Rent the Runway doesn’t think buying clothes is a cost

Rent the Runway is a high-end fashion company with a difference. Instead of directly selling

Rent the Runway is a high-end fashion company with a difference. Instead of directly selling wares from top designers — like say, Net-A-Porter — the Brooklyn-based business allows its customers to rent items from an extensive closet of styles and high-fashion brand names. The price? You guessed it, a monthly a subscription fee.

The so-called “closet in the cloud” service filed for its IPO Monday and, as is often the case here at FT Alphaville Towers, we couldn’t help but have a quick read of the S-1 to see if the numbers added up.

As you might imagine, Covid has not been kind to Rent the Runway. Working from home killed the commuting catwalk, while lockdowns kept the gladrags in the back of our wardrobes, so it’s of little surprise that the business saw its revenues contract 39 per cent to $158m in 2020, with its subscriber count also taking a knock. 2021 hasn’t fared much better either — the company’s revenues for the first half of this year were still a touch below where they were last year.

But, even though we can recognise the business’s real struggles in a post-pandemic world, we don’t think there’s much excuse for what can only be described as the most egregious adjusted ebitda definition since WeWork’s infamous bond prospectus.

Behold:

It’s hard to know where to start or end here, so we’re just going to draw your attention to one line item: rental product depreciation.

Excluding depreciation from ebitda is nothing new. Even since Cable-king John Malone started using the term in the early 1980s, adding back the non-cash charge of writing down an asset has become the norm for the profitability metric. But the question should always be: what sort of depreciation?

Say a car company builds a factory that will last 20 years, and only has to spend a little every year to maintain it. In such a situation, depreciation isn’t a real cost, as the maintenance capital expenditure is a rounding error relative to the annual cost of the depreciation (assuming the factory doesn’t have to be totally rebuilt in 20 years, which is always a big “if”).

But in Rent the Runaway’s case, it’s hard to make the same argument. Whether it’s a Prada jacket or a Valentino sweatshirt, clothing rarely keeps its value once it’s worn, particularly if it’s been worn several times by several different people. Eventually, thanks to the vagaries of trends or simple wear and tear, that item will need replacing at the same cost or, given the recent inflation in luxury goods, a higher price. And that’s what depreciation signifies here.

You can see this dynamic play out in Rent the Runaway’s cash flow statement. In 2020, for example, it excluded $62m of product depreciation from its operating cash flow calculation. Nothing wrong with that, it is a non-cash charge.

But take a look a bit further down, under the Investing Activities statement, and you’ll see it spent almost double its depreciation — $118m — on new product:

Granted, part of that investment will be additional items for its current closet of 18,000 styles, but a good chunk of it likely will be for maintaining its current wardrobe.

So for Rent the Runaway to exclude what is arguably its core cost from its ebitda doesn’t make much sense to us. To put it mildly.

Unless, of course, the company is aiming to IPO at the highest valuation possible to allow private shareholders exit quickly stage left. But we would never suggest such a thing.

https://www.ft.com/content/1dc10bf0-0cba-4689-b355-9cae2aeff865