Greetings. Welcome to the Rent the Runway First Quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Janine Stichter, Vice President of Investor Relations. You may begin. Good afternoon, everyone, and thanks for joining us to discuss Rent the Runway's first 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 our financial results and guidance, 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 undertake no obligation to revise or update any forward-looking statements or information except as required by law. During this call, we'll 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, live presentation posted on our investor website, and our SEC filings. With that, I'll turn it over to Jen. Hi, everyone. Thanks for joining us today. We are very proud of our strong Q1 performance, which showcases our accelerated business momentum, robust subscriber engagement, and improved year-over-year profitability. We exceeded our Q1 guidance across all key metrics, both on the top and bottom line. We grew revenue 100% year-over-year, and grew gross margin by 9 points year-over-year. Adjusted EBITDA margin came in 5 points above Q1 2021. We finished Q1 with 135,000 ending active subscribers, hitting a new record high for quarterly ending active subscribers. Additionally, our subscribers are increasingly more profitable for three key reasons. One, the margins of our new subscription plans, whose rollout was completed last year in May 2021, are nearly double what they were in 2019. Two, subscribers are more loyal than pre-COVID. Three, they are highly engaged, evidenced by the rate at which they opt to pay for additional items in their subscriptions, meaning they rent many items from us for more use cases. In sum, we see continued evidence that the strategies we have in place are paying off, and we are on track for a record 2022. We remain confident in achieving free cash flow profitability over the medium term with the cash we have on hand, as we laid out in our Q4 earnings call, as well as with our more near-term goal to cover our operating expenses over the next two to four quarters. In April, I laid out three key business strategies intended to drive top line and three intended to impact the bottom line in 2022. While these initiatives are just gearing up, I wanted to provide updates on our progress in Q1 and how they're impacting our financials. The first top-line initiative is events. We believe the boom in events this year gives us the opportunity to build out our funnel of potential subscribers, not just for 2022, but for years to come, taking advantage of one of the most unique aspects of the Rent the Runway business, our organic growth flywheel. For 12 years, over 80% of our customers have come to us via word of mouth, and as a result, we have not had to be as reliant as others in the consumer space on paid marketing. The reason why renting from us is so viral is because women rent very bold clothing from us. When a customer walks into a restaurant or work or an event wearing some sexy red knockout dress, the other women in the room notice them, and the same conversation ensues. "Wow, you look awesome. Where did you get that?" The response is typically, "Thanks. It's Rent the Runway." Multiply this by the roughly 80 days per year when subscribers are in our clothing, and that's a lot of opportunities to share Rent the Runway organically. Why am I bringing this up right now? It's because Rent the Runway is benefiting from the fact that women are using fashion for self-expression as they emerge from COVID. In other words, fashion is bolder than ever. The shorter hemlines, cutouts, new trends, and colorful clothing women are wearing right now translates into highly cost-efficient customer acquisition for us. To this end, we've been taking a 360 approach to capturing this demand with dedicated teams focused on full funnel marketing strategy and product experience. We've nearly tripled our events-focused content and creative across our own channels and continue to both market our Reserve business and position Subscription as a solution for multiple events. We're building out the addressable market for weddings through partnerships like our recent successful partnership with Zola and a strong pipeline of future tie-ins during the coming months as we head into peak wedding season. Black tie is to 2022 as sweatpants were to 2020. We are seeing our customers gravitate towards more formal looks, with cocktail dresses and gowns having the highest utilization of any category in Q1 and reaching all-time highs. Customers are evidencing greater confidence in their upcoming plans. As an example, international travel as a use case for our new subscribers has almost doubled since fall 2021. Our second and third top-line initiative, search and discovery, and fit, are more long-term and iterative in nature. In Q1, we focused on back-end infrastructure and cloud investments that provide scaling and efficiency benefits and support our work to provide an enhanced search experience for the consumer, which is expected to be rolled out over the coming quarters. Now, shifting to our strategies impacting the bottom line. First, we remain extremely excited about the prospects for at-home pickup, which is currently live in over 20 markets, covering well over one-third of the subscriber base. As a reminder, at-home pickup is not only more convenient for the consumer, but also less expensive for us versus national carriers, thanks to pickup density and consolidation of inbound shipments back to our warehouses. We are well on our way to bringing this offering to more than half of our subscriber base by year-end. Customer adoption of home pickup during its initial pilot phase exceeded our plan with minimal marketing efforts. The way customers find out about at-home pickup today is via a sticker on her garment bag. We expect adoption to increase meaningfully as we integrate at-home pickup into the product experience of our app, which is set to launch within the next few months. Second, we are continuing to build on the technology and automation investments into our warehouses in 2021, which drove a more than 30% year-over-year reduction in non-transportation fulfillment costs in 2021, and we see ongoing opportunities. We completed the full rollout of RFID on all of our rental products at the end of 2021, which affords us many opportunities to simplify processes within our warehouses, reduce labor expense, and gather more data. Prior to RFID, each returned item had to be individually scanned with a barcode 10x-15 x throughout the reverse logistics process, versus now, we can quickly scan units via RFID readers without human intervention. This has improved labor productivity, and we continue to see cost savings benefits. RFID also enables us to use the hundreds of millions of data points we've gathered over the past decade to automatically sort our inventory into one of 26 distinct cleaning processes to improve garment quality and longevity. In Q1, we took another step in automating our processes and further utilized RFID by rolling out our digital issue tagging software. Now, whenever we discover a garment quality defect, we can record it digitally, which allows us to automate our decisions around processes like cleaning or restoration, which is expected to reduce labor costs and improve product ROI. We also continued the rollout of new packaging in Q1, which is now being used for over 20% of shipments. Our packaging has always been reusable, but we've improved upon it, making it waterproof and easier to pack for us and for our customers. The new packaging also doesn't need to be laundered, which is more cost-efficient for Rent the Runway and supports our sustainability goals by reducing water usage compared to our current garment bags. Third, we continued to grow exclusive designs and launched six new collections in Q1. We remain excited about the pipeline with nearly 20 exclusive design partners in 2022, around half of which are new. Share by RTR and exclusive designs are on track to represent a combined 60% of our product acquisition mix this year. We are within striking distance of the two-thirds that's embedded in our midterm plan to get to free cash flow profitability. Lastly, I'd like to touch on the macro environment, which is on everyone's minds and very uncertain. To date, our business continues to grow, and our outlook is positive, which is reflected in our guidance this quarter. I want to take this opportunity to speak a bit to the character of our team. Two years ago, when COVID hit and the U.S. was sheltering at home, our customer demand significantly declined. Our team reacted swiftly and made a series of tough and bold decisions to cut a significant amount of cost from every area of our business. We changed the way we financed our rental products with our vendors' support because Rent the Runway matters to them. We nearly doubled the margins of our subscription programs. We transformed processes in our warehouses and added significant automation. We were focused on every dollar that we spent as a culture of frugality is embedded in our DNA. We have well-tested plans based on our COVID experience that give us confidence that we are prepared for macro challenges and can continue to drive our business to profitability and capture our long-term opportunity for a large and profitable business that changes how women get dressed. It's not business as usual, but I feel reassured that our team is battle-tested, scrappy, innovative, and most important, resilient. That said, what we believe, interestingly, is that Rent the Runway is entering an environment that may be conducive to growth for our business. Rent the Runway stands to benefit as the share of consumers' wallets shift towards experiences over ownership. We see in our data that the customer is yearning to get back out into the world, back to weddings, back to concerts and events, back to vacations, and even back to the office a few days a week, and we believe that all of this stands to benefit us. Given the significant cost savings she derives from renting, which is around 15% of retail price if she rents à la carte and around $20 an item in our subscription program. We believe that women will consider renting in a cost-conscious environment. During the 2008 recession, Americans continued to purchase about 65 articles of apparel per year. They just purchased them more often at off-price and value-focused retailers. At that time, rental and resale were not mainstream options for the consumer the way they are today. We can't predict how the consumer will be impacted by the macro environment, but we will aim to be part of the customer's larger cost savings consideration set during these uncertain times. We plan to stay vigilant and are confident in our ability to react swiftly, take advantage of opportunities, and always keep our customer as our North Star. With that, I'll turn it over to Scarlett. Thanks, Jen, and thanks again everyone for joining us. I will provide an overview of our first quarter results for fiscal 2022, and then follow with guidance for the second quarter and full year. I want to reiterate the financial framework provided in our last call to grow revenue while driving towards profitability. We are focused on growing revenue by growing subscribers and ARPU, and also generating revenue from our reserve and resale businesses, which are important funnels into subscription. We continue to move towards free cash flow profitability by increasing expense leverage in our three major cost buckets, which are fulfillment, operating expenses, and investments in rental products. Phase one is to cover our OpEx, and we maintain our target to reach adjusted EBITDA breakeven in the next two to four quarters, with free cash flow breakeven to follow in the midterm. Q1 revenue of $67.1 million was up 100% year-over-year. We saw a strong post-Omicron bounce back in subscriber activity after the fiscal year-end with a 17% quarter-over-quarter increase in active subscribers, ending the quarter with 135,000 active subscribers. Total subs increased to 177,000 subs, up 11% quarter-over-quarter and up 70% year-over-year, with paused subs as a percentage of total at 24%, compared with 28% at the end of last quarter. I'd now like to provide an update on the price increase we rolled out in Q1. Thus far, the impact has been within our expectations. This speaks to the significant value we offer through our subscription, which we think is strengthened in an inflationary environment, where the cost of buying new clothing continues to rise. ARPU, defined as average monthly subscription rental revenue per subscriber, in Q1 was ahead of our expectations, benefiting from continued success of add-ons. 28% of active subs paid for one or more add-ons in Q1, which we were pleased to see in a period of high seasonal acquisition and a higher proportion of new subscribers, resulting in 86% of revenue being generated by subscribers. As a reminder, these add-on items are margin accretive, as they are generally added to an existing shipment with minimal incremental cost to us. We reiterate our outlook for ARPU to be approximately up 5% for fiscal year 2022 versus last year. We also saw Reserve and Resale benefit from the post-Omicron bounce back. Customers planned for social events in earnest, which led to a beat of over 20% of our Reserve revenue relative to our expectations. We also saw subscribers in particular buy more units than anticipated, boosting our Resale revenue above our forecast. Our Q1 gross margin rose 9 points year-over-year to 34%. The significant improvement is due to higher revenue per shipment versus last year, and rental product depreciation and revenue share cost at 32% of revenue versus 50% in Q1 2021, as higher subscriber count, and therefore higher revenue, absorb product cost. In addition, revenue share as a percent of revenue was favorable versus our forecast as some Share by RTR items are hitting their max on performance-based payouts, after which revenue is no longer shared with brands. We expect gross margin to be slightly higher for full year 2022 compared with full year 2021. Fulfillment costs were 34% of revenue in Q1, compared with 26% in Q1 last year, as we generally expected, largely due to transportation cost increases. We knew these increases were coming starting in H2 last year, and have been steadily diversifying our shipping partners, which helped to mitigate these costs. In addition, warehouse productivity improvements helped to partly offset the shipping increases. In terms of comping against last year, Q1 2021 still had higher unlimited subscription pricing, and subscribers were less engaged given the COVID environment, resulting in lower fulfillment costs as a percent of revenue last year. We maintain our prior expectation of fulfillment costs as a percentage of revenue at approximately 34% for full year 2022. Adjusted EBITDA for Q1 was -$8.8 million, versus -$6.2 million in Q1 last year, representing -13.1% margin and a 5-point improvement versus -18.5% last year, giving us the confidence to reiterate our target of getting to adjusted EBITDA breakeven in the next two to four quarters. Our total operating expenses, marketing, technology, and G&A, represented 77% of revenue, compared with 93% in Q1 2021, demonstrating our ability to absorb fixed costs with higher revenue, even as we invested in the business in Q1. I want to call out again our investments in technology that provide scaling and efficiency benefits for search, fit, and discovery, which you saw in our Q4 2021 results continuing into Q1 2022, which we expect into the rest of the year. Marketing in Q1 was 13% of revenue, and 11% excluding employee costs. In a quarter when we grew subscribers significantly, and spend was lower than forecasted due to strong organic growth. We intend to keep marketing dollars in our plan for the rest of this year and maintain our target for marketing expense, excluding employee-related costs, at approximately 10% of revenue for the year. Moving to free cash flow, we continue to anticipate rental product CapEx, our largest cash expenditure, at approximately $60 million for fiscal 2022. Remind you that seasonally, Q1 and Q3 spend tends to be higher. We are on track in our expectations for the free cash flow margin this year to be slightly lower than in fiscal 2021 in a more normalized year of product acquisition. Free cash flow should be measured annually through a seasonality of product spend, and we remain on our path to reach free cash flow breakeven in the midterm, as we previously laid out with the cash we have on hand. As we look at the remainder of 2022, we are very mindful of the macro environment and are closely monitoring. As Jen noted, our outlook is reflected in our guidance this quarter. A reminder that Rent the Runway started in a recessionary environment, and we believe our subscription and à la carte services provide even more financial value and a way to save costs in a cost-conscious environment. We also just navigated two years of COVID impact, and we are ready and able to act with effective tools and experience to respond to a negative impact on our business. In particular, a significant portion of our costs are variable, and we have demonstrated we can manage our fixed costs and investments in a downturn. Turning to Q2 and rest of year guidance, I want to reiterate the historical seasonality of subscriber acquisition. We just reported on what is typically one of our stronger periods for the year for acquisition, when customers naturally think about changing over their wardrobes. This means that in the summer months, we generally see slower acquisition and higher rates of pause, and that is reflected in our guidance for Q2. In addition, we expect a continuation of the strong environment for events that we saw benefit our reserve and resale businesses in Q1. Though Rent the Runway has shown greater resilience to COVID variants over time, we continue to closely watch variants and potential impacts, and we have incorporated similar patterns to the prior two years in our expectations for the second half of this year, which means we expect Q4 revenue to be only slightly higher than Q3. For Q2, we expect revenue of $72 million-$74 million, representing 56% year-over-year growth at the midpoint versus Q2 2021. For adjusted EBITDA in Q2, we expect -$4 million to -$3 million. In terms of full year, we are reiterating our revenue guidance of $295 million-$305 million, representing 45%-50% growth versus full year 2021. We continue to believe that longer term, we can sustainably grow revenue in excess of 25% annually. We are actively managing to free cash flow dollars and margin and maintain our prior guidance of negative 6%-5% adjusted EBITDA margin for fiscal 2022. From a quarterly progression standpoint, a reminder of the pre-COVID seasonality of our profitability, with Q3 typically impacted by higher marketing when we lean on seasonal customer acquisition and also by higher product spend and revenue share. We would therefore expect Q3 profitability to be lower than Q2 profitability. We continue to be intently 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. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Our first question comes from the line of Lauren Schenk with Morgan Stanley. Please proceed with your question. Great, thanks. I just want to ask a little bit more explicitly, I guess, given the better Q1 results and the better second quarter outlook, is the maintained full-year guidance just assuming some conservatism given the more uncertain macro backdrop? Is it fair to say you're not embedding any potential upside from, you know, sort of a trade down like benefit, if you will? Just one on at-home pickup. How much of a transportation cost savings or margin benefit are you seeing from that? Ultimately, what percentage of the subscription base do you think you can serve with at-home pickup long term? Thanks so much. Yeah. Thanks, Lauren, for the question. Why don't I start with the guidance? We just reported, you know, a strong quarter. We feel really good about the guidance that we're giving for Q2. You know, given the volatile macro environment and potential COVID impact for the rest of the year, and it's really based on what we've seen the last two years, and also the fact that we're really early in the year, we think it's best to maintain our prior guidance for the full year. That's really why we're keeping the guidance where it is. Then in terms of at-home pickup, Jen, do you want to maybe answer that one around what our potential target could be there? I mean, we continue to see both very high engagement with at-home pickup and stronger growth in markets and getting this activated than we had planned. It's gonna be embedded into our app over the next few quarters. Again, this is a cheaper way for us to pick up the units from customers versus the customers kind of shipping them back via a national carrier. I think that it remains to be seen how big it can get, but we are looking for this to get as big as possible for as many subscribers as possible to have access. We had given a goal that 50% of subscribers would have access to at-home pickup by the end of the year. We hope to be able to beat that. For customers, this is just a much more convenient experience. Yeah. I would say, you know, we also just don't know yet what it will mean to have the experience in the app, right? Right now, we're hoping the customers are seeing the stickers on the bag, and we've seen good pickup there. We're excited about, you know, the opportunity when we really build that into the app over the next few months. Okay, great. Thank you. Our next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question. Hey, thanks for taking the question. I guess Scarlett or Jen, I'm kinda curious, you know, you guys were founded effectively after the last recession. I feel like we're kinda willing a recession into existence the way we all talk about it. How do you know, if we were to see that kind of an economic slowdown, can you kinda talk about, I think, Scarlett, you alluded to this in your prepared remarks, but more specifically, what levers would you guys be able to pull? And then how much, you know, would it potentially throw off your path to profitability, at a high level? Thanks. Thanks, Ike. First, you know, to date, our business continues to grow, our outlook is positive, and that's reflected in our guidance this quarter. We're closely monitoring. I wanna remind you again that we just navigated two years of COVID impact, where we were significantly impacted by, customers in the U.S. sheltering at home. When people were sheltering at home, wearing primarily their pajamas, they had less need for variety in their wardrobe and therefore for a subscription to fashion. During that period of time, we reacted incredibly quickly. We made lots of tough decisions to cut costs across every area of our business, and we think that we're ready and able to act with effective tools, with experience to respond to any negative impact on the business. Now, kind of also going back to 2020, it's really important to understand that data is core to Rent the Runway. We monitor and analyze data real-time. We have this unique advantage in that subscribers come to our app over 3 x a week. They're highly engaged, so as soon as there's a change in their behavior, we see it. We started to see data in early March 2020 that led us to make those really swift and bold decisions to cut costs throughout the business very early on, and we didn't hesitate in making the right decisions for the business. We know early on when there are shifts in behavior. Now, interestingly, right now, we are seeing a shift in behavior in the sense that our customers are actually shifting into more celebratory clothing than we've ever seen before. She's really showing us with what she's renting and how she's engaging, that she is ready to get back out into the world. Whether it's for work, whether it's for the weekends, whether it's for special events, she wants to feel happy, and she wants to use fashion as a way to show up and feel that way. Ike, in terms of the more financial side of the equation, let me take the last question first, which is that we are laser-focused on staying on our path to profitability, even with a recessionary environment. Then more practically speaking, the way that we would get there is really to remind you a bit about the kind of structure of the business and the business model that we have. A significant portion of our operating costs are largely variable, and they represent, you know, approximately 60% of our cash operating costs, which means that they either will vary with demand automatically, or we have high flexibility and discretion to adjust, as we did throughout COVID. These would be things like our fulfillment expenses, our customer service costs, you know, clearly credit card fees, revenue share payments that are performance-based, you know, and marketing. Then the remaining cash costs, which is about 40%, the rest of it is, you know, fixed or largely fixed, and that's mostly in G&A and tech, as you've heard me mention before. I'd say that within the second bucket, approximately 30% are employee-related costs, which, you know, we could reduce in a lower growth scenario. You know, we demonstrated in 2020 at the onset of COVID that we had levers also on capital expenditures, which would be the product and the PP&E CapEx if we saw a change in demand. I also just wanna remind you that, you know, our business is different than other businesses because we're able to monetize our products over many years, as opposed to other retailers or e-com companies that could be stuck with their inventory. We have that ability, and you just saw us do that over the last couple of years. So we feel good about the cost structure of the business and our ability to react, you know, in a kind of a downturn environment. Yeah. One other thing that I would add is that our consumer is slightly different. 80% of our subscribers have household incomes over 100,000. This consumer may be less sensitive to changes in the macro environment, and we'll continue to monitor that. Thanks so much. Very helpful. Our next question comes from the line of Ross Sandler with Barclays. Please proceed with your question. Hey, guys. Just to follow up on that macro question. Jen, you mentioned that when consumers might be trading down the value prop of the, you know, huge savings that they get from Rent the Runway might shine through if we go into a recession. I'm just curious, what other parts of your business, I assume customer acquisition costs would improve a bunch if competition in those ad auctions goes down. What other recessionary impacts might you see to the positive? Like, how could the conversations with designers change if all of a sudden they're getting lots of returns from their departments or, you know, clients, et cetera? Could you just flesh that out a little bit? Scarlett, you mentioned the a bunch of the Share by RTR inventory crossed over the threshold whereby you have to pay the rev share. Just curious, like, is that a meaningful percentage of the Share by RTR? Like, how do we think about that on a go-forward basis that we kind of permanently crossed, and that, you know, that should be a benefit going forward? Thanks a lot. Yeah. Thanks, Ross. You know, I came up with the idea for Rent the Runway in 2008, and really became a student of what was going on in that recession. One of the things that I found really fascinating was that during that last recession, customers were still buying 65 items of apparel per year, which was very similar to what she was buying pre-recession. We saw at that time, not only was she trading into other retailers like the TJ Maxx's and Burlington's and Ross of the world. That was the emergence of kind of flash sale sites, and really also massive growth in value-oriented retail, like fast fashion. I think the consumer was kind of showing us that she still wanted variety, she's still buying high quantity, but she's changing and kind of going for same amount of units at lower price points. What happens? Well, in that environment, from a brand perspective, I think we would have even more ability to shift more of our inventory acquisition into consignment, where our brands would be able to kind of share in revenue with us and benefit. Their alternative would be to deeply discount their own product and/or to kind of sell it to off-price or kind of flash sale sites for lower take rates. I think that as they saw during COVID, when we transitioned into revenue share agreements with many of our designers. When COVID hit in 2020, you know, those designers have been getting their wholesale costs or even more back over time. They trust this kind of consignment channel, and I think we'd be able to drive even more consignment in the case of a recessionary environment. To your point as well, I do think that we might have more negotiating leverage when it comes to paid marketing spend. I also think, more importantly, negotiating leverage would come back as it relates to transportation partners. We saw transportation expenses were rising in 2021, and we were proactive in two ways. Number one is we just increased the amount of partners we worked with from approximately two partners to over a dozen partners, 'cause more partners equals more negotiating leverage. Two, we started implementing consolidation strategies, of which our consolidation centers and home pickup are examples. We think that as potentially e-commerce rates might go down, that transportation partners may be willing to come back to the table and actually negotiate, for the first time in a little while. Ross, in terms of the questions related to Share by RTR, I'm not disclosing the exact percentage of units that hit their caps, but it did positively impact our gross margins, and we were really pleased with the results that were better than we had forecasted. In terms of going forward, you know, it's possible it's an ongoing benefit. It's really gonna depend on the proportion of Share by RTR products that our customers choose, you know, and how close those products are to hitting their caps already, which can vary. But you know, I would certainly take a look at, you know, what I said on the call, which is that we do expect the gross margin to increase slightly this year versus last year. Our next question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question. Thanks for taking the questions. Maybe two, if I can. One, is there anything to call out in terms of geographic differences you're seeing in the business, in terms of either gross additions or customer behavior that might give us a better sense of how the return to office might be playing into some of the dynamics in the business that could promote future growth? That'd be number one. In prior calls, we've talked a lot about your automation efforts for the long term. Anything to add there as an update about how we should be thinking about automation as a driver of margins over the long term? Thanks so much. Yeah. There's actually, you know, not much differences in geographic customer behavior that we're seeing. We're seeing across the board that our customers are back in the office a few days a week. We're certainly seeing them be far more resilient to, you know, COVID impacts in all geographies and variants. One of the interesting aspects of going back to the office in a hybrid way is that she isn't yet back in the office five days a week, and therefore she hasn't bought workwear in the past two years. Justifying purchasing new workwear makes less sense if you're not really gonna be there five days a week, if you don't even know what your dress code is anymore. Renting the Runway for the office makes more sense now in many cases than in the past. We believe that a recessionary environment, interestingly, could lead even more workers to be back in the office more days of the week, 'cause we think that employers may have more power to request people to come back. Just one of the things I would kind of call out that we think about a lot is just that during COVID, when people were sheltering at home, people really were not attending events. They were not going into offices. They weren't walking around their neighborhoods. They weren't socializing. In a recessionary environment, people still get married, people still celebrate New Year's, people still go into offices, and I think they may go into offices more. We're focused intently here on positioning Rent the Runway as the most cost-effective way to get dressed because we know that people still want and need variety in their wardrobes. We think that we may be heading into an environment where this becomes even more attractive to more consumers. Hi, Eric. Then in terms of your second question, you know, we absolutely think that there is a lot more that we can get out of the automation. As Jen mentioned on the call, we just finished the rollout of RFID. We just are implementing digital issue tagging, which should make us much more efficient when it comes to cleaning and restoration. This is really why we think that there are good benefits ahead of us, you know, why we feel confident in what we had said last call, which is that we believe that the fulfillment costs can get back down to below 30% of revenue, you know, over the next few years. Thanks for the color. Our next question comes from the line of Michael Binetti with Credit Suisse. Please proceed with your question. Hey, guys. Thanks for taking our question, you guys. I just wanna ask the marketing going from, I think you said 13% -1 0% for the year. 13% in the first quarter to 10% of revenues rest of the year. You know, it's been kind of been hammered home to us that this is a, you know, biggest wedding season in decades. We've heard that, you know, through the department store earnings calls and diamond jewelers. Obviously, you know, in this environment, that kind of data point quickly gets connected to questions about how to lap those kind of big comparisons next year. I don't know how you feel about that, but do you think this is a, you know, one-time big bump potential for the Reserve business this summer that makes you think maybe you should deploy more towards converting some of those, you know, one-time-ish Reserve customers into that very, you know, lucrative, LTV of the Subscription customer? We feel really good about our plan to continue to spend about 10% of our revenue on marketing this year, excluding employee-related expenses. You know, because, number one, we continue to benefit from this really strong organic growth flywheel, we're doing a lot of marketing that doesn't actually involve paid marketing. We talked about content, we talked about partnerships. We talked about product improvements that might enhance the virality of our business. We completely agree with you that this is a really important period of time for us to build the funnel for both current subscribers and subscribers for many years to come. We're really pleased with our success in Q1 in terms of our Reserve business, beating by 20% versus our expectations. We also have this really large first-party database, and we're able to engage with customers from the past who rented for an event and our prospects to really convert them into coming back to rent à la carte again or coming back to a subscription. We think that we can balance growth with profitability, that we don't have to spend more than 10%, and that our number one goal is driving the business to free cash flow profitability. Thanks for that. If I could ask a follow-up. I think you ran a sample sale in New York in the first quarter, which probably helped that nice resale number in the quarter. If I'm right on that, was that a good experience for you? Is that something that you feel like you could do again this year to add a little, you know, real-life three-dimensional aspect to the brand every once in a while and touch consumers and help monetize some of that product that you've deemed, you know, good to move over to resale? Yeah. I'm glad that you asked that because I think it's really important to distinguish between sample sales, which are part of our liquidation revenue for inventory, and resale. As you know, we are monetizing inventory over multiple years. We depreciate that inventory over three years straight line, and then there's a salvage value that is associated with our apparel that is tested every single year by our accountants. That salvage value is related to how much we can kind of sell the inventory for at the end of its useful life. Now, a useful life means to us that it no longer looks brand new. Once a unit of inventory is not in kind of rentable condition, which we consider like-new condition, we will take it out of our rentable inventory, and we will clear that inventory. Sample sales are one of the channels through which we clear inventory, and that really goes into salvage value. That's not our resale revenue. Resale revenue is the revenue we make from subscribers when they decide to keep units that they already have at home. As part of their subscription, they have these four units at home. I have a dress at home. I decide I love it. We're dynamically pricing that dress, and I can click to purchase it. And/or any person can come to our site at any time and see a dynamic price with which to buy the unit, which is still in like-new condition, and that's our resale revenue. Just to double-click on that a little bit more, Michael, you know, we've been doing sample sales for years, right? This is not a new strategy. This is something that we've always done and has always been a really successful strategy. It really points to the fact that our items, even at end of life, are still valued by customers. I just wanna double-click on something that Jen said, which is that sample sale revenue does not hit the revenue line. That is recognized as a gain or sale, you know, because we've already, you know, finished depreciating the product, you know, and it's at the end of its useful life. That's actually not reflected in our resale line. Okay. Very helpful clarification. Thanks a lot, guys, and congrats again on a nice quarter. Thank you. Our next question comes from the line of Abbie Zvejnieks with Piper Sandler. Please proceed with your question. Hi, thank you guys for taking my question. Going a little bit off of Michael's question with wedding season being the highest it's been in decades, what do you see in the mix of, like, customers that are coming to Rent the Runway for events? Are they going into the Reserve business, and do you see them convert to subscribers later? Or because you know, you get a discount on, like, your first two months of subscribing, do you see them going directly into the subscription business? Like, what's the mix there? Well, we've done a better and better job over time, and this is intentional, about positioning subscription as a solution for multiple events and trying to drive first-time renters into subscription before they even try renting for a special event. We're seeing a healthy amount of new customers come directly into subscription. We see based on the inventory that they rent, that some of them may be event-intending. This is certainly kind of a reason why people are signing up for subscription this year. That being said, our Reserve business continues to be such a critical funnel for us because even though over 80% of our revenue comes from subscribers, you know, the majority of our customers continue to be people that come in a few times a year, rent à la carte, buy from us Resale, and that continues to have a really healthy funnel of people that we can tap into as our future subscribers. We're kind of agnostic. We just want you to come in, try renting, see the depth and breadth of our inventory, see that we carry aspirational designer brands, that we deliver an incredible customer experience. Once you use Rent the Runway, of course, it's our job over time to try to convince you that a Subscription is a smarter and more sustainable way to get dressed for your everyday life. Got it. Thank you. Our next question comes from the line of Andrew Boone with JMP Securities. Please proceed with your question. Good afternoon, and thanks for taking my questions. I'd like to start on paused subs. As we think about COVID just becoming more normalized, is there a way for us to think about what percentage of paused subs is or should be expected, I guess? In other words, are you guys seeing a continued impact from COVID in terms of paused accounts, or how do we think about that going forward? Secondly, on the price increase, how do we think about the potential for future price increases? I'm not looking for guidance in terms of, you know, whether that is next year or whether it's multiple years, but just more structurally, given your learnings from this past price increase, how do we think about that going forward? Thanks so much. On pause is just a natural part of how people use the subscription. It creates flexibility for our subscribers, which keeps them loyal. I wanna call out that the people that are in pause this month are a different group of people than who's in pause next month. That people are kind of coming in and coming out of the subscription based on what's going on in their life. Like, we mentioned that there's seasonality to our business. People think more about and care more about their wardrobes and fashion in general between March and May, between September and November, when we've generally been trained as consumers to actually buy new clothes during this period of time. We see a lot of engagement with customers wanting to use the subscription for newness and for variety at those periods of time during the year, as opposed to, let's say, during the dead of winter in January when we're kind of snuggled up in our sweaters and pajamas at home. You know, that might be a more natural period of time where we see higher rates of pause. Now, in terms of how the percentage of folks that are in pause right now compared to pre-COVID, we do think that we're in a very different environment than we were in 2019. We have a product that we have different programs that have almost double the margins of the programs that we had in 2019. We have a customer who's using us for a much wider array of use cases than she used us for in 2019. To be completely honest, we don't know what the baseline percentage of people in pause is gonna be in this post-COVID world. We know what it was in 2019, but, like, the data, you know, remains to be seen over the next few quarters. Will it baseline out around 20%? Will it stay around 24%? We don't know. All that we care about is that active subs and total subs continue to grow because paused subscribers are the very bottom of the funnel for us. They're automatically rebuilt 30 days later. We love the flexibility that it provides, and we are excited about the fact that we reached a record number of ending active sub count in Q1. Thank you for the question on price increase, Andrew. You know, I would say I think you're really trying to get to perhaps ARPU increases over time and how we drive those, and we do have confidence in driving ARPU increases over time. A portion of how that happens is really through customer engagement, right? Through the fact that we have seen really strong add-on activity, and we believe that that continues. Now we don't have a specific plan for annual price increases. We do think that, you know, from time to time we might do some mid-single digit pricing actions, you know, when it makes sense, right? When we have continued to invest in the experience for the customer, when we're, you know, we're giving her more value. I would say as you think about it for the future, the one that you saw this year, it's probably a little bit harder than what you might normally see, you know, when we decide to do those. You know, that's really to account for the macro inflationary trends. Thank you. Our next question comes from the line of Ashley Helgans with Jefferies. Please proceed with your question. Hey, good afternoon. Thanks for taking our question, and congrats on the nice quarter. Just a quick one for us. We wanted to follow up, and see if you could just provide a little bit more color on the nice gross margin expansion. Thanks for the question, Ashley. I'll take that one. You know, we've talked a lot in the past about some of the very transformative changes that we've made to the business model, you know, by changing the program, changing the way that we acquire products. That was really intended to benefit the gross margin. Now that we see revenue scaling out of COVID, we're really seeing these changes show up even more in our numbers. If I break down, you know, the reasons why gross margin was so much higher this year versus last year, I'd say there's a couple of reasons. One, our revenue was up 100% in Q1 versus last year. Then you'll see that the product depreciation dollars are actually pretty similar to last year. That basically means that those costs now represent about half as much as a percentage of revenue as what they did last year. That's one significant reason, which we've been talking about. It's really nice to see it show up in the numbers today. Two, you know, we mentioned at the higher ARPU than we had expected, you know, obviously because of what I just said with it, which is the strong add-on activity, and that always is going to improve margin for us. Three is what we also discussed, which is, you know, the revenue share as a percentage of revenue was favorable versus our forecast, you know, because of those max payouts, where we no longer have to pay the brand. Those are really the three elements that contributed to the gross margin being, you know, substantially better than it was last year. Maybe Jen, maybe I'll hand it off to you a little bit if you wanna talk about, you know, product depreciation and the dynamic of the longevity of our items, which is really unique to our business model. Yeah. One of the things that I've observed, and based on kind of feedback that I've gotten over the last few months, one of the things that is misunderstood about Rent the Runway is how it's possible to monetize clothing over time. There is this big myth in the fashion industry that things go out of style right away because that's how the retail industry has functioned forever. That you launch product, and a few weeks later you mark it down, and then you mark it down again, and then you have to clear it. We have 12 years of data that show that, number one, things actually don't go out of style after a season, that we can monetize inventory for many years, and that what the customer cares about is she cares about wearing something that is new to her every single time she comes to Rent the Runway. Often, our customers don't know, and they don't care whether something is right off the runway or it's from previous seasons, as long as they've never worn it before. That's why we've invested so much in personalization, because we constantly wanna show our customers a fresh assortment of new items that are new to her. The other thing that's really important to understand is that the lifetime of a garment is much more highly correlated to how frequently it's been used and cleaned to how many seasons old it is. The lifetime is not dependent on fashion trends. It's entirely dependent on our ability to restore the item into like-new condition and how many times it's been cleaned. We have inventory cohorts that we kind of acquired in 2018 and 2019 that are still monetizing and were producing revenue in Q1, and that inventory has already been fully depreciated. We can still make money off these cohorts because customers still want them, and they didn't actually get as much use as we originally anticipated during COVID. I think that dynamic as well of really understanding how we're able to use personalization to drive monetization of inventory over time, I think is one of the most important things to understand about Rent the Runway. Great. Super helpful. Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question. Hi. Good afternoon, everyone. As you think about the product costs, which have been coming down, what do you see the opportunity in product costs going forward? It certainly seems like obviously it's been product costs reduced by 20% of revenue year-over-year. Where could that come from and why? Very interesting on the at home. Any data points on the 20 markets that you have it in so far, what you're learning from that at all enhances the next 20 markets you put it in? Any learnings there? Thank you. We've mentioned that our goal to drive to free cash flow profitability was to move non-wholesale product acquisition. Non-wholesale for us is our consignment business Share by RTR and exclusive designs to move that from 60% of our product acquisition to 66%. As a reminder, we only started non-wholesale acquisition in Q4 of 2018. We've gone from 0% of our acquisition being non-wholesale to 66% in, you know, 3 and a half years. We feel highly confident in our ability to kind of move product acquisition from 60 to 66% over the short to midterm. Maybe I can add something. Yeah. Yeah. Yeah. I think your follow-up question on that was just, you know, as a percentage of revenue, where do we think product CapEx is? You can see, you know, with our guidance of about $60 million spent on product CapEx and at the midpoint of the range, and we're talking about about 20% of revenue. We do feel confident that that number comes down over time for the reasons that Jen just said, which is that we see the mix shifting more and the fact that you have higher percentage of exclusive designs, you know, obviously helps with the total dollars and the percentage of revenue. We do feel optimistic and confident in that, and that's a key element of getting to free cash flow breakeven in the midterm. I think that the biggest learning on this launch of at home pickup is how much the customer wants it. You know, it is. It was a very non-technical launch. The only way that you could find out that we'll pick up the order at your house right now is via a sticker on the garment bag that in many cases you may never even see. Once customers see the sticker, they're like, "A hundred percent, yes. Come pick it up at my house. And that is so much more convenient for me, and it gives me the ability to control and to schedule," especially given who the customer is. She is this busy woman who has a job, who has a life, who has a family, who has social, you know, engagements. We make the experience. We're taking some of the friction out of the Rent the Runway experience. Now, I think the real data is gonna come, Dana, over the next few months as we launch at home pickup into our site and into our app. Because of how high kind of the customer satisfaction rate has been of at home pickup, we've tried to just launch it more broadly. As you saw, like, it's in a lot more markets than we predicted it to be at the end of Q1. We're moving very quickly to getting to this goal of it being available to over 50% of subs by the end of the year. We're really thrilled, and I think we'll have a lot more data once it's launched in the app and on the site. Got it. Thank you. We have reached the end of the question and answer session. I'll now turn the call back over to management for closing remarks. Thanks so much to everyone who joined us today. I'm excited about our continued momentum. I'm energized by the plans we have in place, and we look forward to continuing to update you on our progress on our Q2 2022 call. Thanks again for joining us. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.