Earnings Call Transcript - RENT Q1 2023

Operator, Operator

Welcome to the Rent the Runway's First Quarter 2023 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would like to now turn this call over to Rent the Runway's General Counsel, Cara Schembri. Thank you. You may begin.

Cara Schembri, General Counsel

Good afternoon, everyone, and thanks for joining us to discuss Rent the Runway's first quarter 2023 results. Joining me today to discuss our results are CEO and Co-Founder, Jennifer Hyman; and CFO, Sid Thacker. During this call, we will make references to our Q1 '23 earnings presentation, which can be found in the Events & Presentations section of our Investor Relations website. Before we begin, we would 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 filings with the SEC, including our Form 10-Q that will be filed in the next few days. We have 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 that's 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 turn it over to Jen.

Jennifer Hyman, CEO

Thanks, Cara, and thanks, everyone, for joining. As I shared on our last call, our 2023 growth strategy is focused on improving our customer experience. To do that, we are focused on delivering more value to customers quarter-over-quarter in the areas that matter to them most. It's an exciting time for Rent the Runway. We're delivering tangible momentum in executing against our customer-centric vision, as evidenced by our strong Q1 results. We delivered a new record active subscriber count of 145,220, representing 15% growth quarter-over-quarter, while posting a beat on the top- and bottom-line. Revenue came in at $74.2 million, a 10% increase year-over-year. We continue to hold our gross margin above 40%, at 42.3%, and posted a strong adjusted EBITDA margin of 6.1%, well above guidance. I'm particularly proud of the progress on profitability metrics paired with strong subscriber growth, because I believe that it demonstrates our ability to manage costs effectively while making important investments into the customer experience. We have conviction that our subscriber growth and margins in Q1 provide a strong foundation towards the goals we shared last quarter, which we are reiterating now, growing ending active subscribers by over 25% and reducing cash consumption by almost 50% in fiscal 2023. We have confidence in these goals because of the laser focus we're maintaining on our customer. Our team has demonstrated agility and is focused on execution. Our customers are beginning to feel a real difference and we're going to spend much of this call detailing some of the key improvements we've made so far this year. Having said that, I also want to emphasize that transforming our customer experience is not a one-quarter endeavor. We will be updating you on impact over the next several quarters. Our goal is to maximize customer love and retention, and we'll do that by making their experience easier, more valuable and more fun. We'll know that we're successful if we inspire more women to buy fewer clothes and rent instead. We see that the market for fashion rental is growing all over the world and believe our opportunity has never been greater. Now I want to talk to you about what our team has already accomplished related to our three customer-centric strategic pillars, which are: one, getting her the inventory she wants when she wants it; two, providing an efficient and easy-to-use experience; and three, offering best-in-class product discovery. These pillars are key due to the frequency with which our subscribers use Rent the Runway. And this is what we have to get more and more right over time. As a reminder, the majority of our team is focused on customer-facing initiatives this year. We kicked off the year by permanently adding an extra item to every shipment of our subscription programs, and we've been happy with the results of our launches since then. One, on inventory she wants when she wants it. In support of getting her the inventory she wants when she wants it, inventory availability continues to be a top priority. We know our customer is here for the fashion and her ability to access it is one of the key ways she evaluates the value of her subscription. We've expanded our ongoing strategy to acquire more of the styles our customers are telling us they want in real time. Because of real-time data signals we get on actual and unmet demand, we are one of the few retailers that is structured to chase and refresh inventory mid-season. This gives our buying team significant leverage on pricing. We believe the next step in this effort will be felt deeply by our customers in the back half of the year as we are focused on significantly increasing depth in the key styles and trends we know our customers want. Next, I want to share some of the actions we've taken in Q1 to make Rent the Runway easier to use for our customers. In early May, we launched a luxury-style concierge service to help new subscribers onboard with Rent the Runway more seamlessly. Rent the Runway Concierge provides free one-on-one interaction via text with our customer service team to help new subscribers get the most out of their membership, from building their first shipment to styling tips or solving a fit or shipping issue. We believe this program has the potential to be an important retention driver. Our customers have incredibly busy lives; 90% of them work, a third have kids, and 85% socialize more than twice a week. So, the easier we make the experience, the more it can be cemented into her life. As we've shared previously, we've enjoyed strong long-term customer loyalty, but we also know that the majority of subscribers who churn do so in their first 90 days. By providing a concierge experience in her early months of membership, we aim to delight her with an effortless introduction to rental. We think this will improve retention and make her a loyal customer sooner. You'll see us integrate this offering more deeply into our product experience in the quarters to come. Next, we're making our site and app faster. As an example, we drove a 48% improvement in average load time on a key entry point into our conversion funnel, which resulted in an 89% lift in conversion on that page. Last, we made two improvements to our delivery and returns experience, that directly speak to the premium level of service Rent the Runway offers. One, we launched a new tool to drive further adoption of at-home pickup, which has led to an increase in in-market adoption of the service by nearly 4 percentage points from the end of Q4 '22 to the end of Q1 '23. Second, last week, we launched Saturday delivery to more than half of our subscribers, a significant unlock for customers who can now receive their deliveries on the weekend. We plan to continue to enhance all aspects of our experience to make it as easy as possible for customers to navigate their subscription. Finally, I'm going to share recent accomplishments related to our strategic pillar on best-in-class product discovery, where our goal is to be even better than a typical retailer and how our customers find the inventory they love. First, we shared during our last call that we launched Rent the Look and Similar Items in late March to enable customers to easily find a complete outfit or a visually similar option based on the styling we provide on our product display pages. The introduction of these features has increased member engagement, particularly when members land on pages with unavailable styles. Now she is served similar substitute items through this feature directly on the product display page, leading to a 34% increase in engagement with substitute items among members. Last, and something I'm personally very passionate about, we're excited to announce that in the coming weeks, we plan to launch an AI-driven search beta. This will allow customers to search common fashion terms or use cases and is intended to make searching our sites more intuitive and natural. For example, she will be able to write 'Miami vibe,' 'clam bake in Nantucket,' or 'tropical motifs,' and our AI-powered discovery engine will serve her relevant inventory. We see this as a first and important step in Rent the Runway using AI models to improve our product experience and we expect to build on this launch in the months and quarters to come. We believe that AI has the potential to directly support our 2023 strategy of delivering more value to the customer and leapfrog ahead of the experience that we deliver today. Fashion as an industry serves to benefit from AI to narrow the endless aisle problem of ecommerce. But we believe that Rent the Runway is uniquely positioned to be a significant beneficiary of AI because of: one, the frequency with which she interacts with our product; and two, our unique and rich data catalog which includes her frequent site behavior and all of the data we gathered from her on fit, inventory quality, occasion and more every time she rents. The majority of subscribers are reviewing more than 10 items per month. This dataset gives us a head start on any future innovation we'll endeavor in the AI space. We also believe that our opportunity in AI is bigger than product discovery. We are exploring how it can impact our concierge experience and onboarding to deliver an even more personalized experience to enhance customer loyalty. And we have the team to do this. We've been harnessing machine learning for a decade, employing data to power personalization within our consumer experience, our operations and across our business. So, we're looking forward to continuing to build this muscle at Rent the Runway. I'm truly energized about the progress we've made so far this year and everything that lies ahead. Most of all, I'm looking forward to continuing to deliver for our customers. And with that, I'll turn it over to Sid.

Sid Thacker, CFO

Thanks, Jen, and thanks again, everyone, for joining us. Since our 2021 IPO, investors have asked us two key questions. First, can Rent the Runway grow? Second, how profitable can the company be? Our first quarter results demonstrate solid progress on both fronts. As Jen outlined, we believe deeply that the customer experience improvements we are making are key to driving improved retention and faster growth. At just over 145,000 ending active subscribers at the end of Q1, we are making progress towards 25%-plus active subscriber growth in fiscal 2023. Our path to profitability is focused on free cash flow. Last quarter, we outlined the almost 50% reduction in cash consumption we expect for fiscal '23. We believe that our margins in Q1 provide a strong foundation for progress towards that goal. Let me now review our Q1 '23 results. We ended Q1 with 145,220 ending active subscribers, up 7.6% year-over-year. Average active subscribers during the quarter were 135,966 versus 125,119, an increase of 8.7% year-over-year. Total revenue for the quarter was $74.2 million, up 10.6% year-over-year. Subscription and reserve rental revenue was $66.8 million versus $61.4 million last year, an increase of 8.8%. As we discussed last quarter, we did see weakness in our reserve business in Q1. Subscription ARPU for the quarter was slightly higher year-over-year, primarily due to the impact of the April '22 price increase, partially offset by changes in program mix and add-on rates. Other revenue was $7.4 million versus $5.7 million last year, growing 29.8% year-over-year due primarily to increased purchases of rental products. Note that the timing of these purchases can vary from quarter to quarter depending on the assortment available for sale. Other revenue represented approximately 10% of revenue versus 8.5% of revenue in Q1 '22. Fulfillment costs were $21.9 million in Q1 '23 versus $22.9 million in Q1 '22. Fulfillment cost as a percentage of revenue improved from 34.1% of revenue in Q1 '22 to 29.5% of revenue in Q1 '23. As a reminder, Q1 '22 results did not benefit from our April '22 price increase. We were able to offset the impact of higher shipped units per order on account of our five-item launch with efficiencies in both processing and transportation costs. Gross margins were 42.3% in Q1 '23 versus 33.5% in Q1 '22. Q1 '23 gross margins reflect the impact of the April '22 price increase, the fulfillment cost improvements discussed above, as well as lower product depreciation due to the continued impact of product acquisition mix changes towards more efficient channels. As expected, gross margins were lower than Q4 '22 levels due to seasonally higher product acquisition we typically see in Q1 and Q3. Operating expenses were 5% lower year-over-year and about 13% lower year-over-year before stock-based compensation, primarily due to the favorable impact of our 2022 restructuring plan. We continue to expect about $25 million in restructuring-related savings in fiscal '23 compared to the Q2 '22 run rate. Total operating expenses, including technology, marketing, G&A, and stock-based compensation, were 66% of revenue versus 77% of revenue last year. Adjusted EBITDA for the quarter was $4.5 million or 6.1% of revenue versus negative $8.8 million and negative 13.1% of revenue in the prior year. Adjusted EBITDA margins reflected strong cost discipline that allowed us to offset investments made to improve customer experience. Free cash flow was negative $12 million in Q1 '23 versus negative $28 million in Q1 '22. We continue to expect significant improvement in cash consumption in fiscal '23. Let's turn to guidance. For the full year, we continue to expect revenue of between $320 million to $330 million, and ending active subscriber growth in excess of 25%. We are also reiterating our full-year adjusted EBITDA margin guidance of 7% to 8% of revenue. Our guidance on cash flow remains unchanged and we expect to reduce cash consumption by almost 50% to below $50 million. We are updating our fiscal 2023 product spend expectation to $74 million to $76 million from $69 million to $72 million, as we are seeing increased opportunities to purchase high-quality styles from top brands at deep discounts. Finally, there is no change to our expectation for gross margins to be slightly lower on a year-over-year basis. We expect Q2 revenue to be between $77 million and $79 million. This represents about 5% growth sequentially versus Q1 '23 and approximately 2% growth versus Q2 '22 at the midpoint of the guidance range. Let me talk about the factors affecting Q2. First, as some of you may have noticed, we are experimenting with being less promotional with our new customer offer pricing. We think this will improve retention and allow us to invest in improving the customer experience. We do expect these experiments to reduce acquisitions in the short term, especially in our lower priced programs. As a result, we expect lower ending active subscribers in Q2 versus Q1. We think these are the right decisions for our customers and have factored these changes into our full year guidance of 25%-plus subscriber growth. Second, both sequential and year-over-year growth are expected to be negatively impacted by the decline in the reserve business. Finally, we also expect other revenues to be relatively flat quarter-over-quarter due to higher units sold in the first quarter of this year. Q2 '23 adjusted EBITDA margins are expected to be between 7% to 8% of revenue as we expect a higher revenue base versus Q1 to improve leverage on our fixed cost base. I'd like to end by saying that we remain confident in the trajectory of our business, and we have a very clear sense of how to improve the customer experience. The second half of fiscal '23 should see us make significant progress across inventory, onboarding, and product initiatives. We believe these changes will be noticeable to our customers and make it easier for them to find and experience our inventory and product in a more seamless manner. With that, we're happy to open it up for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Rick Patel with Raymond James. Please go ahead with your question.

Rick Patel, Analyst

Thank you, and good afternoon, everyone. I have a question on 'getting better at giving customers what they want, when they want it.' How do we think about this from an inventory management perspective? Does it mean that you'll be buying more inventory as you get a read on fashion? Does it mean that you'll be leaning more on your share by RTR partners? Just curious how to think about the mechanics of chasing high-demand products? And as a follow-up, what are the financial ramifications from ramping up this initiative on gross margins and working capital?

Jennifer Hyman, CEO

We are addressing this issue in two main ways, which you have seen in our deployment during Q1 and early Q2. The first way involves leveraging real-time data signals to understand what products are performing well and in high demand. This allows us to respond quickly, set competitive pricing, and reorder aggressively for our top styles. Our business model enables us to monetize inventory over three or more years, rather than being confined to the traditional 12-week full-price selling calendar. The second aspect focuses on increasing the depth of styles we offer. Our customers have preferences for certain styles, and we want to provide them with more opportunities to access those products frequently. We are making significant changes to enhance the variety of styles we acquire from our partners, which should be evident in the second half of this year and positively impact customer experience. We have a strong understanding of our customers' needs, and we are now seeing an increase in usage for workwear, weekends, and special occasions in this post-COVID world. Therefore, we are working on expanding the range of styles that are most important to our customers.

Sid Thacker, CFO

Yes, Rick, and thanks for the question. I think in terms of the financial impact of this move, look, it's obviously, number one, factored into the guidance that we have provided for product spend this year. But more importantly, I would say we always face this trade-off, right? How many styles do we want to buy and then how many units of each style that we want to buy, right? So, there is no additional dollars that are required to optimize for depth. I mean, we have a tremendous amount of data when we look at how easy it is for a customer to find items on our site. What is the impact of depth going to do to those metrics? And part of the reason we feel very optimistic about the 25% subscriber growth guidance is we know we have very significant improvements in the customer experience coming as it relates to inventory, because of these optimizations on depth and breadth that Jen mentioned.

Rick Patel, Analyst

Thanks very much. All the best.

Operator, Operator

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

Andrew Boone, Analyst

Good afternoon, and thanks for taking my question. I'd like to talk about the guide for 2023. Just given the guidance for 2Q and thinking about the back half of the year, can you talk about your confidence in the reacceleration of subscriber growth to hit that 25%-plus number?

Sid Thacker, CFO

Sure. I think we need to reflect a bit. This year was always meant to be divided into two halves. When we provided guidance last quarter, we indicated that revenue growth in the latter half of the year was expected to be much stronger than in the first half. We still believe that's true. Our confidence in this year’s growth is primarily based on two factors: firstly, we've had a strong start to the year; and secondly, we have confidence in the data supporting our key initiatives for the back half. We believe that significant changes in inventory will be important because customers come to Rent the Runway to find the products they want. If we simplify the process of finding and interacting with our website, it will enhance customer retention and loyalty. Another important improvement we’ve made is in our personalized onboarding and RTR Concierge service. Since 55% of subscribers leave within the first 90 days, it’s crucial to address the challenges they face during that period. We're offering a personal SMS-based service that acts like a personal stylist, and we’re seeing positive feedback from customers. Overall, we believe the planned product improvements for this year will help us achieve our goal of 25% subscriber growth.

Jennifer Hyman, CEO

Yes. I think our results in Q1 show that the strategic pillars that we outlined this year are working, and they are being felt by the customer. And I think more importantly, what you're seeing across the organization is you're seeing an agile organization that has an execution orientation. So, we've actually done a lot over the first four months of the year. We've launched a lot. We've iterated a lot. And this was within a plan where we knew that the majority of the transformative product experiences would really be showing up in the back half of the year. So, we already feel good about how the customer is experiencing Rent the Runway differently to date, and we know that we have some really exciting things lined up over the next few months.

Andrew Boone, Analyst

Jen, I wanted to ask specifically about AI to that last thing that you said. I think you talked about AI as a first step. Can you talk about the vision in terms of how AI can be incorporated more broadly across the platform, just a little bit more beyond search? Thanks so much.

Jennifer Hyman, CEO

Yes. First, I want to discuss AI and its potential impact on the fashion industry. Fashion e-commerce often presents a challenging experience for customers, who must navigate through numerous pages to find items they like, which no one enjoys. As an industry focused on physical products, fashion will significantly benefit from AI. Rent the Runway stands out from traditional fashion retailers for two reasons. First, our customers engage with us frequently, making it essential to streamline their experience compared to those who shop at retailers once or twice a year. When we create a seamless experience for our regular users, it is even more valued. Secondly, our frequent interactions allow us real-time insights into their preferences, including what they liked or disliked about recent items and how they plan to dress in the near future. This data is unique and can enhance our AI capabilities. If we leverage AI effectively in the coming years, there may be no need for customers to visit our website at all. Currently, customers can text our Concierge for support, and we are launching a beta for AI search in the coming weeks, focused on innovative ways to discover products. Our long-term vision is to combine these elements, enabling customers to communicate with a stylist who can assist them with inventory selection, problem-solving, and inquiries, all at their convenience. We are excited about the beta launch ahead. Additionally, the typical way people search for products across fashion sites globally is quite basic. Users can search for specific items like T-shirts or formal gowns. However, we will empower our customers to search in ways that reflect their personal style and upcoming events, such as finding items for a beach bonfire. This different approach to searching truly highlights the value proposition of a cloud-based closet, and we are very enthusiastic about it.

Andrew Boone, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Ike Boruchow with Wells Fargo. Please proceed with your question.

Unidentified Analyst, Analyst

Hi. Good evening, everyone. This is Kate on for Ike. Congratulations on the improvements in retention in Q1. I guess just first, Jen, we're now three months post the extra items announcement. You guys obviously had a lot of initiatives in place to improve the customer experience. I am curious with this latest cohort. If you can share any more color or numbers behind what you are seeing from a retention basis out of that tranche of consumers? And then, Sid, you noted your confidence in the active subs accelerating into the back half. Just from a seasonality perspective, just looking back the last few years, you guys have tended to lose active subs quarter-over-quarter in Q4. Just anything we should consider between 3Q and 4Q, especially as you're more confident behind some of these initiatives around subscriber growth? Thank you.

Jennifer Hyman, CEO

Yes. So, to address the first part of the question, through Q1, we saw better churn, better rejoin rates, and better conversion rates. And as we get further away from the launch, it's harder to say what's related to the five-item versus other experience improvements that we're making across the board, but we feel really great about what we saw in Q1.

Sid Thacker, CFO

Yes. And in terms of active subscribers, look, you got 100% right. Last year, we did see a decline in Q4. I mean, if I look at the pacing of product improvements and the inventory build that we have this year, I feel very optimistic that the entirety of the second half is going to be positively affected by that, right? So, I'm not going to sit there and guide necessarily to what Q4 is going to look like relative to Q3, except to say that we've already provided a confident outlook in terms of plus-25% subscriber growth. So, we'll leave it at that. So that's what we expect to hit. And I think we feel, given the product improvements we have, very confident in that outlook.

Unidentified Analyst, Analyst

Great. Thanks very much.

Operator, Operator

Thank you. Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed with your question.

Eric Sheridan, Analyst

Thanks so much for taking the question. I want to know if we could maybe just talk about the broader environment that you're operating in generally. We've talked in the past about return to work, the return of big events, elements of possible rationalization of spend by the consumer and shift into a model like yours and away from a purchase model. Can you just give us a sense of where we can level set in terms of the thinking around the headwinds and tailwinds you face in the business as we go deeper into 2023 across those themes that we've talked about before and how those might impact elements of paused subscribers or net adds or purchasing behavior? Thanks.

Jennifer Hyman, CEO

Yes. So, first, we're not seeing evidence based on our acquisition numbers that we were impacted by the macro environment in Q1. So, we're confident that we know what we need to do with this business. The strategic pillars are in line with things that our customers care about. We made huge progress in Q1, and clearly, we're reiterating our guidance for the year. So, some things that we are seeing that could be very positive for Rent the Runway is we're seeing demand for workwear continuing to increase and demand over-penetrates into workwear relative to active units on our site, very similar to pre-COVID for the first time since COVID has occurred. And so, we think that because of the macro environment as CEOs are calling their workforce back into offices and demanding more that they're there, that this is a very positive tailwind for our business. And it feels great to see workwear back up to similar utilization than we saw pre-COVID.

Sid Thacker, CFO

I believe it's important to address the macro environment, which is currently uncertain. However, we remain optimistic for two key reasons. First, we are tackling issues that our customers have expressed concern about. Second, we have data that supports the effectiveness of our decisions. For example, we are currently implementing the concierge service and have real-time data on sign-ups and the positive impact of our improvements on customers. The focus now is on how many customers we can enroll and the time it will take. We're observing continued data that indicates enhancements to the customer experience. Additionally, inventory management is critical this year. Once we optimize our inventory actions, we can predict how customers will feel about the availability of items on our site, based on historical data. We understand how a customer is likely to respond and their loyalty will increase with better availability. The user experience on our site is becoming more enjoyable and efficient. These improvements are based on solid data, not guesswork. It is purely a matter of executing our plans effectively and benefiting from the actions that resonate with our customers.

Jennifer Hyman, CEO

Yes. We just see this as a market that's growing. We think that rental continues to offer tremendous financial value, whether you're renting a-la-carte or you're subscribing, and our goal is to focus on making our customer experience as positive as it can possibly be and to continuously improve it quarter-over-quarter in a market where there are more customers who are considering rental than ever before.

Eric Sheridan, Analyst

Great. Thank you for the color.

Operator, Operator

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

Ashley Helgans, Analyst

Hey, thanks for taking our question. Anything you can tell us on the composition of subscriber growth trends? Are you activating more reserve users or seeing new subscribers coming to the platform? Thanks so much.

Sid Thacker, CFO

Yes, we have identified the weaknesses in the reserve business, which have impacted our performance this year. However, we are seeing increased activity among returning customers and new subscribers. This is linked to two key factors. Firstly, more customers are opting for rentals, leading to a positive trend in new sign-ups. Secondly, loyalty has become a significant contributor to our success in the first quarter and is expected to continue driving performance throughout the year. Overall, it’s a combination of attracting new customers through rental options and maintaining strong retention levels from Q1.

Ashley Helgans, Analyst

Thanks.

Operator, Operator

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

Nathan Feather, Analyst

Hey, this is Nathan Feather on for Lauren. Two quick ones for me. So, first, how is inventory utilization trending with the launch of the five-item plan? And do you feel you have the right mix of inventory or anywhere you see a material gap that you're trying to fix? Thank you.

Jennifer Hyman, CEO

So, as we anticipated, inventory utilization has increased due to the launch of the five-item plan. We're recognizing an opportunity in workwear and are increasing our purchases in this category by 50% compared to last year. Utilization aligns with our expectations prior to the five-item launch. We're also seeing strong utilization in weekend wear and accessories, and these are the areas where we've invested our reorder dollars to access more styles.

Nathan Feather, Analyst

Great. Thanks. And then, good to hear the improvements in churn and rejoin rate. I guess, just thinking about the split between existing and new cohorts, was there any big divergence in trends between those two?

Sid Thacker, CFO

Ultimately, retention is very important to us for ensuring the long-term growth of our business. It's worth noting that 80% of our customers come to us organically, and 60% come because they've heard about us from someone they know. Our strategies are focused on improving the customer experience to ensure they are delighted and talk about us. This not only has a positive mathematical impact on subscriber growth this year, but it also contributes to sustained growth over time as our customers share their positive experiences. Loyalty and our initiatives are backed by substantial data, which reinforces our approach.

Nathan Feather, Analyst

Great. Thank you.

Operator, Operator

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

Ross Sandler, Analyst

Hey, everyone. How do we feel about our current position regarding the high demand this season, specifically in terms of SKU depth and availability? Is everything fully optimized and established at this point, or, Sid, you mentioned investments for the second half related to this. When do we anticipate being in the right position to align the size of the subscriber business with our inventory?

Jennifer Hyman, CEO

Yes, I think customer is going to start to feel a major difference as it relates to inventory availability starting in August, because we made a significant change in our depth strategy for the second half of the year. So that's when she is going to feel that she is getting more of the items that she hearts, she is finding that more of the items are in stock for her. In terms of AI, you correctly pointed out that AI for us helps to even further leverage the long tail. If you think about, what I mentioned, how cumbersome any e-commerce experience is, of just passing through many, many pages of results, and on Rent the Runway, there's hundreds of pages per search result, it could be for you clicked blazers, et cetera. And so, to be able to actually have a query that's related to something that's going on in your life, like, what to wear to the University of Michigan Tailgate this weekend? Like, you're going to see this long tail of styles that might have taken you many pages of looking at hundreds of products otherwise. So I think that this can help in product discovery.

Operator, Operator

Thank you. Our next question comes from Ed Yruma with Piper Sandler. Please proceed with your question.

Ed Yruma, Analyst

Hey, good afternoon, guys. Thanks for taking the questions. I guess first on reserves, just want to click down on that a little bit more. I know you guys are obviously facing some tough compares there. Has inventory been an issue there? I know it was through part of last year. And then, I guess just kind of stepping back and maybe as a follow on to the AI question. I guess, how do we think about the rate by which you can bring some of these innovations to the market? I know you indicated you're going to have kind of a soft launch in a couple of weeks. But should we think about this as being kind of a couple of quarter phenomenon, or do you think you can implement on these AI search functions relatively quickly? Thank you.

Jennifer Hyman, CEO

So, in terms of AI, I think that whatever we do launch will be in beta and we'll continue to iterate and improve it over time. I think AI is so new to everyone. And I think that what I'm excited about is how quickly we've been able to leverage our data here and create a product that we think is going to make a nice difference to product discovery, and we'll just continue to make that better over time.

Sid Thacker, CFO

Yes. And on the reserve, I think, look, it's a fascinating question. So, as indicated last quarter, we've been very focused on driving our subscription business. So, everything we did on marketing, on brand messaging, all reflecting that focus on subscription, particularly with the recent five-item launch in Q1. But having said that, we think internally see a real opportunity to grow our reserve business over time, and they're not mutually exclusive business, right? So, we're working on plans that involve both inventory and product that re-energizes our offering and obviously, none of that is factored into the guidance and the expectations for this year, and we've just reflected a continuation of trends, but over time, we feel pretty optimistic about our ability to re-energize that business, have it continue to serve us quite positively actually.

Ed Yruma, Analyst

Thank you.

Operator, Operator

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

Jennifer Hyman, CEO

Thanks so much for joining us today. I'm really 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 Q2 2023 call in September. And thanks again for joining us.

Operator, Operator

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