Here’s What to Know Before You Chase Rent the Runway (RENT)

Undoubtedly, the shocker of the Dec. 8 session arrived courtesy of Rent the Runway (RENT). A member of the burgeoning sharing economy, Rent the Runway offers an e-commerce platform where subscribers can rent or purchase designer apparel and accessories. Although RENT stock suffered from inauspicious timing regarding its initial public offering, it appeared to flip the narrative on Thursday.

Gapping up immediately from the midweek session, the equity unit of the sharing-economy specialist seemingly enjoyed multiple afterburner stages. Once the dust finally settled, RENT stock gained an astonishing 74.26% of market value. Notably, the benchmark equities index perked up as well but it performed nothing like Rent the Runway.

Undergirding the blistering performance was a better-than-expected print for the third quarter. During the three months ended Oct. 31, 2022, the shared designer closet “reported record quarterly revenue of $77.4 million, which represents year-over-year growth of 31%. Gross margins soared up 7 points to 41% during the quarter.”

In addition, “the company reported adjusted EBITDA of $6.6 million compared to -$5.6 million for the same period last year. Overall, Rent the Runway reported a net loss of $36.1 million, including $5.8 million related to restructuring charges. However, the net loss was still a significant improvement from Q3 2021’s net loss of $87.8 million.”

Combined with subscriber growth of 15% YOY to 134,240 active subscribers, it’s no surprise that RENT stock attracted intense interest. Essentially, the underlying enterprise beat the negative implications established by falling U.S. consumer confidence.

In other words, people are willing to spend money, which suggests the doomsday forecasts regarding the broader economy are a bit off. Based on this latest development, then, RENT stock might seem reasonable. But should you chase shares higher?

Traders Bid Up RENT Stock

Given the enthusiasm for Rent the Runway’s Q3 earnings report, that it lit up multiple screeners for unusual options activity shouldn’t shock anyone. First, RENT stock represented one of the highlights of unusual stock options volume, which shows the difference between the current volume and the average volume over the past month, highlighting extraordinary movement.

Specifically, RENT stock saw volume levels reach 16,217 contracts against an open interest reading of 19,871. Call volume hit 14,436 contracts while put volume pinged at 1,781. Again, with the robust Q3 performance, the exceptional bullishness was to be assumed.

Moreover, RENT stock attracted attention in the core screener for unusual stock options activity. Here, traders targeted the $2.50 calls with an expiration date of Dec. 16, 2022 – seven days till expiration since the placement of the order. Volume reached 6,276 contracts against an open interest reading of 245.

Fundamentally, Rent the Runway – though risky because of its incredible performance – appears viable based on macroeconomic dynamics. Interestingly, inflationary forces may have unintuitively contributed to the astonishing success of RENT stock.

Yes, higher prices impose burdens for consumers of discretionary goods and services. However, unlike prior inflationary cycles, the current one also included the COVID-19 pandemic. And as government agencies relaxed their mitigation protocols, people inherently owned greater incentives to dress up.

Remember, during the early days of the pandemic, folks could just get away with wearing pajamas. That’s not going to fly anymore.

Nevertheless, buying new wardrobes didn’t make sense for many consumers. Therefore, the concept of a shared designer closet (for a relatively nominal subscription fee) resonated with people who wanted to take full advantage of the social and economic reopening.

Challenges to Monitor

Another factor bolstering RENT stock is workplace normalization. With pandemic fears fading along with the economic pendulum swinging in favor of employers, many companies have recalled their workers. In fact, a Resume Builder report noted that 90% of companies will require their employees to return to the office at least part of the week starting from 2023.

Adding to the pressure, 21% of organizations stated that they will terminate employees who do not return to the office. Naturally, this carrot-and-stick approach may force people to accept their employers’ terms, which then implicitly requires a wardrobe upgrade.

Still, even with this positive catalyst, the business news cycle disseminated several stories of major enterprises announcing layoffs. Further, with the Federal Reserve committed to tackling what has been stubbornly high inflation, the central bank could take the gloves off regarding its hawkish monetary policy.

This would likely exacerbate recessionary pressures, leading to more job cuts. Ultimately, such a framework wouldn’t be helpful for RENT stock.

In addition, Rent the Runway must be careful about exaggerating the consumers’ ability to sustain discretionary purchases. For instance, the personal saving rate has been on a sharp descent since April 2020. As well, credit card loans jumped to record levels in recent months.

Combined, this circumstance suggests that while consumers may be opening their wallets now, at some point, they may have to fade their expenditures. If that happens, RENT stock could look a lot different than it does at the moment.

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