Rent the Runway Inc
NASDAQ:RENT
Earnings Call Analysis
Q3-2024 Analysis
Rent the Runway Inc
Rent the Runway ended Q3 2023 with $312 million in debt, a significant amount relative to its equity. Changes to debt terms are expected to pause the increase in total debt and reduce interest expense by $66 million over the next six quarters. This strategic financial restructuring aims to bolster investor confidence and address concerns over the company's market viability. Despite flat revenue around $300 million for 2023, the company experienced customer growth limitations due to inventory depth issues. These issues have since been mitigated, as evidenced by a 40% decrease in churn due to stock availability and a noticeable increase in rental satisfaction rates. The company also noted strong performance in its exclusive designs and newly introduced luxury category, 'The Vault.' Revenue per user and loyalty are up, and the business is strongly directed towards achieving breakeven free cash flow in 2024, even in a no-growth scenario.
Despite revenue being flat this year, Rent the Runway has made substantial improvements to its financial model that may not be readily apparent. Improvements include sourcing inventory through cost-advantageous channels, maintaining year-to-date gross margins around 40%, and reducing the fixed cost base by $27 million from the Q3 2022 restructuring program. These efforts, combined with no planned interest expense for fiscal year 2024, are reinforcing the company's path to free cash flow breakeven by the next fiscal year.
Though specific Q4 projections were not extracted due to tool errors, based on the preceding sections, the management's tone suggests cautious optimism. The company is realigning its promotional strategies, leveraging inventory more efficiently for resale, and emphasizing the successful try-before-you-buy program to boost loyalty and margins. Inventory spend is slated to drop below the originally forecast $80 million for the first half of fiscal 2024, thanks to strategic partnerships and cost-saving measures.
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Welcome to Rent the Runway Third 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. '[Operator Instructions]'. As a reminder, this conference is being recorded. I would now like to turn the call over to Rent the Runway's General Counsel, Cara Schembri. Thank you. You may begin.
Good afternoon, everyone, and thanks for joining us to discuss Rent the Runway's Third Quarter 2023 Results. Joining me today to discuss our results for the quarter ended October 31, 2023, our CEO and Co-Founder, Jennifer Hyman and CFO, Sid Thacker.During this call, we will make references to our Q3 '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 within 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 to our investor website and in our SEC filings. And with that, I'll turn it over to Jenn.
Hi, everyone, and thanks for joining. With a sub-dollar stock price and very little support from the public markets, my goal this evening is to address the elephant in the room when it comes to Rent the Runway, with transparency and convey that we believe that we have reached a positive important turning point where our business can hopefully start to be evaluated on its strong business model and the vast opportunity ahead of us as opposed to our challenged balance sheet.As of the end of Q3 2023, Rent the Runway had $312 million of outstanding debt, which obviously is a large amount, especially compared to our current equity value. Before COVID, Rent the Runway held significantly less debt with a sizable portion of it at low rates via an asset-backed loans, which use our inventory as collateral.After COVID hit in mid-March 2020, we needed to move very quickly to refinance to secure the business and address the fact that our inventory was now being appraised at a small fraction of its pre-COVID value, and we faced serious consequences under the term of our ABL. This pressure, alongside our precipitously declining revenue due to COVID lockdowns meant that we had to take on a higher quantum of debt at high PIK to save the company and repay our ABL.While the debt amount was always in our view high, it was essential to stabilize the business for the duration of the pandemic and support our post-COVID recovery, and it felt manageable at a $1.7 billion IPO valuation.I believe it's clear based on many conversations with public investors that a key reason why our stock prices declined into sub-dollar territory is because of this debt. Because of our balance sheet, we believe that the market lacks confidence in our viability.Today, we are announcing significant modifications to our debt terms that we believe provide meaningful flexibility and will allow the company the opportunity to generate significant free cash flow before the debt maturity date. First, both PIK and cash interest have been eliminated for 6 quarters, beginning with Q4 2023, reducing total interest expense by $66 million over this period, $18 million of which is cash interest. This means that the debt will remain flat at $312 million during this period, which is intended to allow equity value to accrue as we grow and to reduce drain on company cash while we are driving the business to free cash flow breakeven.In addition, the minimum liquidity covenant has been reduced from $50 million to $30 million, which provides additional cushion even in significant downside scenarios. We have also mutually agreed on spend caps in fiscal year 2024 for inventory CapEx, marketing and fixed operating expenses, which align with our profitability goals. I encourage you to read the full details of the amendment that has been filed in a Form 8-K prior to this call.While the quantum of debt still needs to be addressed, we believe that these modifications provide significant breathing room while we are laser-focused on significant free cash flow generation, improving the strength of our business model to the market.Simply put, don't believe everything you read in the press, Rent the Runway is here to stay, and I am confident that 2024 is going to be a big year for us. The other significant elephant in the room has been a question mark as to whether Rent the Runway can grow. The market has lacked confidence in our growth opportunity because the business is expected to be more or less flat this year at around $300 million in revenue.I want to be clear that we believe our lack of growth in 2023 is a temporary problem primarily driven by the inventory depth issue that we explained in detail last quarter. Lack of depth in the style customers wanted to rent led to elevated rates of churn. And as a result, we enacted strategies to pull back acquisitions while we solve this problem.In great news, the actions we have already taken to fix our assortment and greatly improve inventory depth in the second half of 2023, have already made marked improvement on our customer experience.We are seeing positive green shoots and momentum in the most important input and output metrics of the company, including subscription Net Promoter Scores, that are both the highest we've seen since pre-COVID and that continue to climb weekly. Global churn is down since last quarter and the churn of our post 90-day subscribers is amongst the lowest levels we've seen since Q4 2021, with higher NPS and higher loyalty, we believe that our positive customer growth flywheel can be reengaged.As a result, we're highly confident that we're on the right track. We believe we're focused on the right priorities in 2023 to fix the foundations of our customer experience, and we want to update our commitment to being a fully cash flow breakeven business in 2024.I want to be clear, we are laser-focused on driving this business to free cash flow breakeven next year. That's why we are setting up a cost structure that is designed to enable us to do so even in a zero growth scenario. Zero growth is clearly not our goal, but we think best to plan conservatively when it comes to cost. I firmly believe that creating a sustainable business will enable us to control our own destiny and capture as much of the large rental market as possible over the upcoming years.The rental market continues to grow at a clip far faster than the overall fashion market in the U.S. and around the world as demand for subscription to fashion and normalization of rental has never been higher. While we believe there will be many winners, we have generated the highest revenue of any fashion rental platform, and we believe this is due to our positioning as the premium service for the more premium professional customer with the premium brand relationships. Regarding this quarter specifically, we met expectations on the top and bottom line. We ended the quarter with an active subscriber count of 131,725. We shared with you last quarter that we plan to make deliberate choices that we anticipated would negatively impact short-term revenue and subscriber count to drive profitability.We believe that the sub count is a result of our strategic decisions to hold the line on lower promotions and lower marketing spend to prioritize inventory in stock rates. In other words, we acquired fewer customers by design, but the customers we have acquired are more profitable.As we shared last quarter, for Rent the Runway, our customer experience is all about her ability to access the fashion she wants when she wants it, which is where our focus on inventory depth and in-stock rate comes into play.The fashion informs her satisfaction with and loyalty to our offering. Thus far, in the second half of '23, we've improved the fashion on our platform in terms of depth, selection that is significantly more aspirational and versatile and importantly, in line with what our core professional female customer is looking for.The green shoots we are seeing in the data are as follows. First, as we've shared, the most important component of our inventory strategy is greater investment of depth of styles and brands we know she wants, so, we are in stock more of the time. We told you the depth of our second half '23 buys were expected to be approximately 1.7x the depth of our first half buys, which would increase our in-stock rate by 700 to 1,000 bits.We have over-delivered against our plans. As of Q3, in-stock rate was 1,400 basis points higher than Q2 and 1,200 basis points higher than Q3 last year, contributing to increased customer satisfaction and retention rates.Beyond buying at greater depths, there have been several additional important strategies we have deployed to improve the customer experience with fashion on our platform, including consolidating key styles by Warehouse, better site and app merchandising and creating a unique onboarding experience for early term subscribers.Loyalty is highly correlated to in-stock rates, and we have early data to show that the focus on depth is working. As of October, inventory as a reason for churn has gone down by 40% over the past 6 months. Additionally, for rental satisfaction rate has increased year-over-year. Not only is it easier for her to rent the item she wants, the assortment is resonating with her even more. Hearts on our new inventory are over 30% higher this year over last year.Workwear is a key driver of this satisfaction. Utilization of workwear is 1,000 basis points higher than last year, which is great for our business as there's less seasonality involved in people who use our service to dress for work. We're also seeing that paid add-on rates have gone up as in-stock rates have improved and are at the highest level since before we launched our extra item plan.It's great that when our inventory availability is higher, she will pay more to get more of it and ARPU increases. We're also pleased with our purchase rate this past quarter. We think that one of the most compelling elements of our business model for customers and for us financially is when customers use their subscription to try pieces and then purchase them from us when they already have them at home. In Q3, purchase rate is up 50% in units sold versus last year, indicating that the pricing and assortment is resonating, and we are getting better at positioning try-before-you-buy as a key value proposition of having a subscription with us.We think about the try before you buy channel as a retail 2.0 experience where we are bringing the store directly into the customer's home. In a dressing room, she tries out the product and get a brief sense of fit and aesthetics. But with Rent the Runway, she experiences how the product fits into her life, received validation from people she knows and determines whether she wants to make it a permanent part of her closet.The vast majority of these at-home sales have recovery rates far above what we paid for the item. And we see higher loyalty rates and subscribers who purchased from us. Expect us to continue to push on this developing channel in a much bigger way in 2024. Next, Exclusive Designs, continues to be beloved by our customers as evidenced by utilization, wear rate and love rate all up year-over-year. As a reminder, we create these designs in close collaboration with brand partners and leverage our own unique data.Today, just in time for holiday, Rent the Runway introduced the Vault. A new category of luxury evening wear styles from 20 of the top brands in fashion, including many new-to-site designers like Etro, Oscar de la Renta, Brandon Maxwell, Ana October, Giambattista Valli, Rachel Gilbert, Paris Georgia and more, available exclusively for 4 and 80 rentals.We view this launch of luxury as a key step in reinvigorating our special events rental business, which was always based on renting aspirational brands that you couldn't afford or didn't make sense to buy and solidifying our premium positioning in the market. Overall, our brand relationships continues to be one of the rebounding strengths of our business model. Even in this complex macro environment, Brand CS is a powerful marketing partner. The new designers, I just mentioned, are a testament to that.Over the past few years, we have managed to continue reducing the input cost per unit while increasing the MSRPs of the fashion on our site. Simply, our costs are decreasing, while the aspiration and premium nature of the assortment is increasing.Our pay-for-performance revenue share model continues to scale in terms of the number of partners and in the percentage of the overall buy. Based on our bias to date, we currently expect that in the first half of '24, that almost 50% of our inventory acquisition will be acquired via paper performance.Beyond our success in our inventory pillar, the teams have continued their work across our other strategic pillars, efficient and easy to use experience and best-in-class product discoveries. We are pleased with the strides we have made across the Rent the Runway ecosystem and are offering a high-touch luxury style experience that we believe our customers are noticing. Related to an easy-to-use experience, our SMS-based styling and support service, Rent the Runway concierge, has reached an all-time high adoption rate with over 30% of new subscribers opting in as of the end of Q3.We have seen sustained retention improvements not only for customers who use concierge in their first 30 days, but also in their second and third months with us. Early term customers who opt in to concierge have 15% lower churn rate than those who do not. So, our plans are to continue to scale this program.Our in-product onboarding is also seeing encouraging results. 95% of new subscribers completed, leading to a 33% drop in the time it takes her to place her first order. That means she has more than a month to enjoy her Rent the Runway items. We've come a long way in 2023 and feel excited about the path ahead.
Thanks, Jenn, and thanks again, everyone, for joining us. While we met our third quarter guidance, as Jenn mentioned, we're disappointed with revenue that will essentially be flat this year in a growing cash and rental market. Despite this, we have continued to make underlying improvements to our financial model that may not be as apparent.In the context of our rental product issues this year, it's easy to overlook that most of our rental product today is procured using cost-advantaged non-wholesale channels. Due to the near-term gross margin impact of rightsizing our inventory debt, it's easy to overlook that our year-to-date gross margins of approximately 40%, including both product and fulfillment costs point to strong underlying unit economics.It's also understandable that both our $27 million reduction in the fixed cost base from the Q3 '22 restructuring program as well as the incremental $5 million in annualized fixed cost reductions this quarter, might go unnoticed. These building blocks in combination with our current plans give us confidence that Rent the Runway is on track to reach free cash flow breakeven in fiscal year '24. We expect to bring our business to breakeven sooner and at a far lower level of subscribers than we had initially announced. As we plan to outline next quarter, many of the actions that allow us to reach this milestone have already been taken.Our rental product spend is known and is expected to be considerably lower than fiscal year '23 levels that were impacted by the need to make inventory debt adjustments. We have reduced our fixed cost base in the third quarter and expect to continue to find ways to optimize this further.Our transportation expenditures have good visibility. The balance sheet actions we announced today results in no interest expense for fiscal year '24. Do not assume that significant growth is required to reach our free cash flow goal. Let me now turn to our Q3 results. This is 131,725 ending active subscribers, down 1.9% year-over-year. Average active subscribers during the quarter were 134,646 versus 129,186 subscribers in the prior year, an increase of 4.2%. Ending active subscribers declined from 137,566 subscribers at the end of Q2 2023.As previously disclosed, we tested varying levels of promotions during Q2 and decided to be much less promotional in Q3. Our lower Q3 ending subscribers primarily reflected these promotional pets ending in Q2 and lower ongoing new customer promotions during the third quarter.Total revenue for the quarter was $72.5 million, down $4.9 million or 6.3% year-over-year. Revenue in Q3 '22 benefited by approximately $1.6 million from our exclusive design pilot program with Amazon.Subscription and reserve revenue was $64.7 million versus $68.8 million last year, a decrease of 6%, driven by continued weakness in our reserve business and lower average revenue per subscriber.The lower average revenue per subscriber was primarily driven by fewer full-price subscribers from the promotional testing previously discussed, along with expected declines in add-on revenues year-over-year. These declines were partially offset by higher average revenue per subscriber due to lower new customer promotions.Fulfillment costs were $21.5 million in Q3 '23 versus $23.2 million in Q3 '22. Fulfillment costs, as a percentage of revenue, was slightly lower year-over-year at 29.7% of revenue in Q3 '23 compared to 30% of revenue in Q3 '22.Fulfillment costs, as a percentage of revenue, was flat to Q2 '23, despite higher new receipt processing costs. Fulfillment costs benefited from a new transportation contract with UPS, which locked in competitive rates and consolidated the vast majority of our shipping needs. Gross margins were 34.8% in Q3 '23 versus 41.1% in Q3 '22. Q3 '23 gross margins reflect higher rental product costs due to increased investment in inventory year-over-year. The increased investment year-over-year is largely a onetime correction of inventory depth to increase inventory in soft rate, which are essential for fueling customer satisfaction and growth.Gross margins were negatively affected by approximately 400 basis points versus Q2 '23 due to seasonally higher revenue share expenses attributable to new receipts. Operating expenses were about 11% lower year-over-year, primarily due to the favorable impact of our 2022 restructuring plan, further fixed cost actions we have taken this year and lower marketing spending.Total operating expenses, which include technology, marketing, G&A and stock-based compensation, were about 60% of revenue versus approximately 63% of revenue last year. Adjusted EBITDA for the quarter was $3.5 million or 4.8% of revenue versus $6.6 million and 8.5% of revenue in the prior year. In Q3 2022, adjusted EBITDA benefited by $4.6 million from the launch of the Exclusive Design pilot with Amazon and significantly higher inventory liquidation to third parties.Adjusted EBITDA was $4.2 million lower in Q3 2023 versus Q2 2023, largely due to seasonally higher revenue share receipt, which peaked in Q1 and Q3. Free cash flow for the 9 months ending October 31, 2023, was negative $47.3 million versus negative $69.9 million for the same period in fiscal year '22. We continue to expect significant improvement in cash consumption in fiscal year '23 versus last year. Let me now turn to guidance. We are maintaining revenue guidance for fiscal year '23 and expect that FY '23 revenue will be at or above fiscal year '22 revenue of $296.4 million with Q4 '23 revenue at or above $74 million.We are also maintaining our fiscal year '23 adjusted EBITDA margin guidance of 7% to 8% of revenue. We expect Q4 '23 adjusted EBITDA margin to be at or above 7% of revenue. We are no longer providing fiscal year '23 free cash flow guidance, while we still expect significant improvement in cash consumption versus fiscal '22 as evidenced by year-to-date results, we are focused on ensuring that fiscal year '24 is free cash flow breakeven.We anticipate incurring cash expenditure in Q4 in preparation towards meeting those sold. As an example, we expect to incur capital and operating costs during Q4 to improve warehouse operations that we expect will drive savings in fiscal year '24. We think these are rational business decisions and a part of our fiscal year '24 free cash flow breakeven road map. While this year has had its challenges, we believe we are making meaningful progress. Our balance sheet actions have been designed to provide us with greater financial flexibility. Our inventory strategy has yielded results and customer retention has improved.We are also making further improvements to our fixed cost structure during the third quarter. Finally, we are working to bring Rent the Runway to free cash flow breakeven for fiscal year '24. We will now take your questions.
Thank you. We will now be conducting a question-and-answer session. '[Operator Instructions]'. Our first question comes from the line of Dana Telsey with Telsey Advisory Group.
On the debt restructuring that you announced in the amended facility, as you think about the go forward, I mean, obviously, you have 6 full quarters beginning with the fourth quarter of '23, how do you see the continuation of the debt? How do you think that is positioned as we go through the next 4 quarters? And given the expense structure of the business, which you're managing and looking to reduce the cost, what should we be seeing whether it's both from fulfillment expense and the cost structure that you mentioned that it sounds like still has opportunity to address in the face of the enhancements that you're making to the model like with the luxury evolved and looking to improve active subscribers.
Hi, Dana, thanks so much for the question. So, first of all, we think that focus on the business model in general has been tremendously clouded by the fact that we did have and we do have this debt.Now, by essentially reducing all interest or eliminating all interest for the next 6 quarters by reducing the minimum liquidity covenant, what it does is it allows the business to drive to breakeven next year. It allows us to be in a position where we can generate significant free cash flow profitability before the debt is due, which is around 3 years from now.And in so doing, really show the market the strength of this business model. We have high margins. We continue to improve those margins. We have high flow-through margins. And we are excited to deliver a breakeven business in 2024 and are really encouraged by the fact that the growth flatness that we've experienced this year that we were able to identify the problem, that we were able to start to make significant corrections to that problem in terms of our depth strategy in the second half and that we're really seeing green shoots in the data that give us confidence going into next year.
Yes, Dana, I would say the only thing I would add here are, number one, what should you take away from the debt modifications we've announced? The first thing is that we actually have a very supportive lending partner who understands the business and is willing to work with us. That's important.The second thing is the debt doesn't mature until October 2026. And what we're focused on, what's in our control, is to deliver the best business results possible and improve the strength of the business to the market. And I think we've taken, as Jenn outlined, very important steps along this path this year.
And just, Jenn, how could the consumer -- what are you seeing as we go into this holiday season that's the same or different than last year?
Well, one of the most encouraging things that we're seeing in our business is this significant increase year-over-year in workwear. And we started to see that last quarter, we mentioned it, but it has continued to accelerate, which to us, is really just what the pre-COVID Rent the Runway behavior was where women utilized our service throughout the year to get dressed for work in addition to her everyday life and special occasions.So, for us, we feel encouraged by the fact that behaviors that our customers are using now feel more normalized to a pre-COVID kind of set of behaviors. We're also seeing that we've continued to see nice impact to improve retention. We continue to see good acquisition despite the macro environment and the fact that we've significantly decreased both our marketing spend and our promotions over the last few quarters because we didn't want to intentionally bring people into an experience where the inventory depth was not there. And we feel very encouraged by the results that we're seeing thus far.
Yes. I think a couple of other encouraging signs that we've seen that give us some confidence that the health of our customer is strong. Number one, as we've improved the inventory assortment, we've actually seen them engage with the inventory more. So, as Jenn pointed out, we've started to see improvement in our add-on rate. People are willing to pay more for inventory they like.The second thing that Jenn mentioned in her remarks is, we've actually improved and seen encouraging signs in terms of our ability to sell inventory to our customers in a profitable way. So, I think either just indication that the customer remains healthy, retention is improving, they're engaging with the inventory in a way that benefits us and recognizing the value that we provide.
Thank you. Our next question comes from the line of Eric Sheridan with Goldman Sachs.
Two, if I could. Just coming back to the inventory issue, is there a way to either put a quantification or maybe duration around what's left in terms of getting the inventory issue to where you want it to be to invest back in the flywheel for the business as we get into 2024, that would be number one. And as you have this period over the next 6 quarters with savings on the capital structure, what are the priorities to invest those savings back in the business to again capitalize on this 2024 and beyond potential for a momentum?
So, one of the things that we shared last quarter that we're reiterating is that, the improvements that we made in the back half of this year where we increased debt by 1.7x versus the first half of this year was really our first step towards a much broader depth strategy in 2024.Now, as a reminder, the first half of 2024, those orders have already been placed. So, that's why we had insight into the almost 50% that's coming from pay for performance. That's why we can tell you that the debt strategy in the first half of next year is already more robust than it was in the back half of this year.Now, we've seen that across all cohorts, loyalty rates have improved markedly. And in particular, they've improved significantly amongst folks that have been with us for 90-day plus, and we showed that as of the end of Q3, that loyalty rate is kind of 15% better than last year, which is really a significant increase for the segment that the majority of our subscriber base kind of thus far. So, our strategy is to continue to push on depth, to continue to buy a selection that resonates more with who our core customer is, who is this more aspirational woman in her 30s and 40s, who is professional, who is educated, and we see that it's not just about the depth, it's the fact that the selection is resonating more than before. Hearts are up 30%. She's buying more inventory. She's adding more inventory into her cart, which is obviously increasing our ARPUs again and our margins.So, we feel really good about the continuation of this strategy, leading to even higher rates of loyalty. But even more so, we feel that the business is poised to really step on the gas pedal as it relates to marketing and growth and acquisition, that this is a customer experience based on improved Net Promoter Scores that are some of the highest Net Promoter Scores we've seen since pre-COVID that we feel excited about bringing new customers into.
What was your second question?
Just generally, over the next 6 quarters, how you think about the priorities to reinvest the savings from the capital structure changes, how to think about the priority sales?
I would say, we're very clear about our priorities for fiscal '24. And the priorities for fiscal '24 are number one, to ensure that we bring this business to free cash flow breakeven, right? That is a nonnegotiable, really important initiative for us next year. So, that's the first thing.The second thing I would say is that if you actually look at fiscal '23, given the results and so on, some of these things perhaps aren't to get lost sometimes. But we have done a huge amount to invest in the customer experience this year, all the way from rolling out a program that is tailor-made for individual subscribers, filing one-on-one interaction. I mean, these are things we never had before, but now we are available to everyone who joined the program. We have invested $70-plus million in inventory capital this year, now our customers have access to amongst the newest inventory they've had in a long time, the freshest inventory, inventory they lost and at high-end soft rates. So, I think if you think about our mindset and think about investment in the customer, yes, it's true that the modifications on the debt will free up some resources. But really, we have never stopped investing in the customer experience.And I think that is going to continue where we will see additional focus next year in addition to obviously getting the cost structure right and making sure we break even on a free cash flow basis is on the growth side, really turning our attention to making sure more people and more customers experience the program, and we drive excitement amongst the potential customers that have yet to try Rent the Runway.
I think the strength of our brand relationships as well as helping us to deliver incrementally more value to the customer month-over-month. I mean, one example of that is the launch that we did today of luxury evening wear on our platform, which not only is the first launch of luxury evening wear for us, but it's the first time that many of these brands have ever participated in rental before.We're starting to rent gowns and dresses on our sites that retail for up to $8,000 MSRPs at rental price points that are quite accessible and affordable. And so, this is really continuing to offer our customers even more and doing it oftentimes on a pay-for-performance model with the vendors that we're working with. So, that everyone really matters.
Our next question comes from the line of Irwin Boruchow with Wells Fargo.
This is Julian for Ike. Just a couple of questions. First, on how you're thinking of G&A marketing and tech spending efficiencies moving forward. I know you mentioned about 200 basis points and efficiencies there this quarter. If you can maybe give us some more color on that?
Sure. I think, look, you obviously called out two numbers in the prepared remarks. The first is, we saved $27 million in fixed costs as a result of the Q2 '22 restructuring so far. In the third quarter, we enacted further changes, primarily affecting the technology line that we expect will save another $5 million on an annualized basis starting the fourth quarter.And I think the message that we're sending to you is, we're continuing to focus on the cost structure. We continue to look at every spend no matter how small it is and making sure that we bring that fixed cost structure to a level where if you don't want to rely on any sales growth, can we get this business to breakeven in fiscal '24. So, that is our aim and we'll make sure that the cost structure reflects those ambitions.
And then just one follow-up. Are there any thoughts on subscription pricing taking place there or maybe tying that into there's any updates on market share, how you're feeling about your position in the rental market overall?
We think our subscription pricing is in a really good place. Of course, as Sid mentioned, our goal is to continuously be offering our customers more and more value quarter-over-quarter.We started this year with that philosophy in mind by launching an extra item for all of our customers, really giving them 25% more value for the same price. We've followed that up by now giving them free concierge and free styling via text, now expanding the MSRPs of our selection.So, our selection has continued to become more high end over time even as they're getting more items. So, for us right now, it is about delivering a better experience and more aspirational and premium experience to our user base, it is not going to be about increasing price.
And I think the one important clarification to the answer to the earlier question is that on marketing, we do not, at this point, expect to have any changes in marketing spend for fiscal '24. So, we do not expect to reduce our fixed cost reduction plans, do not involve reductions in marketing spend. In fact, as we pointed out earlier, we want to expose more people to a significantly improved experience in fiscal '24.
Our next question comes from the line of Lauren Schenk with Morgan Stanley.
This is Nathan Feather on for Lauren. On the purchase rate for resale being up 50% year-over-year, what have been the key drivers moving that up? Are there any plans or how are you thinking about driving that up further in fiscal '24? And then as you transition to greater depth across the inventory base, how are you using resale as a method, if at all, to kind of trim that existing lower debt inventory?
Yes. So, number one, we've seen a lot of success, but as the selection has become more attractive to the user demand to purchase the inventory has gone up. Number two, we've gotten even more sophisticated with our pricing algorithms. So we know exactly how to price the inventory so that we're still selling it profitably, but doing it in a way that is compelling to our user base.I would say that both of those two improvements are within a strategic channel that is really unique to a subscription or rental model. You think about other companies that are selling items that have been worn before, they don't have the advantage of the fact that our customers always have at least 5 things at home in their closets already. They've already worn them. They've already experienced them. They've already fallen in love with them. So, if we're able to price it at the right price point, both for them and for us, there's a much higher likelihood that they will convert on that inventory. The other thing that we started to do, quite honestly, is started to tell customers that this was a benefit of their program. So, one of the reasons why some of our customers might sign up for a subscription is that they're busy. They're professional women. They have kids. They have other things going on. And this is an easier way for them to kind of shop because they can try things before they buy it.So, just by nature of positioning this as a value set of the program is also another benefit. The last thing I'll say is that in the past, we used our try-to-buy channel, primarily around much older inventory. So, inventory that was in our base for two or three or four years and kind of when they had it at home. We have started to really build the muscle around using currencies and inventory as part of our try to buy and building replenishment businesses around that inventory.So, really understanding that our customers might want to buy, for example, denim from us and as opposed to just selling it to them and depleting the amount of denim we have on our platform instead just replenishing that denim with our partners so that we're both providing the customer value, making money off of the inventory and not depleting the supply of important categories.
Yes. I would say there's 3 things that we think about when we think about retail, the first is, we have now this quarter, the past quarter actually become quite surgical at looking at category by category, brand by brand, trying to understand age of inventory, what we can tell that inventory for, how much that matters to our customers and so on. So we're utilizing some of those lessons to actually drive some good decisions in terms of what we can sell to who.The second thing is we've actually made product enhancements to the customer experience and through the technology backbone here where we can target specific items that customers have at home and convince them to try that item and perhaps buy it if they like it.And then the third thing is you got to remember all of these, this year has been about making sure that the inventory experience for our customers and the in-stock rate is in good shape. So, what we want to also make sure is we protect that. So all of this increase in resale has been essentially dovetailed at the same time with a real protection of the in-stock rates that our customers are experiencing. And so, we are working on a replenishment type system that ensures that we can not only sell items that customers want improve loyalty for them, but also, of course, maintain the inventory experience that they are now becoming accustomed to.
Thank you. Our next question comes from the line of Andrew Boone with JMP Securities.
I wanted to ask about how is the promotions over the last quarter and how we should think about that as related to growth going forward.
We couldn't quite hear you, but if I understand your question correctly, it's to do with how we're thinking about promotions going forward. Is that right?
And warnings from the last quarter.
Yes. I think what we have seen is -- so if you look at the big changes we've made, right, we used to have promotions that span several months, and we have shrunk those last quarter to essentially a 1-month promotion.We've changed some of the promotional pricing for new customers that enter into the program. And what we have found is a fairly encouraging response in terms of our ability to attract customers at price points that don't involve giving away 3 or 4 months' worth of pricing for new customers.Obviously, these are all subject to change, we may decide to bring more people into the program as the experience improves and so on. But I think that what we have learned is that it isn't essential to be as promotional as we want to.
As an example, this Black Friday, Cyber Monday, we were far less promotional than Black Friday, Cyber Monday in previous years. So, as an example, like our promotion this year around for 15 fewer days than last year, we spent 40% less promo dollars than last year, and we are acquiring customers in a more profitable way.Now, the fact that loyalty rates are up across all of our cohorts, meaning that LTV is up and our margins are improving. It means that we have also more room to play around with promotions at different points during the year. So, we're going to continue to experiment. But to Sid's point, we do not believe that we have to be as promotional as we once were.
Our next question comes from the line of Ross Sandler with Barclays.
Sid, question on the gross margins. So your fulfillment margin looks fine. The gross margin was down a little bit from the rental depreciation uptick. So is that just from the overall aggregate rental product purchases being higher last couple of quarters on the inventory replenishment or was there some mix shift back to wholesale or some kind of channel mix thing we should be aware about? And, I guess, what's the outlook for gross margin for next year? And then the second question for Jenn. Picked up kind of anecdotally in some of the surveys that you guys are looking or experimenting a little bit with lower price points. Could you just talk about what you're seeing there? And is that part of the strategy?
On the first question, so yes, you're absolutely right. The gross margin decline this quarter really reflects a much higher level of inventory spend over the last couple of quarters and certainly relative to last year. We're not giving specific gross margin guidance for fiscal '24. But I will say, and as we pointed out several times on this call, we do expect to be free cash flow breakeven in fiscal year '24. And we'll, obviously, one part of that is our inventory spend is expected to be considerably lower than it is in fiscal '23 as we've really adjusted all of the debt issues and fix the debt issues that we needed to address.
Ross, I'm not sure what you mean about lower price points because the MSRPs of our rental products are actually going up, meaning we're renting more aspirational higher-end product, even though the cost of those products are going down because of the either discounts we get with our vendors or the pay for performance deals that we have with them. So, were you talking about price points of inventory or something else?
Yes, the inventory, it might just be anecdotal, but is there any new strategy around lower-priced inventory. It sounds like now, but that's what --
If you track our inventory over the last 4 or 5 years, the MSRPs have gone up every year, meaning the inventory across all of our categories is actually getting more aspirational. Our brands are better. They're more premium. And while there are growing competitors in the space, there's very little brand overlap between Rent the Runway and cash and rental competitors, we really hold the kind of premium space in the market with the hundreds of designer brands that we have, and we kind of further buttress that today with the launch of luxury.
And I think the last thing to clarify that I think I didn't mention to your point, to answer your question around, is the mix changing at all, the mix is not changing towards wholesale. In fact, it's going the other way, as Jenn mentioned in her remarks, in the first half of fiscal '24, we expect actually almost 50% of our total inventory buy to come on consignment or people.
And I'll just kind of remind everyone that when we IPO-ed the business 2 years ago, we stated that over medium to long term that we would expect 1/3 of inventory to come in via paper performance. And we're already announcing that close to 50% of the inventory in the first half of '24. It's coming in via paper performance, meaning we do not pay for it upfront, and we only need revenue share on the performance. This is no risk inventory for us. So, we are really beating the goals that we set out in basically the most important and the most important expense bucket of the business.
Thank you. There are no further questions at this time. And I would like to turn the call back over to management for any closing comments.
So, thanks for joining us today. We were really happy to have the opportunity to really transparently address what we think are the real elephant in the room as it relates to our business. We are excited about this constructive relationship we have with our lender about our debt restructuring. We think that it gives the business opportunity to break even to become a profitable business to prove out this model to the market. We are very excited about the path ahead and the data that we're seeing in the business and looking forward to talking to you more about it.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.