Greetings, and welcome to the Rent the Runway Second Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Janine Stichter, Vice President, Investor Relations. Thank you, Janine. You may begin.

Good afternoon, everyone, and thanks for joining us to discuss Rent the Runway's second quarter 2022 results. Before we begin, we'd like to remind you that this call will include forward-looking statements. These statements include our future expectations regarding financial results, guidance and targets, market opportunities and our growth. These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially. These risks, uncertainties, and assumptions are detailed in this afternoon's press release, as well as our SEC filings, including our Form 10-Q that we filed in the next few days. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During this call, we will also reference certain non-GAAP financial information. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Reconciliations of GAAP to non-GAAP measures can be found in our press release, slide presentation posted on our investor website, and in our SEC filings. And with that, I'll hand over to Jen.

Thanks for joining us today. I'm going to focus my remarks on two important topics: First, my confidence in the long-term demand outlook and the strength of our customer proposition. Second is my commitment to building Rent the Runway into a business that is profitable, has strong margins, and is self-funding. The restructuring actions we announced today are an important step towards meeting those goals, and Scarlett and I will review the details with you today. Let's begin with the customer. Our revenue grew 64% year-over-year to $76.5 million, our highest quarterly revenue to date. We were also adjusted EBITDA positive for the first time since our IPO, significantly ahead of plan, generating $1.8 million and a 2.4% margin. Subscription and reserve revenue grew 63%, and quarter-ending active subscribers grew 27% versus the prior year. We began the quarter with some of our best subscriber acquisition numbers in history, culminating in our strongest-ever May acquisition. All subscribers also reactivated nicely in May. Our subscriber engagement metrics, such as customers who add items to their subscriptions, were at strong levels, and we saw some of the highest monthly subscription ARPUs in our history. We saw strength in our event-based rental business as our customers demanded wedding and party attire, black-tie, and going-out clothes. Our resale business also demonstrated excellent performance. Starting in mid-June, we noticed an increase in subscriber pause rates and a decrease in retention, along with the delay in former subscribers rejoining versus history. This, combined with seasonally lower acquisitions, resulted in an ending active subscriber count that was lower than expected for the quarter. Our goal is to be transparent with investors about what we do and do not yet understand about our performance and the evolving consumer environment. We are highly confident in the long-term opportunity for our business, and this is unchanged. However, in the short term, I want to acknowledge that it remains difficult to predict how customers will behave, and we want to be measured in our approach and guidance for the rest of the year. It is becoming clear to us that our customers live, work, socialize, and travel differently in 2022 than they did prior to the pandemic, and this influences what they wear. We are still learning how these types of changes in customer behavior impact the business, particularly in a challenging macro environment. At just over 124,000 active subscribers at the end of the quarter, we believe that we are in the early innings of our closet-in-the-cloud model for fashion. We have seen positive signs of stability and a strong bounce back in our customer metrics in August and September to date. Let me outline just a few reasons I'm confident that Rent the Runway can grow significantly and become an even more important part of our customers' lives. First, we think we're only just scratching the surface of initiatives to improve every customer metric from organic acquisition and converting to retention and propensity to rejoin. We believe just executing on these initiatives and continuing to invest in our customer experience provides us an opportunity to more than double our business in the years to come. Let me highlight just a few examples. We recently began testing a loyalty program to reward our early-term customers with one additional item of clothing for their next shipments. This simple test was one of the most successful drivers of loyalty in our history. Another successful initiative to improve our customers' conversion and loyalty includes giving them an understanding of items that are likely to fit them via fit tags on product pages. We plan to soon rollout fit tags on our product grid to expand on our impact here. We've seen success this quarter in optimizing the way we display pricing to our customers, driving higher conversion, and we plan to build on this in Q3. Given our long history with event-based rental, we think there is significant opportunity in reactivating some of the more than 2 million customers who have been one-time rental customers in the past. In July, we launched home pickup in our app, and now over 50% of our subscribers have access to this ahead of plan. We continue to see improving customer adoption and satisfaction with home pickup, which both improved customer experience and lowers cost. We believe we can become a much larger business simply by focusing on matters within our control. Notably, the opportunities above don't require any changes in customer acceptance of rental. We believe the apparel market continues to evolve in a way that's favorable to our business. Our recent partnership with Saks OFF 5TH to sell pre-owned clothing with our branding was a success and highlights an increased willingness by mainstream customers to wear secondhand clothing. As more of the biggest apparel retailers in the world sell pre-owned clothes, these trends should only strengthen. At first, we would expect greater usage in our event-based business. Retailers around the world sell billions of dollars of outfits that customers wear to social events. We want to capture this demand and grow event-based rentals into multiples of where it is today. As acceptance grows and as events turn customers into subscribers, our subscription business should benefit. Given its everyday nature compared to the event-based rental business, we see an even larger opportunity. I truly believe that our best days lie ahead. Let me now turn to profitability. I want to be clear that in order for Rent the Runway to be successful, we must be profitable and able to fund ourselves. Further, given our superior monetization of inventory versus traditional retailers, we have a significant gross margin advantage. Along with growth, we intend to maintain stricter cost discipline in order to generate above-average profitability in the medium term. Today, we announced a restructuring plan to reduce $25 million to $27 million of annual operating costs and streamlined our organizational structure. We made the difficult decision to reduce our corporate headcount by about 24%. The headcount measures will be largely complete in Q3, and we expect to realize savings starting in Q3 and into fiscal 2023. We took a deep and rigorous look at our business, benchmarking ourselves to other companies, and realized that we have the potential to improve efficiency and drive profitability sooner while continuing to grow revenue. Despite almost 45% incremental flow-through margins on additional revenue, growth in our relatively high fixed cost base prevented more rapid gains in profitability. We believe that our customers are best served by investments that focus on them and by simple and quicker decision-making. Let me discuss the financial implications of these actions. Once implemented, we expect these actions to positively impact adjusted EBITDA by approximately $4 million to $5 million in Q4 and $25 million to $27 million in fiscal year '23. As Scarlett will outline, we expect to generate a mid-teens adjusted EBITDA margin and cover our product depreciation at approximately $400 million in revenue. At this revenue base, which we think is well within our reach in the short term, we believe we will be able to fund product CapEx for our existing customers and reduce cash burn before interest expense to approximately $30 million. We also expect to maintain a healthy cash position, allowing us to navigate potentially tougher economic conditions. Our medium-term target is to generate a 15% margin on adjusted EBITDA less product depreciation. I want to be open about the possibility that the path to this 15% margin may not be linear. While we intend to clearly demonstrate that Rent the Runway can be a profitable company with attractive margins, we may decide to reinvest in growing the business where it makes sense. That said, we remain steadfast in our commitment to efficiency and further prioritizing investments that benefit our customers. Ultimately, we believe the strength of our offering, continued growth in the business, and a focus on removing costs in areas that don't affect the customer will result in value creation over time. I want to end my remarks by acknowledging the contribution that all of our employees have made to the success of Rent the Runway and by saying a heartfelt thank you to the employees leaving us. These actions are difficult; however, they are necessary for Rent the Runway to become a healthier company. As a company, we are resilient and innovative and have always been willing to make difficult decisions that are right for the business. As an example, during COVID, we fundamentally changed the way we acquire rental products, changed our subscription programs to be higher margin, and drove efficiencies in our warehouses through technology and automation. Today, our challenge is to capitalize on the many opportunities in front of us while making rapid progress toward being a self-funded business. We intend to meet that challenge and provide our customers with the experience and products they deserve. With that, I'll turn it over to Scarlett.

Thanks, Jenn, and thanks again, everyone, for joining us. I will start today with an overview of the restructuring plan we just announced and what it does for our profitability profile. Then we'll follow with a short review of our second-quarter results for fiscal '22, and we'll end with guidance for the third quarter and full year. As we've discussed, our number one goal is to drive our business to profitability and demonstrate our compelling business model, which we believe can deliver a 15% margin on adjusted EBITDA less product depreciation in the midterm. As Jen outlined, we are confident in Rent the Runway's ability to grow significantly in the coming years. We are taking restructuring actions now for two reasons. First, we want to ensure that the business can navigate potentially tougher macro conditions. In short, they are intended to provide a margin of safety; second, these actions improve our medium-term profitability. They allow us to reinvest in our customer and create shareholder value. It's apparent that economic and financial conditions are uncertain. Our job is to position Rent the Runway to emerge from a tougher environment with strength. However, our actions aren't just a response to this environment. We believe we have high gross margins and the potential to be a very profitable business. We can make faster progress on profitability by focusing on our fixed cost base. These actions are intended to allow Rent the Runway to become more efficient and customer-focused. We believe they will set the stage for significant margin improvement in the coming years. Let me now outline what these actions mean for our business. First, the immediate impact. This plan is expected to result in a $25 million to $27 million improvement in adjusted EBITDA in fiscal 2023. The headcount reduction is expected to be largely complete by Q3 and positively impact adjusted EBITDA in Q4 by $4 million to $5 million. All these figures are versus the Q2 level; two, our near-term goal. At approximately $400 million in revenue, we expect to generate a mid-teens adjusted EBITDA margin and to be breakeven after product depreciation. This means we are able to fund product spend for our existing customer base with the only cash outlay for growth. For example, if we funded 20% growth in our customer base, we would reduce cash burn before interest expense to approximately $30 million; three, our medium-term goals. We intend to maintain strict cost discipline, approximately 45% incremental flow-through on revenue, and generate approximately 30% adjusted EBITDA margin. That represents a 15% margin on adjusted EBITDA less product appreciation. This is, in our view, solid profitability that is considerably better than traditional retailers and online peers. At that level, we believe we will be free cash flow profitable, fully internally self-funding the business even at strong growth rates, and we aim to get there with the cash we have on hand. Now let me give a detail on the reductions and restructuring. I've already mentioned that we expect approximately $25 million to $27 million in annual cash savings in fiscal '23 compared with the Q2 '22 run rate, nearly all of which are fixed costs. We prioritize continuing to focus on growth and delivering the best customer experience and targeted our cuts in other areas. About $20 million relates to a reduction in head count of approximately 24%. We anticipate a related severance charge of approximately $2.5 million to be largely recognized in Q3. For the full year '23, in addition to headcount reductions, we anticipate a $5 million to $7 million reduction in tech and G&A expense relative to the Q2 '22 run rate. Though we are largely focused on fixed costs, I want to touch on our variable expenditures. We have a business model where we can react to demand changes. Two of our larger variable cash outlays are marketing and product CapEx, and we intentionally did not touch either of them as we continue to prioritize growth and customer experience. On marketing, we expect to keep the existing headcount at approximately 10% of revenue as we continue to prioritize efficient spend and growth. Product spend for this year remains at our last guidance of approximately $60 million. It's very important for us to be prepared with the right product assortment for our customers. As for the remainder of our variable costs, that fulfillment costs, customer service costs, credit card fees, and revenue share payments to brands, they all largely flex with demand. Taken together, we now expect our fiscal '22 free cash flow margin to be slightly better than in fiscal '21, which, as a reminder, includes a more normalized level of product acquisition versus last year. Now let's turn to the review of Q2. We are very pleased with our Q2 financial results, with revenue hitting a record of $76.5 million, up 64% year-over-year and up 14% quarter-over-quarter. Active subscribers increased 27% year-over-year to 124,000 but declined 8% quarter-over-quarter. As Jen mentioned, in the second half of the quarter, like many companies in the sector, we saw weakened demand. This was in addition to the seasonality we typically see with lower acquisition and a higher rate of pause in Q2 versus Q1. Total subscribers increased 37% year-over-year to 173,000 and declined 2% quarter-over-quarter. Although active subs were down sequentially, we beat our revenue guidance due to strength in customer engagement and ARPU, or average monthly subscription rental revenue per subscriber. Q2 ARPU benefited from both a full quarter impact of price increases and high add-on rates, with 30% of active subs paying for one more add-on. We reiterate our outlook for ARPU to be up approximately 5% for fiscal year '22 versus last year. In addition, even in this difficult environment, we saw high subscriber monetization with subscribers continuing to buy items at healthy levels, driving strong retail revenue and resulting in 87% of total revenue being generated by subscribers. Reserve was up 9% versus Q1 '22. Though we had planned for high demand for special occasions, party, and going-out items this year, we saw even higher usage than expected of these items by subscribers, which may have constrained our reserve business in the quarter. We see this as an opportunity and are planning our assortment for this year and next with an even higher proportion of rental items for social use cases. Our Q2 gross margin of 42% was three percentage points higher than the prior year and nearly nine points higher than Q1. Some of this benefit has to do with seasonality. Fulfillment cost as a percentage of revenue came in at 31% versus 34% in Q1, partly due to lower shipments per average subscriber, which we typically see in the summer. We would expect average shipments per subscriber to increase seasonally in Q3. But there are two factors that we believe will persist. One, we had higher revenue per shipment than last year, due to both the price increase and high add-on activity; two, rental product depreciation was 18% of revenue versus 24% in Q2 '21 as it was absorbed over a higher revenue base. We are improving our target for fulfillment costs as a percentage of revenue to be approximately 33% for full year '22, and we expect gross margin for the full year to be a couple hundred basis points higher than full year '21. We are very pleased with our adjusted EBITDA this quarter, which was positive for the first time since we went public, coming in at $1.8 million versus negative $1.9 million in Q2 last year, representing a positive 2.4% margin and a six-point improvement versus negative 4.1% last year. Our total operating expenses, marketing, technology, and G&A represented 70% of revenue compared with 79% in Q2 '21. We expect quicker OpEx leverage with the cost reductions we just discussed. Let me now turn to guidance. Our historical seasonality would typically lead us to expect strong subscriber acquisition and sequential revenue growth in Q3. And as Jen said, we have seen an uptick in subscriber acquisition and unpausing activity in the last few weeks. However, we think that changing consumer behavior post-pandemic and the macroeconomic environment continues to be uncertain. For instance, higher remote work trends may have contributed to the demand impact we experienced this summer and could change the seasonality patterns of our subscription business. As a result, we've reflected this uncertainty in our guidance for Q3 and the rest of this fiscal year. We also continue to monitor COVID variants, and have modeled Q4 after the last two years, where we saw COVID impact, and we currently expect Q4 revenue to be slightly lower than Q3. For Q3, we expect revenue of $72 million to $74 million. This guidance reflects ARPU that is lower in Q3 versus Q2. In Q3, we expect a positive adjusted EBITDA margin of 1% to 3%. A reminder that we again expect Q3 to include our typical higher marketing or seasonal customer acquisition and also higher product spend and upfront revenue share payments to the brand as we receive new fall/winter products. Though typically, Q3 profitability is lower than Q2 profitability, we now expect it to be higher than planned due to the impact of the restructuring on part of the quarter. In terms of full year, we now expect revenue in the range of $285 million to $290 million, representing 40% to 43% growth versus full year '21. The low end of our range reflects a continuation of the summer trends and the high end reflects slightly improved trends and more normalized seasonality in Q3. Both the low and the high end also reflect an impact from COVID variants like we saw in the last two years. We are revising upwards our prior guidance for adjusted EBITDA margin for fiscal '22 to negative 2% to 0% from the prior negative 6% to negative 5%, which largely reflects our cost discipline throughout the year and the reduced cost base in Q4. We continue to be intensely focused on balancing robust growth with profitability, and will seek to strike the right balance to attain both objectives and maximize the long-term value of Rent the Runway. With that, we are happy to open it up for questions.

Thank you. Our first question is from Ike Boruchow with Wells Fargo. Please proceed with your question.

Hi, thanks. Jenn, I wanted to ask you, just back to the cost initiatives. Could you elaborate a little more? The cuts seem fairly deep. I'm just curious the timing—why now, especially given signs of positivity in the business that you guys are seeing.

Thanks, Ike, for the questions. So the reductions are just as much about growth as they are about efficiency. This was the result of rigorous analysis and a rigorous process. We benchmarked against numerous companies, and we saw the opportunity to become more efficient, which informed the size and scope of the cut. But because they're equally about growth, this gives us the ability to reinvest in the customer experience and place significant offense. We're a proactive organization, and we follow the data. This is what we did when we saw the very early impacts of COVID, and we acted early and meaningfully. And as promising as the bounce back has been in August and September, we simply can't predict what's going to happen in the next 12 months. These changes put us in a strong position to continue to grow both in the immediate and once the environment is fully recovered. On the financial front, we think this is transformative for the business. We go from a business that's been burning a lot of cash to one that has a much tighter cost structure in the short term that can fund product costs for its existing customer base and reduce burn to approximately $30 million before interest at approximately $400 million in revenue. In terms of why now, we're confident in Rent the Runway's ability to grow significantly in the coming years. We took these actions for two reasons. First, we wanted to ensure that we could navigate potentially tougher economic and financial conditions; and second, we wanted to pull forward the path to profitability and improve Rent the Runway's medium-term profitability. This truly allows us to reinvest in our customer and create shareholder value.

Thanks, Jenn.

Thank you. Our next question is from Ashley Helgans with Jefferies. Please proceed with your question.

Hi, thanks for taking our question. Scarlett, this is for you. Can you please walk us through in a little more detail your near- and medium-term margin target? And just how you're planning on getting there?

Sure. Thank you for the question, Ashley. So maybe just a little bit of redefinition of what we talked about on the call. I mentioned a couple of things. The first thing I mentioned is our near-term goal, which is at approximately $400 million. We would expect to generate a mid-teens adjusted EBITDA margin, and that would translate to being breakeven after product depreciation. Adjusted EBITDA was a very important first milestone for us to show our ability to generate cash from operations to cover our OpEx, which we did in Q2, ahead of our plan even before all these cuts. Looking at EBITDA after product depreciation is really about measuring our profitability, taking into account the full annual cost of products for existing subscribers. So we've said that getting to approximately $400 million is a number that we think is well within our reach in the short term, we can get there. First of all, starting with the cost of fulfillment. That implies it stays pretty similar to where it was in Q2 at about that 32%. Our revenue share is similarly at very similar levels to where we are in Q2. Our depreciation in Q2 came in at about 18%. We're talking about a decline of percentage points, and you would get there through a mix of products as well as volume discounts that we would expect. G&A and tech are going to see some significant leverage at higher revenue as the fixed costs remain essentially flat, right? We intend to keep strict cost discipline. So combined, you would see them at about 40%. That’s about 60% in Q2, and we will see that reduce pretty significantly even in Q4 as a result of this restructuring plan. Marketing, which we consistently said will stay at about 10%, gets you to about a 15% adjusted EBITDA margin and implies, like I said, an adjusted EBITDA minus product depreciation that will be breakeven. We also said that at this level, we believe that our cash burn would be about $30 million, excluding interest expense. You think about the cost after that, which are product CapEx, we think that's about 20%, a 20% growth. Maintenance and other CapEx is a couple more percentage points, and that's how you get to about $30 million in cash burn, excluding the interest expense. From that point to get to the 15% adjusted EBITDA margin minus product depreciation, it's really about a slight more improvement in fulfillment, right? You heard us talk before about getting back to 30% or lower. Revenue share should be pretty much phased at the same level. We would expect to see a little bit more decline in depreciation at a larger scale. And then in terms of G&A and tech, we believe that we can get even more leverage with higher revenue, and that should take it to a combined about 20% of revenue, excluding stock comp, with marketing staying at the same 10% that we've been discussing.

Great. That was super helpful. Thank you.

Thank you. Our next question is from Edward Yruma with Piper Sandler. Please proceed with your question.

Hi, good afternoon. Thanks for taking the questions, guys. I guess two-parter for me. First, can you give a little more specificity as to where you made the cuts? I know you protected certain areas of the firm that you want to invest in, but are there specific initiatives that you're not doing now? Or like where did the bulk of the cuts sit? And then as a longer-term question, particularly we have what could be tougher macro conditions, how do you feel today about the price-value relationship or better yet, how do you think your customers feel about it? And are you considering any adjustments?

Because we feel very confident in the continued growth in our business, we were intentional with this restructuring plan to not cut in areas that impact the customer. We still feel confident in our ability to deliver on initiatives that will positively impact all of the metrics within our control, whether that's acquisition, conversion, rejoin rate, or the loyalty of our customers. So we cut relatively more in back-office functions than we did in customer-related functions. Also, as Scarlett mentioned, we intentionally didn't touch our variable costs. We're continuing to invest in our marketing budget and in our rental product budgets, and we've actually seen that the demand for social occasions and casual occasions is even higher than we had anticipated. So we are going to work to reallocate some of our inventory dollars going into the back half of the year and next year. The goal was to focus on growth and delivering the very best customer experience because we think that we're really in the early days of rental and resale and that the industry is just getting started.

Yes. And Ed, maybe just a little bit more in terms of examples. Even before this restructuring, we had already eliminated significant expenses in CapEx that were originally planned for our budget for this year. Some examples there include getting out of one of our floors in our headquarters, some CapEx planned in our warehouses, and corporate being much tighter in terms of discipline on hiring and backfilling in areas for better growth and customer experience. We're seeing some really nice productivity in our customer service agents as well beyond the volume benefits that we would typically be able to benefit from as well. And then, I would say on a go-forward basis, the $5 million to $7 million reduction in tech and G&A should come from areas like third-party fees, consulting, some tech expenses in discretionary corporate and occupancy-related expenses, and we continue to look at additional opportunities to reduce our expenses.

Ed also asked about the price-value equation. We've been monitoring our customers for pricing sensitivity. We've noted slightly more price sensitivity than in the past, especially given historical patterns of what we've seen during the summer. We've continued to lean into our value messaging and invest behind the customer experience. We have worked to remind our customers how much retail value they're receiving when they rent, how renting is a better financial equation versus buying. Our marketing efforts have been focusing on showing that it doesn't make sense to buy a dress that you will only wear once. We're boosting our total marketing efforts to highlight the value of renting over buying. We think we're still in the early innings of this as part of our core brand messaging.

Thank you.

Thank you. Our next question is from Lauren Schenk with Morgan Stanley. Please proceed with your question.

Great, thanks. I wanted to dig in on the subscriber net adds, if I could. Obviously, lots of different moving parts. But if you had to hypothesize what the one or two largest factors of the June and life slowdown are, what would you say those are? And just on the reserve strength, is there anything further you can share on the profile of that customer during the quarter? Between those customers that were maybe previously subscribers versus new to Rent the Runway? Just trying to understand if there's maybe a bit of a trade-down effect happening there on the subscriber side.

As it relates to performance this summer, we don't know exactly why subs were down. It could be a combination of many factors. Most significantly, it’s becoming very clear to us that our customers live, work, socialize, and travel differently in 2022 than they did in 2019 or throughout the pandemic. This influences what they wear. For example, in 2019, over a third of subscriber activity was related to clothing rented for the office. This year, only 20% of what they wore was related to clothing worn for work. If the return to office maintains the status quo or remote and hybrid work trends increase, our subscription business might become more socially and casually oriented, as it has been in 2021 and 2022 to date. Therefore, we might experience more seasonal peaks and troughs. One reason why we don't have the exact answer right now is that we've seen some positive signs of stability and a strong bounce back in our customer metrics in August and September. While we can't predict what happens in the short term, we're very confident about our prospects over the next few years. We believe this market is in its infancy and that customer adoption of rental and resale will continue to grow. There's much we can control by focusing on the metrics that matter like acquisition and conversion rates, rejoin rates, and customer loyalty in order to more than double the business in upcoming years. Our goal with this restructuring is to secure the strongest possible financial profile to invest in the customer and capture what we think is enormous growth potential. Regarding reserve in the quarter, Scarlett mentioned earlier; both our reserve customers and our subscribers displayed notable usage of special occasion inventory. Subscribers took more formal going-out inventory than we anticipated. We believe this affected our reserve business somewhat. We don't see a trade-down effect happening, as our data shows no differing profiles in our reserve customers. We are observing positive signs of a bounce back in August and September among our subscribers.

Yes. And regarding new versus existing customers, we see a similar proportion this quarter as last quarter of new versus returning customers.

Great. Thanks so much.

Thank you. Our next question comes from Ross Sandler with Barclays. Please proceed with your question.

Hi, guys. Just a couple of follow-ups to the last question, and I think the one before: Did the April price increases have any impact on the June churn that you were talking about or the re-subscriber rate? And then, Jenn, when you talk about macro, do you mean higher gas prices or people getting laid off? I thought we were kind of a great value prop during a tougher consumer pinch given the cost savings here. So yes, just any elaboration on that macro would be great. And then Scarlett, it sounded like the product appreciation would go down to 15% of revenue in that medium-term goal. Is that from better terms in wholesale and exclusives? Or is that a mix shift to Rent the Runway or Share by RTR? Could you walk us through that reduction on that one important line?

Why don't I start off with the product depreciation? We’ve seen that reduce over the last couple of years as a result of having a more appropriately sized revenue to that supply. We've seen a consistent decrease in product depreciation from better matching of supply and demand. Point number two is that we foresee benefits as we shift away from wholesale, which will positively impact product depreciation, particularly because of the lower percentage of wholesale products. As we increase exclusive designs—those have about 50% of the cost of the wholesale item—this helps us. If we see larger volumes, we should also get volume discounting that benefits pricing.

So Ross, regarding the first part of your question, the price increases might have had an impact on churn, but there might also be increased seasonality affecting the near-term numbers. Regarding the macro impact, it's really hard to pinpoint because we saw some weakness in the summer, but recently, we've seen strength. Our objective is to position the company for long-term health so that we can continue driving profitability in lower growth scenarios. We've not cut in areas around growth either—in fact, we are continuing to invest in growth.

Thank you. Our next question is from Michael Binetti with Credit Suisse. Please proceed with your question.

Hi, guys. Thanks for taking my question. I'm curious about ARPU. You mentioned it was up 5% in the quarter on a year-over-year basis, driven by price increases and higher add-ons, given the decline in active subs. Could you break down the contribution by each of the components of the 5% increase? I'm curious which inputs you see as the most sustainable and which were more affected by the macro environment. Additionally, Net Promoter Score was a topic we discussed during the IPO process. Can you speak to trends in the NPS score from the subscription consumer today? They've experienced a lot of changes with the program including the shift from unlimited swaps to sunsetting unlimited swaps, price increases, changes in use cases, and budget pressures.

So regarding ARPU, the price increase is one component we expect to persist. We’ve consistently seen great add-on activity from our subscribers over the full year, typically around 30%. It's early to tell, but it seems to be holding steady. However, we do expect ARPU to drop in Q3 due to a higher percentage of customers seeing a lower price point as new customers enter the program. On Net Promoter Score, it remains stable. We’ve got deeply loyal customers, especially among older cohorts who stayed with us through COVID. While we don’t have any updates specifically on NPS, we do monitor leading indicators. Our continued growth has been organic through word of mouth and positive customer engagement.

ARPU is driven both by the price increase and from the fact that our customers are choosing to pay for more items in their subscription. We’ve observed some of the highest ARPUs ever in the summer despite the seasonal impacts. The 124,000 ending subscribers we had at the end of the quarter were highly engaged with the product. We feel good about the leading indicators of NPS and how customers are engaging with us, falling in love with brands, and that’s why we’re focused on providing the best experience while building these relationships. We’re offering a great product and making it more seamless to use, which we believe will help us continue growing.

Thanks a lot, guys.

Thank you. Our next question is from Rick Patel with Raymond James. Please proceed with your question.

Thanks. Good afternoon, everyone. Could you give us more color on the improvement in subs that you're seeing early in the third quarter? Are you doing anything differently from a marketing or customer experience perspective that's benefiting the business beyond the normal seasonality? And second, what’s your outlook for marketing? You're sticking with the target of 10% of revenue for the year. What’s earmarked for performance spend versus top of funnel? If macro has become more of a headwind, do you see the potential to flex this line to protect your margins?

In a normal year, we would typically see that the summer has lower seasonality for us. This is because during the middle of the summer, many customers are on vacation, engaging more casually. We offer a range of 800 top designers, which means that while we carry casual inventory, customers aren't necessarily thinking much about self-presentation in mid-July. Our marketing hasn't changed from prior years; it ramps up into the fall when everyone returns to life, events, and work. One thing we are emphasizing is value-oriented messaging across all marketing communications, highlighting the value customers receive when renting. For example, in every email, we explain the cost breakdown of their subscriptions versus buying a dress they’ll wear once. We’re reminding customers why renting makes more sense financially, particularly with marketing campaigns that emphasize this message. We foresee strength in our customers using us for social lives and have leaned into that in our marketing. We haven't seen any significant changes from what we originally planned for the summer.

Regarding your second question, the guidance we're providing includes a low and high end—both assume that we would maintain spending at approximately 10% of revenue.

Got it. Good luck as well.

Thank you. Our next question comes from Andrew Boone with JMP Securities. Please proceed with your question.

Thanks for taking my questions. You talked about keeping marketing at 10% of revenue despite seemingly less revenue visibility. Can you talk about the decision to keep marketing at that level in a tougher macro environment? Also, with changes in customer use cases, how do you think about '23 and potentially '24 in terms of maintaining the right inventory levels given the more casual customer?

Marketing is discretionary. If we see signs of negative trends returning, we can cut back as appropriate. For now, we are continuing to invest in growth because we believe significant opportunities exist in the months and years ahead. If we see the same negative trends from the summer, we will react. As for the assortment in '23 and '24, we believe one of the largest changes will be focusing on special events. Subscribers have been utilizing special occasion apparel more than we previously planned, indicating an area for growth, and this will help in managing our inventory for future quarters.

We also see a huge potential in marketing by leaning into special events. Subscribers are taking more special event rentals in the summer, which is an opportunity. We are analyzing our assortment for the upcoming years to incorporate more rental items for social use cases.

I'll also add that we are extremely disciplined with our marketing. We measure our marketing ROI, and we're still seeing it as highly effective. For the time being, we continue investing in marketing because we believe it will drive growth and capture more customers as they discover rental options, both in subscription and reserve.

Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Hi, good afternoon, everyone. As we move through the third and fourth quarter, what do you see as the key differentiating factors this year in Q4 versus last year concerning product? Given you have at-home pickup now, what could be the surprises, one way or the other, on the delta?

As we mentioned for Q3 and Q4, we are taking a measured approach. Despite some positive signs over the last few weeks, uncertainty remains. Q4 may have a similar impact as experienced last year, particularly related to COVID, which could influence outcomes.

Got it. And then on at-home pickup, what have you been seeing there as you expand it from the previous territories?

We achieved the goal of expanding at-home pickup to over 50% of our subscribers two quarters ahead of plan. We've noticed that customer adoption rates continue to improve and that customer satisfaction with the service remains high. This is a win-win for both customers and us. The launch of at-home pickup in Q2, integrated into our app for easier scheduling, enhances convenience for customers when returning items. It’s more cost-effective for us as well. We're consistently focused on customer delight, removing friction from the rental experience, which we believe will ultimately enhance key metrics such as loyalty, helping us double the business in the coming years.

Thank you.

Thank you. Our next question comes from Noah Zatzkin with KeyBanc. Please proceed with your question.

Hi, thanks for taking my questions. To follow up on the reserve again: in regards to your comments around adjusting the assortment for social occasion use cases, has anything changed concerning how you're thinking about the size of the reserve business long-term compared to previous estimates? Also, can you provide more insights into how reserve serves as a funnel for subscription? Any changes in dynamics during the quarter that you expect to persist throughout 2022 and into the longer term?

We believe that the reserve can grow several times its current size. We are planning to significantly increase the percentage of high-formality inventory in fiscal year '23, which should benefit both the reserve and subscription business, as subscribers often rent this inventory as well. We see a robust value proposition for why customers should rent instead of purchase. With billions of dollars of dresses sold yearly in the U.S. for social occasions, we want to capture that demand. Reserve continues to be a straightforward entry point, and we are investing in marketing to emphasize this. Importantly, 50% of our subscribers have previously been reserve customers, showing that reserve serves as an effective funnel into our business.

We have observed positive upticks in reserve customers converting to subscription over the last six months. This trend is encouraging, as it highlights how initial rental experiences can drive customers toward eventually subscribing.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Jen Hyman for any closing comments.

I just wanted to thank everyone for joining us today and listening to our Q2 call. I'm very excited about our plans to accelerate our path to profitability and the long runway for growth ahead. We look forward to continuing to update you on our progress on our Q3 2022 call, and thanks again for joining us.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.