Rent the Runway is an upscale fashion company with a difference. Instead of directly selling products from top designers – like Net-A-Porter, for example – the Brooklyn-based company allows its customers to rent items from a vast closet of high fashion styles and brands. The price? You guessed it, a monthly subscription.
The so-called “closet in the cloud” service filed for its IPO on Monday and, as is often the case here at FT Alphaville Towers, we couldn’t help but quickly read S-1 to see if the numbers added at the top.
As you can imagine, Covid has not been kind to Rent the Runway. Working from home has killed the commute podium, while blockages have kept gladrags in the back of our cupboards, so it’s no surprise that the company has seen its revenue shrink 39% to 158. million dollars in 2020, with the number of subscribers also taking a hit. 2021 didn’t go much better either – the company’s revenue for the first half of this year was still slightly lower than last year.
But, while we can recognize the real struggles of business in a post-pandemic world, we don’t think there are many excuses for what can only be described as the definition of adjusted ebitda. the most egregious since WeWork’s infamous bond prospectus.
It’s hard to know where to start or end here, so we’ll draw your attention to just one thing: amortization of rental income.
The exclusion of ebitda depreciation is nothing new. Even since cable king John Malone began using the term in the early 1980s, adding the non-monetary burden of depreciation of an asset has become the norm for measuring profitability. But the question must always be: what kind of depreciation?
Suppose an automaker builds a factory that will last 20 years, and only has to spend a little each year to maintain it. In such a situation, depreciation is not an actual cost, as the maintenance capital expenditure is a rounding error to the annual cost of depreciation (assuming the plant does not have to be completely rebuilt in 20 years, which is still a big “if”).
But in the case of Rent the Runaway, it’s hard to make the same argument. Whether it’s a Prada jacket or a Valentino sweatshirt, a piece of clothing rarely retains its value when worn, especially if it has been worn multiple times by several different people. Eventually, thanks to the vagaries of trends or simple wear and tear, this item will have to be replaced at the same cost or, given the recent inflation of luxury goods, at a higher price. And that’s what depreciation means here.
You can see this dynamic play out in Rent the Runaway’s cash flow statement. In 2020, for example, it excluded $ 62 million of product depreciation from its operating cash flow calculation. Nothing wrong with that, this is a non-monetary charge.
But look a little further down, under the investing activity statement, and you’ll see that it spent almost double its depreciation – $ 118 million – on a new product:
Granted, part of that investment will be additional items for her current 18,000-style closet, but a good part will likely be for to keep her current wardrobe.
So for Rent the Runaway, excluding what is arguably its base cost from its ebitda doesn’t make much sense to us. This is an understatement.
Unless, of course, the company is aiming for an IPO at the highest possible valuation to allow private shareholders to quickly exit the threshold. But we would never suggest such a thing.