As you know, ask your question in the box below, or you can email me at agrey@allianceg.com. So we'll go ahead and dive right in. To start off, I'm gonna turn it over to you, Sid, to provide some opening remarks on background on Rent the Runway to some listeners who might be new to the story.
Great. Terrific. Thank you so much for having us. We appreciate all of you who've joined and the time you have, are gonna spend with us. Let me just tell you two things. One is what we do, and then two, give you a sense of where we are as a company today. In terms of what we do, we provide designer clothing rental services to customers. The majority of our business is subscription-based. Most subscribers pay $144 a month to receive two shipments and 10 items of clothing that they pick from. We have hundreds of designers for them to pick their items from. We also have an event rental business, and a resale business, where customers can buy items they love. So where are we as a company today?
The first thing I'll point out is we generated about $300 million in revenue in fiscal 2023. Secondly, as outlined in our guidance on our Q1 and Q4 calls, we said that we expect to be free cash flow breakeven this year. So this is a substantial improvement from $70 million in cash consumption in fiscal 2023. I would say the last thing I'll point out before turning it back over to you, Aaron, is, you know, over the last several years, we have completely changed how we purchase the clothing we rent. So the bulk of our capital expenditures are associated with clothing that we rent to customers.
This year, we expect almost 50% of all the new units we purchase to come via our revenue share channel, where we incur, I mean, little to no cash expenditure upfront, we take no risk, and we only share revenues with our brand partners if the unit performs. A substantial portion of the remainder of our rental product purchases come from designers where we manufacture their designs, that is, the clothing they design, at lower costs in partnership with our brands and under their own labels.
So in some sense, the big change in the business over the last few years, in addition, of course, to us becoming or expecting to be free cash flow breakeven this year, is that we have effectively become a platform for rental clothing and a really important partner, for our brands in terms of marketing, awareness, how customers actually become familiar with, those brands. So our focus now, given the unit economics that we have, given where we are in terms of our free cash flow path, is to grow the business and realize the sort of strong incremental margins we've been able to generate.
Mm-hmm. Great. Fantastic. Thanks for that opening remarks, Sid. You know, as we kinda dive more into the story, first, I wanna kick off with the demographics and the, and the businesses, right?
Sure.
First and foremost, can you talk about the core demographic for Rent the Runway, and then kind of break out two of the core business lines between the subscription and the Reserve?
Of course. So our average customer is between 20 and 40 years old. About 60% of our customers have average household incomes above $100,000. Something that sometimes people don't fully appreciate is how geographically diverse a business we are. 77% of U.S. zip codes are represented in our customer base. And you can look at some of the other statistics we provide on the investor presentation on the website, but we have a substantial portion of our customers that are outside the top 100 cities. And I would say between the two businesses, the subscription business and the event rental business, rather than a difference in the customer profile, the main difference in those businesses is what the customer is actually looking for.
So in the Reserve business, we're catering to a customer that wants a particular dress on a specific date, whereas our subscription customers—and those, those dresses tend to be-
Mm
... a little bit higher formality, a little bit associated more with, you know, evening rentals and weddings, and things of that sort. But our subscription customers use us really to get dressed every day, with about 54% of items shipped for casual wear, and then the remainder split fairly evenly between work and evening wear.
Mm-hmm. Okay. Appreciate that there, Sid. Talking about building the customer base, right? So you had 185,000 total consumers now, 136 active. Both numbers are roughly flat year-over-year. So I wanna talk about some of the efforts you have to return that to growth. You know, one front's re-engaging old consumers. So just talk about how you're looking to re-engage previous Rent the Runway consumers, and the steps you're taking to inform them of some of the new offerings you have to offer.
Sure. So I would say broadly for us, reigniting growth comes down to, number one, improving the experience the customer has with our product. And as anyone who's followed the company for a while knows, that is a consistent thread and theme for the last several years. But we are working very hard to improve, you know, every facet of that experience, and I'll get into some of the details in a second. The second thing is, we're also working to improve their experience with the inventory they have, so the brands that we carry, the clothing that we have. And then finally, the third lever that we are spending a lot of time on is marketing. Now, first two, in terms of improving the experience the customer has with the product and the inventory, are particularly important for re-engaging previous Rent the Runway customers.
So on product, for example, we've rolled out styling services. So we're the only you know, we sell, if, if you look at us versus many of the other companies that do similar things, we have the most premium assortment of brands. We work with the widest variety, almost 800 brands that we carry. And our services and our product that we offer are really a reflection of that premium nature of services that we provide. So we've rolled out styling services. We've rolled out a personal concierge service, where customers can interact with us via text message. If you look at our photography and the representation of the clothing on our site, it is substantially better looking than it has been. And we've made interacting with our app far easier, a lot more engaging.
And then on inventory, as we've discussed in previous calls, we have substantially increased our in-stock levels by buying our styles at greater depths. So what that means is, our customers, when they come to our site and explore the inventory that we have, they are much more likely to find that it's available, they get what they want, and they're delighted with that item, those items that they have at home. And as we shared on our Q1 earnings call, our former customers have actually noticed those changes. We've had really good momentum in rejoiners coming back to Rent the Runway, leading to the Q1 subaccount numbers you've referenced.
We have seen a continued improvement over the last several quarters, in revenue growth, and we expect to continue to see that, based on the guidance that we've sort of provided, both for Q2 and the rest of the year. I think on marketing, which is both applicable to new customers as well as existing customers, it's really about adding to the channels we use to reach customers. We wanna spark referral. There's a lot of work that we're doing on lifecycle marketing, and really putting a much greater emphasis on our brand and in real life events. So I think, you know, even at a very high level, 50,000-foot level, if you actually look at our penetration across different states...
So if you look at acquisition for every state that we're present in, and you do a penetration analysis that says, "How many customers are we acquiring as a percentage of that state's population?" What we actually find is, there's substantially different penetration in states with very similar demographic profiles, and so on. So what that tells us is that there is a real virality to the business in terms of attracting new customers, and so on. And so our efforts are really spent focused on trying to drive that behavior in region after region across the country. But if you were to look at that data and look at the underlying penetrations, you would have no doubt that there is a very, very substantial opportunity for us to grow the business.
Mm-hmm. Right, absolutely. And talking more towards finding that new consumer, right? Versus just re-engaging the legacy consumer. Can you speak towards maybe new demographics? You talked about the core demographic for Rent the Runway before. Are there new consumer demographics that you believe could be, you know, enticed by the offerings for Rent the Runway, and how are you looking to engage them?
Sure. I mean, I think, I think the nice thing about our business and about consumers today is that rental is becoming a bigger and bigger part of the consideration set, no matter the age of the customer that exists today. In the sense that, you know, we speak to investors who their family members subscribe, and one of our investors, you know, 75-year-old spouse subscribes to the to Rent the Runway, goes to parties, talks about us. But it's applicable to an older customer because we have sophisticated brands, we have brands that, you know, our older customers can relate to, but we also have brands and we have the breadth of offering for a customer in their 20s who likes to go out.
So if you look at our core demographics, it's 20- to 40-year-olds. But really, we're working to expand the kind of range of styles, the range of products that apply to, you know, different demographics and different psychographics, really, in terms of, you know, who our customer is. And really, what we're after is somebody who wants to feel stylish every day, who wants to have that confidence, and, you know, is clearly thinking about rental as a viable option, no matter the age that they are.
Mm-hmm. Okay, great. No, yeah, great to hear that, that expanded consumer base there. One initiative you guys have is digging back into the Reserve one-time rental business for events. So what are the steps necessary to rebuild that aspect of the business? Does it require you building up new inventory, or is it primarily just communicating the availability of rental outfits for these special occasions, even without a subscription?
Sure. So we're spending a considerable amount of time developing plans and starting to implement plans to revitalize the one-time rental business, because is a very substantial opportunity, number one. And number two, we're one of the only players in the market that offers that product. So there's two components to this. One is, on the supply side of things. So we have increased on supply, the inventory available for Reserve-only rentals. We're working with more and more brands on a revenue share basis for the Reserve business . And the Reserve business has really attractive economics, so it is really a win-win for both us, our customers, as well as the brand partners.
Because we can monetize that inventory at relatively rapid rates, the brands can get paid back relatively quickly, and it's an attractive way for them to get introduced to new customers. On the demand side, obviously there's a number of things going on. One is, we've recently reopened our New York City store, so customers can try on items before reserving them. We're also working on a number of initiatives to drive greater customer satisfaction with fit. So we offer. You know, we have to do a better job of communicating this, but we offer a second size for every rental that a customer decides to purchase from us.
We also offer a discounted second style, so in case that one style doesn't quite do it for the customer, they are able to get another style at a discount and make sure that we address them for the occasion that's important to them. And then there's also a real premium service around fit. I mean, if they need help, they're, we're a text message away, we'll sort out their problems. What we want is customers to have a really terrific experience. And I'd say the last thing is, we have a lot to offer in terms of-
Mm-hmm
... additional things that we can provide customers. So for instance, we don't really, haven't really marketed quite as effectively as we should have, the fact that we have accessories. You can use us to get dressed for your event, but why don't you add a handbag? You can add some jewelry. Add that second bag, as you know, style. I mean, there's lots of things that we are doing that really will provide customers with that real confidence that they can get dressed for the event, knowing that they will look good, the item will fit them, and if it doesn't, we will take care of that customer.
Mm-hmm.
It's both supply and some of the work we're doing on marketing and demand side.
... Yeah, no, absolutely. So I wanna dive a little bit more into the marketing first, on some of the legacy customers. Can you speak towards any type of CRM database that you have, you know, of legacy consumers who are no longer a part of it? You know, how big of a database is that for you? And then some of the more direct marketing initiatives, are you tailoring it specific to maybe what she might have been utilizing in the program before, and then what you think she'd want now? Like, how are you utilizing data, and then how big of a legacy CRM database did you guys have for those legacy customers?
Sure. I would say, even zooming out a little bit in terms of, you know, how are you really thinking about reaching out to customers? Of course, the database and the CRM is one important component of that, but there's more to it than simply the CRM, right? So if you think about our marketing initiatives, there are four real categories that I think we think about. One is, we really want to focus on our brand. So move away, or at least not solely rely on bottom-of-the-funnel kind of marketing, but really emphasize and reinvigorate, you know, people's understanding of what we offer in our brand.
The second is, and this relates to some of the comments that you had, but creating not just a simple email strategy or a simple using our CRM and our email list, but truly creating a life cycle strategy that meets the customer where they are, and provides them with the exact service that they might want, or we think they might want at that time. And the third part of this is emphasizing in real life experiences of all kinds. And then four is really a little bit broader than simply CRM, but just developing new marketing channels. So let me just tell you, maybe say a couple of sentences on each of these so you get a sense of what we're trying to do. You know, on the brand, we are a really beloved brand.
I mean, when people, when consumers think about clothing rental, they do think about us. We have a lot of unaided awareness. But what we are working on is making sure that we move, again, move away from just solely bottom of the funnel, and really try and highlight that emotional connection that the brand has with customers. So for instance, Jen started the year, this year, with her LinkedIn campaign. We have made a, you know, other... There's a couple other things that we followed up with in terms of Women of Substance. Make It a Moment so that, you know, you can get dressed every day and feel good about every moment of your life.
So really igniting, you know, that, that love with the brand and that emotional, building on that emotional connection is important to us. The second thing is, in terms of life cycle, I would say we have additional work to do here, where, you know, how do we really engage customers throughout their journey with us, right? So, you know, a customer who comes in to do an event rental business, to do an event rental at one time, how do we make sure that we understand what other events that might be going on in their life? When do we reach out to them to make sure that we're in front of them when they have that additional event?
So it sort of starts even with simple things like that, to making sure that if somebody comes into the site, decides to go somewhere else, we target them again, make sure that they're aware of us coming back. That applies obviously to rejoining and former customers also. But also provide former customers with new information, new brands that we have to offer. What has changed? I mean, there's lots of additional work we can be doing, and lots of additional communication that we can have to reinvigorate that former customer base of ours.
Mm.
The third thing I think is important is, we obviously, as I mentioned, reopened our New York City store. And you can take a look at the comments on Instagram. Customers want to interact with us in real life. I mean, they like the fact they can come to the store, drop off their shipment, or try on a bunch of clothes that they might rent for an event in a month or two. And it's really sparking some real, you know, love with the fact that they can enter into a store and experience that brand in real life. We also just did an event, and it goes beyond New York City. I mean, we just did an event with Pookie and Jett, you know, of TikTok fame, in Atlanta, that was really well-attended.
People loved coming and seeing what we had to offer. Then I think the other part of marketing for us is to make sure that we can actually ignite new marketing channels. So, you know, it's not just about email, it's not just about search and paid social, and so on, but can we work with a broader range of influencers? Can we work with and develop a real affiliate strategy? You know, direct mail. There's lots of different channels that we can interact with customers, that will make a significant difference in their willingness and their sort of kind of you're almost priming them for conversion when they actually come to the site because they're really familiar, and we've been in touch with them through a number of different channels.
Mm-hmm. Right. Absolutely. So I wanna continue off that, you know, bringing back live with the stores. You talked about one of the benefits, right? In terms of, like, being able to go and see the products, right. What are some of the other advantages of the physical stores that it provides the company? And then how do you think about that in terms of also, the cost of then, you know, expanding more back into the store? So, you know, why do you think now was the right time, and what are the broader benefits outside of what you just mentioned in terms of having these stores?
Sure. So in terms of timing first, couple things to mention here. One is, we've already done a lot of hard work in getting the company to the point at which we're no longer consuming a lot of cash. I mean, we went from $70 million in cash consumption to what we're expected to, and with the guidance we provided in Q1, to be break even, free cash flow breake ven this year. So I think the unit economics are sound, the customer demand is there, and, you know, the timing is right for us financially as a company to start really going on the offense and thinking about other ways to engage customers.
I think in terms of the store- And, and the other thing I should mention on the New York City store in particular is, we had a lease in New York City, so it isn't costing us a lot of additional capital here, certainly this year. And of course, you know, we're gonna, we're gonna scale into it and, you know, see how things go in New York, et cetera. I would say that, in terms of the stores- what's interesting to us, and, and the reason we're confident in the store launch, is we used to have both store-within-a-store, this is many years ago, and, you know, our own retail stores. And customers absolutely loved the stores.
I mean, just to give you some sense, when we first had stores, customers would walk into the store, they got dressed for work, they returned to the store, returned those items, got dressed for their evening out, and came back. So I think they just loved the fact that this was a real extension to their closet, and compared to then, we actually offer a lot more now. I mean, we have more stylists, we have newer brand partners. Ultimately, what we're trying to do is make sure the customer knows that we're there for them in real life, we're there for them a text message away, and that we will make things right if something doesn't fit them, and we're taking care... We'll take care of them. I mean, we really want to...
We value their business, and wanna make sure that they view us as real, you know, as real partners for them and in their lives.
Right. No, great to hear. Well, have to stop by the store for anyone who's in New York City.
I would say the other thing is, it is really... I mean, sometimes, it, it's hard to appreciate it fully, but for a customer who hasn't worked with us before, they have an important event in a month, two months, three months, et cetera, it's not simple to convey and to provide that confidence virtually, without them actually having the experience of trying on a number of outfits, and so on, to be fully confident that this is what's gonna look good for them for their event that's important to them. So I think to actually, for the event rental business, it is a really important component that's very difficult to replicate, virtually. Of course, there's a lot of customers who come who've rented with us before. They sort of know their size, they know what they're gonna get, et cetera.
But for new customers, just that additional level of comfort is really important for us. And also, as I pointed out, there is a substantial amount of virality in this business, and as we start to target geographies and start to, you know, spark that virality, that physical presence becomes a pretty important component in that strategy.
Mm-hmm. Right. Absolutely. We've talked about a number of initiatives to help drive sales growth. First quarter sales were up 1%. You're targeting 1%-6% for the year. What are some of the KPIs that you're monitoring to ensure that you're seeing sales trend towards the direction you guys would like?
Sure. So as you know, Q1 represented an improvement in sales growth versus prior quarters. Our Q2 guidance that we shared on our last call also shows further improvement versus Q1. And then our full year guidance clearly encompasses the possibility of further acceleration and growth. So I think that's good, good news. I would say that the timing of growth, the other thing sometimes is difficult to keep in mind when you look at our published growth rates, is that the timing of growth is really affected by the retention issues we experienced midway through fiscal 2023, as a result of the inventory and stock issues we've discussed before, right? So I think we did that, we changed our promotional strategy, and so on. So I mean, those, those affect the timing of when we build back subscribers, and so on.
But the good news is, every quarter, over the last few quarters, we have shown progress, in the right direction. I would say in terms of KPIs, of course, what we're monitoring is acquisitions. We're monitoring acquisitions from both former and new customers. As I mentioned before, and as we mentioned on the call, we're seeing really good... You know, we saw really good momentum in Q1 on former customers coming back to us. They recognize the value and the improvements that we have made to the experience. And then we'll also pay very close attention to retention metrics for customers throughout their tenure, so a new customer all the way through customers who've been with us 12, 24 months, et cetera.
And then we're also paying attention to customers' willingness to purchase products to keep forever, because that's also an important indication for us, that our customers are willing to... They appreciate the product, first of all, they appreciate the inventory, they fall in love with it, and they're willing to pay to keep that item.
Mm-hmm. Right. Wanna move down to the P&L a bit, talk about profitability.
Sure.
Rent the Runway has meaningfully improved the profitability. 9% EBITDA margin last fiscal year, up from 2% prior, targeting 15%-16% this year for the year ending January 2025. So can you talk about the main drivers behind this margin expansion, and where do you think the long-term margin target could be for you guys?
Okay. So as you point out, we generated a 9% Adjusted EBITDA margin in fiscal 2023, or about $27 million in Adjusted EBITDA. We've also outlined on our last call that we expect about $11 million in lower costs as a result of our cost reduction efforts in fiscal 2023. So if you take the $27 million, add in the $11 million in lower cost, that alone accounts for a very substantial portion of the bridge between the 9% and the guidance we provided on Adjusted EBITDA margins for this year. The second thing is, we've also highlighted that we expect continued improvement in variable costs, especially related to fulfillment. Of course, you can look at our progress in fulfillment and on fulfillment costs year-over-year in Q1, and you can see that we're very clearly on the right track there.
And then finally, higher expected revenue, given the guidance we've provided, including from resale, which is, as you know, has been growing significantly year-over-year, is also a contributor to the additional margin improvement. As far as sort of long-term margins go, I think, you know, rather than me giving you a specific number, I would say that the best way to assess that question for yourself is to look at our gross margins of close to 40% over the last few quarters. I mean, those costs, those cover the cost of inventory, as well as our fulfillment expenses. We incur a relatively small amount in variable credit card fees and customer service costs, but the incremental margins in this business are quite high. And we have, in recent history, done a very good job of controlling fixed costs.
So I think growth should improve margins, given these, high incremental margins.
... Mm-hmm. Okay, okay, great. Appreciate that there, Sid. And moving to profitability, I wanna talk about a little bit more cash flow, and then what you mentioned before in terms of moving more to a capital-light model.
Sure.
Talk about the revenue share with brands. So again, can you just let the audience know the program, so how you were buying before, right, and how you're doing it now, and how the rev share makes it more capital-light for that? So first, I just wanna get back to you in terms of how important that is for the company, and how it helps you improve, the cash flow for it.
Sure. I mean, I think for new investors and market participants who haven't spent a lot of time looking at us, I would say that is probably the most surprising and most underappreciated part of what has happened to the business over the last few years. So if you look at 2019, essentially all of the inventory, more or less, that we were buying was us buying inventory directly from brands at wholesale prices, right? We would incur the capital costs upfront, we would pay the brands their wholesale cost, and then we would have the inventory, and we would own that inventory. Now, there's been a substantial change in that model. Now, in that particular model, with that buying everything upfront, obviously there's a working capital component to it. We incur all of the cash and incur all the cash upfront.
There's also a risk component to it, given that we've already expended the capital, and we need to make sure that we have the demand to take advantage of that. But if you look at what's going on, what's gone on since then, is we have now three ways in which we work with brands. The first is the traditional wholesale model, which has actually become a minority of the business at this point in terms of percentage of units that we're sourcing from that channel. So we still work with a number of brands on a wholesale basis. The second way in which we work with brands is on a revenue share basis, so this is through our Share by RTR program.
This year, what we have said is, we expect about 50% of all of the units we are receiving this year to be sourced through the Share by RTR program. And in this program, we're paying brands very little, to most cases, no upfront payment. And this is, these are- it's not that they're shipping items that they just choose to ship to us because, you know, they have too much of it or whatever. We're actually selecting from their collections what items we think our customers like and want, and they will ship those items to us. And so these are desired brands. They're items that are, you know, popular with customers. They are sending those items to us, essentially without payment upfront-
Mm-hmm
... and we are monetizing those through rental. And with every rental that we make with those items, we essentially compensate those brands. So those brands will get paid over time, but effectively, they take the risk. And the reason, and there's been a very substantial increase in the percentage of inventory that we're sourcing through this program. But I think the important thing is, you've gotta ask yourself, well, why, why are the brands willing to work with us in this particular fashion? And it's because we're providing them with access to a customer base. We're providing them with data about fit and what our customers are saying about those products, so that they can use those to improve their own designs.
I mean, we have provided items and feedback that have resulted in, you know, best-selling items at, at brand partners and so on. So I think increasingly, we are finding brands more and more willing to work with us under this model because they also recognize that rental is here to stay and is a very significantly, it's gonna be a significant part of the market for, for years to come. I would say the third way in which we work with brands is through our exclusive designs program, where that costs us about 50% of wholesale, where we are essentially working with brands, the brands design the product under their own label. They're giving us their designs. We use a network of manufacturers to actually manufacture the product.
Those designs are exclusive to us, and our customers get the advantage of, you know, products that are designed by world-class designers. Of course, the economics work for us.
Mm-hmm. Okay, great. Thanks for that, Sid. So right, we talked about how, I mean, that's underappreciated, right? 'Cause it's almost like a new economic model for this-
We, we're becoming effectively a fashion platform, right? I mean-
Right
... we have a very significant portion of the inventory really coming from, almost no cost or relatively low cost-
Right
... sources.
So then I guess the question could become, right, so with this new capital-light model and little upfront capital cost, how much easier does it make it for you to then scale the business? 'Cause there's not that capital, right, associated with it. So how much does it help you to then scale the business, either via inventory, as you get more brands and it's not capital-intensive, and then having more inventory to offer consumers then, so that brings on more consumers? So does that help you to then drive more top-line growth in a capital-efficient manner?
Hundred percent. I mean, we are. I mean, one of the reasons that we're doing this is exactly as you say. I mean, we don't have to incur this, this cost upfront. We can essentially plan the business in a way that does allow for us to take advantage of the lower cost of inventory, and ultimately, you know, sure, I mean, part of this is us, the unit economics, and improving the unit economics, and so on. But a large part of this, to be quite honest, is providing our customers and returning a lot of that value back to customers, right?
So we are able, as a result of those programs, to offer customers, you know, a lot more than we otherwise might have been able to, right, in terms of, depth of inventory, in terms of styles, in terms of, inventory available for the Reserve business that's exclusive to Reserve, on, on a revenue share basis. I mean, all of these things ultimately will help, you know, customers come to us to find great clothes and to get dressed every day, and the more we can do in terms of providing them with those choices and options, of course, you know, the more we'll be able to grow the business.
... Mm-hmm. Right. No, absolutely. So, bringing it back home now with more capital light and improved EBITDA.
Yes.
Free cash flow, right? So you're targeting free cash flow breakeven for the full year. Key things to achieve this, right? We've talked about some of them now, I guess. What would you put as... How much of it is just from these cost savings initiatives and moving to the asset-light model, versus how much of it being embedded in top-line growth, right? You're only embedding 1%-6%, so it sounds like most of this, in terms of free cash flow breakeven, is from the cost-saving margin improvement, and then the more capital-light model. Right, so then how do we think about the free cash flow generation on the go forward?
I guess it's somewhat similar to how we asked it before on the margin, but how do we think about that all flowing through into, into Rent the Runway becoming more of a cash flow generating company?
Yes. So I would say, in terms of... Let me just break this up into two parts. One is, I mean, if you-- Let me just say this, which is, we are, as a company, clearly focused on achieving free cash flow breakeven this year, and our goal is to have a company that can generate a substantial amount of cash in the future. I think if you look at 2023, we consumed about $70 million in cash, and we went through a fairly detailed bridge in our Q4 call that went essentially from $70 million to zero. Now, if you look at the components of that, there's $5 million in lower cash interest expense because we changed the terms of the debt that we have.
There's about $30 million from lower rental product capital expenditure, for all of the reasons we've just gone through, in terms of becoming more capital light, and so on. There's about $11 million from cost reduction efforts we've concluded. We had- we incurred about $10 million from in excess working capital and some one-time items in fiscal 2023, that we no longer, that we don't expect in fiscal 2024. You know, that alone is, is essentially the bulk of the change and improvement relative from the $70 million essentially to, to zero. But there's a couple other components. One is, of course, we have outlined that we expect variable cost improvements, especially on the fulfillment side. And as you can see in Q1, we have about 300 basis points lower, fulfillment costs year-over-year.
And then finally, of course, we did point out the revenue growth that we expect, and as you pointed out yourself, it isn't, you know, substantial in terms of, a component to, to that bridge, given the factors I've already outlined. So I mean, we have, you know, we've already done a substantial amount of work to get us from $70 million to zero. And then in Q1, I should mention that we consumed under $2 million in cash, which is a substantial improvement from $12 million in the prior year, and $20+ million the year before. You know, our rental product expenditure is also a bit weighted in the first half, and so it affects the timing of quarterly free cash flow.
But you can see that we are making a very substantial amount of progress in that journey towards becoming free cash flow breakeven this year. In terms of ongoing and what we expect in the future, of course, we highlighted the incremental margins that, you know, adding an incremental customer, you can see the margins that that is, coming in at. So, and, and we expect to maintain fairly, close control over the fixed cost base. But the other thing that you should do is, in the Q4 2022 earnings presentation, we have a lot of slides around the maintenance and growth characteristics of, and, and cash flow, and so on, that you should, you know... I encourage, any investor to go through. I'm happy to walk through those, in detail in one-on-one conversations, and so on.
But I think those two components should give you a pretty good sense of how growth impacts cash flow, and how accretive it is to cash flow.
Okay, great. Thanks for that, Sid. That was really helpful detail. Again, if you have any questions, go ahead and type them into the Q&A or email me at agrande@alliancegp.com. Last question from me then. Just quickly on the balance sheet, shortly before you became CFO, the company refinanced its debt, extended out its maturity to October 2026. What are some of the key financial targets you aim to reach in the next two years to best position the company regarding the balance sheet?
Yeah. So I will say a couple of things on the debt. So you're right, we did extend the debt, and the maturity of the debt from October 2024 to October 2026. But we also had another, you know, refinancing, or at least a renegotiation of the debt, more recently, where that resulted in essentially no interest payments for 6 quarters, and then a reduction, a substantial reduction in the minimum liquidity covenant. I would say the details of those are found in the publicly released materials that we have provided, but I think the more important parts of that, both of those financings, is, number one, we have one lender. That lender has been an observer on our board for a number of years.
They know the business very well, and as you can see by the cooperation that we have experienced from them over the last two financings, it is a very supportive relationship. They want the business to succeed, and they're willing to work with us to make that happen. Obviously, in terms of what we are doing in the KPIs and so on, you know, the better we do as a business, the more progress we can demonstrate in terms of getting to free cash flow breakeven this year, and cash generation from then on out, the more options we're gonna have in terms of dealing with the balance sheet. Obviously, we recognize it is important to investors. It is important...
It is, it is an important part of what we need to do as a company and as a management team, but we feel good about the relationship we have and the progress we're making.
Mm-hmm. Okay, great. Thanks for that, Sid. I had a question come in, in terms of consumer demographics, specifically around Gen Z. Maybe something that, some things that you're doing to make sure that you're catering, you know, towards that consumer, if you're seeing some shift, you know, away from some of the legacy millennial, you know, work wear, and how Gen Z might be different, how you're catering and marketing towards them?
... Sure. So, I mean, we have, obviously, a marketing team, an inventory planning team, a buying team that is constantly looking at our customer base, constantly examining the trends that they're seeing. And we're working with our brand partners as well, who want to use us to spur awareness amongst the different, you know, groups of customers that we can target, essentially, right? So we... You know, stay tuned. I mean, we're doing a lot of work in, each of those areas to broaden the kind of customer we reach out to, and so on. We have nothing to announce at this moment, but, you know, stay tuned.
Mm-hmm. Okay, great. And then quickly on the, the rev share model, right, in terms of its ability to replenish inventory for demands of new consumers, new demands of consumers versus traditional wholesale model, you know, how does it differ between the two versus traditional wholesale and the rev share in terms of being able to have that newness for new consumer demand?
I mean, we work with our partners in much the same way, in the sense that we are. You know, the buying teams will go and examine all of the inventory that those partners are producing and have introduced to the market, and we will select the inventory that we think best reflects the makeup of our customer base and the demand that we expect to experience. So we work with the you know, wholesale or revenue share partners in much the same way. I would say that the couple of differences that we do see are, we have noticed an increased willingness from revenue share partners to work with us on a replenishment basis.
So items that are popular, that are in high demand, that customers wanna buy, we can actually go out and replenish those items. So, I mean, there are some additional benefits in working with revenue share partners, especially those that, you know, produce a lot of inventory, and so on. So I think we're actively working on taking advantage of some of the many benefits that revenue share does provide us. But also, we're continually expanding the kind of revenue share partners we're working with. So as I mentioned, we're doing now more with Reserve-only, higher-formality revenue share partners, et cetera. And I think that's a pretty positive development as far as that program goes.
Mm-hmm. Okay. No, I appreciate that there. For the Reserve business and the special events, for the marketing towards that, right, how do you look to potentially look at the website differently than it has right now? It seems to be, you know, not as obvious when you're going on the website that that's availability, subscriptions are pushed more. Do you plan on changing that now in terms of as you're looking to push the business, so that that offering's available? And how do you think about... Do you see risk of any cannibalization, right? So people might switch from being subscribers, and they see Reserves available, so pushing Reserves, you might lose subscriber. Do you see any potential cannibalization with that?
Sure. I mean, I think the more important question for us is, the opportunity is just so vast. I mean, we are, in terms of... Even if you were to narrow it down to the number of women that, young women that attend the prom or the number of people that go to weddings and the number of, you know, event rental rentals that we have, I mean, it is just a very, very, very tiny portion of the market. So I think we have a considerable opportunity to grow that business. It is not so much about cannibalization and whether, you know, a subscriber becomes a Reserve customer, and so on.
It really is truly about communicating effectively the value proposition for Reserve, making sure the customer feels confident that we have their back, that we are able to provide an item that fits them, that they will look good in those items, that they have the opportunity maybe to go to a physical location and try on those items. They can get accessories, handbags, other things, another style. I mean, there's lots of things that we can do to really communicate better the entirety of the value proposition for the Reserve business. You know, I think the... Sorry, what was the second part of your question?
No, that was the main part there.
Sorry?
I said that was the main part of it there.
Okay, got it.
Yeah.
Sorry. Great.
No, no, no, no problem. No, I know we're coming to an end here, so, I'll leave it to you to close out with some closing remarks in terms of what you believe investors, you know, might be, you know, missing in the story today, and what they can look forward to, you know, in the coming quarters and years for Rent the Runway.
Yeah, I would just say that, number one, we think the long-term opportunity for rental is really substantial. Consumers want to get dressed in an environmentally sustainable way. This is a form of self-expression, and they're excited about trying us out. The second thing that I think is important is, we have drastically changed the business model in a way that works for us financially and in a way that allows us to take care of our customers in a much more robust fashion. I would say that the third thing is, so the opportunity is there, the financial model is in good shape. You know, we have gone from a business that's clearly consuming a lot of capital to a business that, this year, will hopefully be free cash flow break even.
And I think the onus now is on us to really use the platform that we have built after many, many years of hard work. And by the way, that platform, this business does have some characteristics of it may not be winner take all, but it might be a couple players or a few players really, you know, experiencing a lot of growth and a lot of market share in this business. Because this is a business where you need the brands, and customers want to rent from a company that offers them that choice. So it isn't as compelling for a customer to go out to a company that might have one or two brands and, you know, a single-branded retailer and so on, to adopt rental there.
I mean, we have 800 brands, and we have that variety, and it's not that simple to replicate that type of dynamic for competitors. So I would say that, you know, we're in an attractive market. The economics are good. I think we've built a really interesting position in that market. And I would say the last thing for us to do is to execute and make sure that, you know, we do all of the work that we need to do to make sure that customers truly fall in love with the offering, that we provide them with the magical experience that we are trying to provide them. And I think if we do that, there is a lot of opportunity ahead.
Mm-hmm. All right, great. Sid, I think that's a great place to end things here. Sid Thacker, CFO, Rent the Runway, ticker RENT. Thanks so much for joining me today here, Sid, and thank you everyone who joined in today for the Rent the Runway conversation and all the other conversations we had for the Consumer Showcase here at AGP. So Sid, thank you, and thank you to everyone who joined. Hope you guys have a great evening.
Thanks, everyone, and thank you, Aaron, for the opportunity.