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Earnings Results: Rent the Runway executives thought people were ready to dress up again, but it looks like they were wrong

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Online clothing-rental platform Rent the Runway Inc. on Monday announced plans to slash corporate staff after summer-season demand wobbled and remote-work trends endured, and shares plunged more than 20% in after-hours trading.

“Starting in mid-June, we noticed an increase in subscriber pause rates and a decrease in retention, along with a delay in former subscribers rejoining versus history,” Chief Executive Jennifer Hyman said on Rent the Runway’s
RENT,
+10.04%

second-quarter earnings conference call Monday.

Active subscribers for the second quarter came in at 124,131, down from 134,998 in the prior quarter. Analysts on average had been expecting 144,000 subscribers, according to FactSet. Rent the Runway said the cuts were intended to protect itself against “potentially rougher macro conditions.”

Just three months ago, executives had expected to take advantage of shoppers rethinking their wardrobes as they returned to offices, concerts, dates, weddings and other social gatherings in the third year of the COVID-19 pandemic.

During Rent the Runway’s last earnings call, Hyman said customers were using cocktail dresses and black-tie dresses at a higher rate than at any point in the company’s history. She said customers, while returning to the office, were only going in two or three times a week, meaning there was less reason to buy new work clothes. And she said shoppers were making bolder, more colorful fashion choices — beyond business suits and athleisure.

CFO Scarlett Brillet O’Sullivan had a different update Monday, though, saying “higher remote trends may have contributed to the demand impact we experienced this summer,” potentially reshaping seasonal subscription patterns.

In the second quarter, Rent the Runway recorded quarterly sales of $76.5 million, up 64% from $46.7 million a year ago, while losing $33.9 million, or 53 cents a share. Analysts polled by FactSet expected Rent the Runway to lose 65 cents per share on sales of $73.6 million.

In their second-quarter earnings release, executives described the job cuts as part of a plan to reduce operating costs by up to $27 million in fiscal 2023. In response, the company’s leaders raised their annual adjusted-margin outlook, but cut their full-year sales forecast.

“We believe the $25M-$27M in anticipated annualized fixed-cost savings we’ve announced help ensure RTR can navigate potentially rougher macro conditions, while also allowing us to significantly improve our medium-term profitability,” according to the announcement.

Rent the Runway executives said they expected to “substantially” complete the restructuring plan by the end of the fourth quarter.

Executives raised their full-year adjusted EBITDA margin forecast to a range of zero to negative-2% of revenue, while reducing their sales guidance to a range of $285 million to $290 million from a forecast of $295 million to $305 million provided in June.

Rent the Runway shares have declined 54% so far this year, while the S&P 500 index
SPX,
+1.06%

has fallen 14.7%. After closing with a 10% gain at $4.93 Monday, shares dived lower than $3.80 in the after-hours session.

Need to Know: This superbull at JPMorgan who called the summer rally sees a soft landing ahead. Here’s his advice on stocks and oil.

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