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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended January 31, 2021 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our final prospectus (the "Prospectus") dated October 27, 2021 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the "Securities Act"), for our initial public offering (the "IPO"). Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company's fiscal years ended in January and the associated quarters, months and periods of those fiscal years. Overview We built the world's first and largest shared designer closet - that we call the Closet in the Cloud - with approximately 19,000 styles by over 780 designer brands. We give customers ongoing access to our "Unlimited Closet" through our Subscription offering or the ability to rent a-la-carte through our Reserve offering. We also give our subscribers and customers the ability to buy our products through our Resale offering. These offerings allow us to engage and serve our subscribers and customers across diverse use cases from everyday life to special occasions. We have served over 2.5 million lifetime customers across all of our offerings and we had 150,075 ending total subscribers1 (active and paused) as of October 31, 2021. For the nine months ended October 31, 2021 and 2020, respectively, 83% and 88% of our total revenue (including Reserve and Resale revenue) was generated by subscribers while they were active or paused. The variety, breadth and quantity of products we carry is important to our business, and we strategically manage the cost-effective acquisition of a high volume of items every year. We have successfully disproved the myth that fashion apparel items and accessories only last one season as we are able to rent or "turn" our products multiple times over many years, and over 40% of our styles turn for three or more years. We price our items at a fraction of their retail value, creating an attractive price and value proposition for our subscribers and customers. We launched our Reserve offering in 2009 and focused on normalizing shared closet behavior with consumers and designer brands by giving customers the ability to rent a-la-carte for special occasions. In 2016, we launched our Subscription offering. Today, we source all of our products, which includes apparel, accessories and home goods, directly from designer brands. Prior to 2018, we purchased nearly all of our products from our brand partners typically at a discount to wholesale cost, which we refer to as "Wholesale" items. In late 2018, we began to procure products through Share by RTR and Exclusive Designs. See "-Our Product Acquisition Strategy" below for a description of the three ways in which we procure products. Recent Business Developments

Initial Public Offering. On October 29, 2021, we closed our IPO, in which we issued and sold 17,000,000 shares at the public offering price of $21.00 per share. We received net proceeds of $327.1 million after deducting underwriting discounts and commissions and offering expenses.

Debt Paydown and Amendment. Concurrent with our initial public offering, we paid down our senior secured term loan with Ares Corporate Opportunities Fund V, L.P. (the "Ares Facility") of $80.7 million in full and $60.0 million of our subordinated, junior lien term loan with Double Helix Pte Ltd. as administrative agent for Temasek Holdings (the "Temasek Facility"), resulting in a total debt repayment of $140.7 million. We also refinanced the remaining Temasek Facility (the "Amended Temasek Facility").

Key Operating and Financial Results. We have achieved the following operating and financial results for the three months ended and as of October 31, 2021 and 2020, respectively:

1 Ending total subscribers represents the number of subscribers with an active or paused membership as of the last day of the period and excludes subscribers who had an active or paused subscription during the period, but ended their subscription prior to the last day of the fiscal period.

We have achieved the following operating and financial results for the nine months ended October 31, 2021 and 2020, respectively:

Third Quarter Business Highlights.


We experience seasonality in our business, which may change due to the effects of the COVID-19 pandemic. For our Subscription offering, we typically acquire the highest number of subscribers in the third and fourth fiscal quarters, with net subscriber acquisition in the third quarter generally higher than the fourth quarter. We generally see a greater number of paused subscribers relative to total subscribers in the winter and summer months. We typically realize a higher portion of revenue from Reserve rentals during our third and fourth fiscal quarters as a result of increased wedding and holiday events.

The third fiscal quarter of 2021 has demonstrated subscriber seasonality patterns that are generally consistent with our historical trends. In addition, our seasonality trends are seeing effects from COVID-19 as Reserve orders and revenue are impacted by fewer large-scale holiday and special events compared to pre-COVID-19, especially those typically occurring in the third and fourth quarters. Subscriber acquisition will likely also be impacted by COVID-19 in the fourth quarter due to fewer large-scale holiday and special events.

For more detail on the Impact of COVID, see section "Impact of COVID-19 on Our Business".

The COVID-19 pandemic materially adversely affected our fiscal year 2020 operating and financial results. In March 2020, we instituted numerous health and safety measures and took immediate financial actions to withstand COVID-19 including pausing of paid advertising and marketing activities and other cost-saving measures to reduce operating and capital expenditures in the short term, including salary reductions, closing of brick and mortar stores and right sizing of labor in our fulfillment centers. These actions significantly reduced Table of Contents

                                                      Three Months Ended October 31,                Nine Months Ended October 31,
                                                         2021                   2020                   2021                   2020
                                                                                    ($ in millions)
        Active subscribers (at the end of period)          116,833              65,545                   116,833             65,545
        Gross profit                              $           19.9          $      2.4          $           46.2          $    11.1
        Adjusted EBITDA (1)                       $           (5.6)         $     (5.4)         $          (13.7)         $   (16.0)

Gross Profit and Gross Margin: We define Gross Profit as total revenue less fulfillment expense, rental product depreciation and revenue share. We depreciate owned apparel assets over three years and owned accessory assets over two years net of 20% and 30% salvage values, respectively, and recognize the depreciation and remaining cost of items when sold or retired on our statement of operations. Rental product depreciation expense is time-based and reflects all items we own. We use Gross Profit and Gross Profit as a percentage of revenue, or Gross Margin, to measure the continued efficiency of our business after the total cost of our products are included. For the three months ended October 31, 2021, Gross Profit was $19.9 million compared to $2.4 million in the three months ended October 31, 2020 representing Gross Margins of 33.7% and 6.8%, respectively. Gross Profit was $46.2 million for the nine months ended October 31, 2021 compared to $11.1 million for the nine months ended October 31, 2020 representing Gross Margins of 33.2% and 9.0%, respectively. The increase in Gross Profit and Gross Margin in the three and nine months ended October 31, 2021 was driven by the improvement in some areas of fulfillment costs and lower rental product depreciation and revenue share, which represented a lower percentage of total revenue than in the prior periods and was partially offset by higher operations wage rates and transportation costs. We expect to have the opportunity to improve Gross Profit by driving growth in total revenue, fulfillment and operational efficiency gains, and strategically evolving our mix of product acquisition.

Dec 10, 2021


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