still, it could have been done better.
[0] https://www.sec.gov/info/edgar/specifications/edgarfm-vol2-v... (search for "5.2.2.3 Acceptable HTML Tags Within a Document Body" and the following sections).