Welcome to Rent the Runway's 4th Quarter and Full Year 2022 Earnings Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. I would now like to turn the call over to Rent the Runway's Vice President of Investor Relations, Jackie Blatt. Thank you. You may begin.
Good afternoon, everyone. Thanks for joining us to discuss Rent the Runway's fourth quarter and full year 2022 results. Joining me today to discuss our results for the quarter and fiscal year ended January 31st, 2023, are CEO and Co-founder, Jennifer Hyman, Chief Financial Officer, Scarlett O'Sullivan, and SVP of FP&A, Sid Thacker. During this call, we will make references to our Q4 2022 earnings presentation, which can be found in the Events and Presentation section of our investor relations website. Before we begin, we would like to remind you that this call will include forward-looking statements. These statements include our future expectations regarding financial results, guidance and targets, market opportunities, and our growth. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially.
These risks, uncertainties and assumptions are detailed in this afternoon's press release, as well as our filings with the SEC, including our Form 10-K 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 will also reference certain non-GAAP financial information. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Reconciliations of GAAP to non-GAAP measures can be found in our press release, slide presentation posted on our investor website and in our SEC filings. With that, I'll turn it over to Jennifer Hyman, Co-founder and CEO of Rent the Runway.
Thanks, Jackie. Thank you everyone for joining our earnings call today. I'm really excited for 2023 as I believe it will be a transformative year for Rent the Runway. We have entered a new era for the company, where the majority of our internal resources are focused on investments for our customers. As we've shared before, the market for fashion subscription and rental, which we pioneered, is taking off and is expected to see massive growth over the next decade. It's our belief that we have built the brand and infrastructure to capture this opportunity. We have conviction that the way we grow and become a profitable business is by ensuring that we are adding tangible value to our customer experience quarter-over-quarter.
We already kicked off this strategy in early March of this year by changing all our subscription programs to offer more items for the same price with minimal impact to our gross margins anticipated versus fiscal year 2022. The customer response has been incredible. I'm excited to share more throughout this call. First, let's close out 2022. I'm pleased to report that we had a strong finish to fiscal 2022 as we exceeded guidance on both the top and bottom line. On our earnings call at the beginning of fiscal 2022, we laid out two- key priorities for the year. One, to grow revenue 45%–50% in fiscal 2022. Two, show progress on our path to profitability. I'm proud to share that we achieved both goals.
In fiscal 2022, we grew annual revenue 46% year-over-year to $296.4 million, which accelerated up from 29% revenue growth in fiscal 2021. We posted three consecutive quarters and our first full year of positive Adjusted EBITDA since IPO, generating Adjusted EBITDA of $6.7 million for the year. Fiscal 2022 was notable for the decisive actions we took to position Rent the Runway as a financially stronger business. We right-sized our fixed cost base, cutting approximately $25 million in fixed operating expenses versus our Q2 2022 run rate. Financial discipline is firmly embedded in our operating culture. We extended our debt maturity and substantially reduced cash interest expense by over $20 million during the next two years.
The cumulative impact of the decisions we have made since 2019 is highlighted by our 40% gross margins after fulfillment and product costs that are better than many traditional retailers and online peers on a comparable basis. Equally important is the progress we have demonstrated on product acquisition. We acquired almost 60% of our rental product in full year 2022, either on consignment through our Share by RTR program or through lower cost exclusive designs. Our product acquisition success provides a powerful competitive advantage for our business. We believe our gross margins are healthy, our cost structure is right-sized, and our rental product acquisition is increasingly efficient. Our primary task is to grow. A larger subscriber base at our current margin structure leads to improved free cash flow. The thing we were not satisfied with in fiscal 2022 was our subscriber growth.
We ended the year with 127,000 active subscribers. We've mentioned before that we believe the price increase we took in April 2022, though beneficial for revenue and profitability, hurt our subscriber growth, especially given that the price increase did not correspond to meaningful improvements in customer value or experience. We have long-term relationships with our customers via our subscription product, and it's critical that they feel that their experience is always getting better, which is our strategy for 2023 and beyond. As of April eighth, 2023, we've already rebounded to an all-time record high of over 141,000 active subscribers, which gives us early signs that our growth strategies, which I will discuss later on this call in greater detail, are working. Before I discuss our plans for fiscal 2023, I want to discuss our path to free cash flow profitability.
As the founder of this business who sees Rent the Runway as my life's work, it's my number 1 goal to create a self-funding company that generates cash and captures the massive global opportunity for a Closet in the Cloud. The customer thinks about building her wardrobe in a way that is completely different than just 10 years ago. She's open to secondhand, she's willing to subscribe and rent. It's our job to capture the growing market we built. The good news is that these goals are consistent. A larger subscriber base at current growth margins and fixed costs should lead to free cash flow profitability. While Scarlett will walk through more details, we are making rapid progress. Our expected free cash flow in fiscal 2023 is at least $42 million better than in fiscal 2022, a reduction in cash consumption of approximately 50%.
We will discuss shortly, with 158,000 average active subscribers, a level consistent with our minimum 25% subscriber growth guidance for this year, we might expect a further $20 million improvement in the cash consumption from our base business. The details of our business can be complicated to understand, so we are providing additional information to help illustrate the important strides we are making towards generating free cash flow. Finally, as Scarlett will outline, we think we are well within reach of an active subscriber base that is able to generate enough cash to sustain itself and begin to contribute towards our growth requirements. It's imperative that we capitalize on the significant growth opportunity that lies ahead of us. Let me walk you through how we plan to grow in fiscal 2023 and beyond.
Our growth plans revolve around our customers and seeking to improve every facet of their experience with Rent the Runway. We believe doing so provides important benefits to retention as well as organic customer acquisition. While you can see in our earnings presentation that we enjoy strong revenue retention, we believe that focusing on customer experience can drive further improvements to retention. About half of the total subscribers who leave us do so within their first 90 days. Improvements to their experience can be powerful drivers of growth. While we aim to retain more of those customers, the benefits go well beyond that. Our longer-tenured subscribers leave us at a fraction of the rate of these newer subscribers. Thus, retention improvements would not only add more customers but also keep them significantly longer. More satisfied customers are key to driving organic growth for our business.
The majority of our historical subscriber acquisitions have been organic. Almost 60% of customers hear about us from someone they know. Our customers have always been our best marketers. New customers will undoubtedly hear about the more positive experience we are trying to create via word of mouth. We started off our year with a bang by changing all of our subscription programs to include an extra item in every shipment, offering 25% more value for the same price. With this launch, our base program shifted from four items to five items per shipment. For the substantial majority of subscribers who pay $144 for two shipments per month, they are now receiving 10 items versus eight items previously. The math is simple for customers in our 10-item plan. Each designer item now costs $14.
This pricing is meant to go head-to-head with fast fashion. Of course, we believe Rent the Runway beats fast fashion by offering the quality of real designer fashion, more variety with our hundreds of brands and constantly rotating styles, and of course, a more sustainable way to get dressed. We had data from years of testing across various economic environments demonstrating that subscription loyalty is directly related to how many items customers wear from us every month. Giving her more items per shipment means there's a higher likelihood more items will fit, she'll wear more items, and her rental behavior will be cemented. Thus far, we've seen exciting results from our extra item launch. A few highlights are: active subscriber count has grown to over 141,000 subscribers as of April 8th, 2023, the highest number of active subscribers we've ever had.
We are seeing significantly higher loyalty improvements amongst our full customer base than we had expected, meaning both completely new customers to Rent the Runway and tenured customers have all been churning less. Former subscribers are rejoining our program. Acquisitions of churners for the month of March were up 24% from levels just prior to launch. Our pause subscribers have reacted extremely positively. We have seen a several percentage point decline in our pause population as a percentage of total subscribers from 26% at the end of fiscal 2022 to 22% as of April 8, 2023. Here's one great example of how far we've come over the past few years. Following the launch, we've seen some of the highest volumes of units processed in our DFCs since the fall and winter of 2019.
However, our ops productivity rates so far this year are nearly double what they were three years ago, meaning to process the same volume, we need 43% fewer associates. Looking ahead for the rest of 2023, to drive improvements in loyalty, we are investing deeply into our customer experience. This makes sense because Rent the Runway has a fundamentally different model than other retailers, where experience is our product. Typical e-commerce sites see clients purchasing a few times per year, whereas Rent the Runway subscribers are interacting with our website and app and selecting, receiving, wearing, and returning multiple pieces several times per month. The physical and digital experience of a subscription to fashion matters immensely. It's our job to continue making it easier and more delightful for our customers over time. There are three pillars of our strategy in 2023.
These pillars are informed by rich data we have collected from current and former customers around what drives their loyalty and our biggest opportunities for improvement. Our three strategic pillars are in service of those opportunities. First is getting her more of the inventory she wants when she wants it. Second, best-in-class product discovery. Third is increasing the efficiency and ease of use of our experience. Regarding the first pillar of getting her more inventory she wants when she wants it, in 2023, we are planning to invest $69 –$72 million in rental product CapEx to support our existing customer base and anticipated growth in subscribers. We are focused on use cases that are relevant to her today, such as workwear.
We are investing in greater depth amongst brands and styles customers love so that more of her desired styles are in stock when she's browsing and picking for her next shipment. We also have a renewed focus on inventory freshness and are strategically exiting inventory at the right moment in its life cycle, leveraging our pricing algorithms to optimize monetization of our inventory base. Our second pillar is best-in-class product discovery. Right now, Rent the Runway is at par with most fashion retailers related to how customers find, filter, and search for inventory on our platform. We want to be way better given how many items a subscriber has to select from us each month. Giving women access to variety and bounty is the basis of my vision for a Closet in the Cloud.
The freedom to try something new and express yourself through fashion however you want is powerful. At this point, Rent the Runway already has an awesome matrix of designer brands and styles, and my opinion is that this Closet in the Cloud is one of our biggest competitive advantages. This pillar invests in tools, features, and algorithms that will bring our competitive advantage to the forefront of our customer experience. We need our customers to understand that we have just as many options for her day in the office as we have for her upcoming beach vacation, and that we are the very best place to access trends and keep her wardrobe updated. Best-in-class product discovery will come to life across three areas on Rent the Runway.
First, passive discovery, which means she doesn't know what she wants and needs to be inspired. We plan to create a large set of immersive curations of our product, created by humans, powered by AI tools. This will allow prospects and subscribers to better understand the myriad ways she could use her subscription. Second, active discovery is when she knows what she wants, and she wants to find it efficiently. By leveraging foundational technology, product catalog, and database work done in 2022, we aim to improve search and filters so it's much quicker to get exactly what she's looking for. Third is stalled discovery. This is a somewhat unique challenge to rental. When she wants something, but it's not available right now, we plan to ensure she never hits a dead end, and we are always recommending similar items to satisfy her needs.
We have already made progress on discovery in 2023. In March, we rolled out a much-asked-for feature called Rent the Look, which showcases how to rent the full outfit that's styled on the model and presents similar items if any item is unavailable to rent right now. Over the coming months, customers will see improvements to other discovery features like filters powered by this more robust data set. This feature, coupled with an overall shift to styled model images on site, has upleveled the usability of the site, and we've been seeing higher engagement on our product pages just in the few weeks since launch. We've also completed the integration of our new product catalog into new search service. As a result, we can tap into the richer and fresher set of product attributes to yield better search results.
Our third strategic pillar for 2023 is improving the efficiency and ease of use of our experience. One way we are tackling this is by making our site and app much faster since site speed is an area where we lag behind our competitors today. We've already made improvements to two- key entry points to our funnel that have improved speed and performance of these pages by over 30%. Another focus area for us is completely revamping our subscriber onboarding process, so that new subscribers have deeper education at their fingertips on how to use our programs and direct contact, if needed, with CX associates to ensure they are receiving what they want right from the beginning of their experience with Rent the Runway.
As you know, we launched at-home pickup in 2021, and the service is now available in 34 markets, serving 60% of our subscriber base. At the end of Q4 2022, we saw 37% adoption amongst subscribers who had access to our at-home pickup offerings. Transportation cost per shipment continues to benefit from at-home pickup. For the 29% of at-home pickup in Q4 that were live swap, where the delivery and return happened simultaneously, the transportation savings is higher. We've always believed in the strong correlation between home pickup and loyalty, and the data shows us that customers who use at-home pickup churn at significantly lower rates than those who do not.
The three strategic pillars we're focused on this year are emblematic of a new era for Rent the Runway, where we've transitioned the majority of our energy and attention to continuous improvement of the customer experience. Now that the market for circular fashion is robust and growing, and we've built the technology and infrastructure we need to scale, we believe extreme customer focus will help enable us to capture the multi-billion dollar opportunity of fashion subscription. While our customer economics are already strong and our subscribers are profitable, we expect that the loyalty improvements from our 2023 strategies should make our customer unit economics even better over time. We believe our plans will bring our business back to at least 25% active subscriber growth in 2023. 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 fourth quarter results for fiscal 2022, then move to guidance for the full year and first quarter of 2023, including outlining the impacts of the recent change to our subscription program. First, here are the financial takeaways for fiscal 2023. We are guiding to accelerated active subscriber growth this year in excess of 25%. There will be a revenue lag relative to subscriber growth. That's primarily due to building from the subscriber count at the end of fiscal 2022. We're gonna go into more detail on this. We expect strong Adjusted EBITDA and margins that partly fund product spend. Therefore, you see that this year, we're planning on cutting cash consumption nearly in half versus last year.
We believe we're close to a turning point of being able to cover not only our variable and fixed costs, but also the product spend required to maintain our existing subscriber base. In fact, as we grow subscribers more, that means the existing base should generate cash to fund growth. Now on to our Q4 results. In Q4, we generated revenue of $75.4 million, up 18% year-over-year and ahead of our guidance. We had 127,000 active subscribers at the end of the year, up 10% year-over-year and down 6% sequentially. Our active subscriber count at year-end is a function of where we ended Q3, which in turn was impacted by the price increase in Q2. Second, we saw a typical higher rate of pause and churn seasonally in Q4.
Our record high active subscriber count of 141,000 at April 8, 2023, up 14,000 from year-end, indicates that we have seen a strong pickup in Q1 so far. We are providing average active subscribers as we believe this gives a better indication of revenue in the period than ending active subscribers, which measures subscribers on a specific day. Average active subscribers for a quarter is calculated as the average of the beginning of quarter and end of quarter active subscribers. For the year, is calculated as the mean of average active subscribers for all quarters in that year. For Q4, average active subscribers was 130,000, compared with 116,000 in the same quarter last year or an increase of 12% year-over-year.
While the large majority of subscribers still enter our mid-tier $144 program, during Q4, we saw a slightly higher proportion of new subscribers entering our lower priced One- Swap program, which we factored into our expectations for this year. Our revenue beat versus our guidance was primarily due to strength in average monthly subscription rental revenue per subscriber, or ARPU, driven by add-on spots. 28% of active subs paid for one or more add-ons in the quarter, even in this inflationary environment. Other revenue represented 9% of revenue in Q4, versus 8% in Q4 2021, and up 32% year-over-year. Other revenue included a carryover of $0.7 million from the pilot to sell brand new exclusive designs to Amazon, which we had anticipated.
For the year, we generated $296.4 million in total revenue, up 46% versus 2021. We had 129,000 average active subscribers over the year, up 38% year-over-year, with ARPU for the year at $147, up 9% year-over-year, aided by the April price increase. 86% of total revenue in fiscal 2022 came from subscribers or about $1,980 per average active subscriber for the year. Our Q4 gross margin of 44% was 7.5 percentage points higher than prior year. Fulfillment costs as a percentage of revenue came in at 30% versus 32% in Q4 2021, primarily due to higher revenue per order.
For full year 2022, it came in at 31%, only slightly higher than full year 2021, as we offset higher shipping and wage costs with transportation efficiencies and labor productivity, setting us up well to be able to offer an additional item per shipment to customers with minimal impact expected on fulfillment costs. Total product costs came in at 26% of revenue in Q4 2022 versus 32% in Q4 2021, and at 28% for full year versus 35% for full year 2021. This puts gross margins for the year at 40% and up over 600 basis points versus full year 2021.
Adjusted EBITDA came in significantly ahead of our guidance at $7.1 million versus negative $5.5 million in Q4 last year, representing a positive 9.4% margin and an 18 percentage point improvement versus negative 8.6% in Q4 last year. Our total operating expenses, marketing, technology, and G&A, represented 60% of revenue compared with 76% in Q4 2021. Employee expenses in Q4 saw nearly the full impact of the restructuring. For the year, we had an Adjusted EBITDA of positive $6.7 million, representing a positive margin of 2.3% versus negative 9.4% in 2021.
As we mentioned on our last call, we opportunistically pulled forward approximately $4 million of product spend into fiscal 2022 as we were able to access highly desirable product at discounted prices, putting total purchases of rental product at $62 million for full year or 21% of total revenue versus 16% in fiscal 2021 as we increased product spend in 2022 to support a higher subscriber count. Our more capital efficient non-wholesale channels represented 60% of total spend, excluding the FY 2023 pull forward, versus 55% in fiscal 2021. Even with the pull forward on rental product spend, our fiscal 2022 free cash flow margin was better than anticipated and came in at -31%, ahead of last year's margin of -32%. A couple of housekeeping items I want to call out for the quarter.
The restructuring related severance charge came in at $2.4 million for the year. We decided not to move forward with another long-term warehouse CapEx project as part of our restructuring work and recognized a non-cash loss of $1.5 million in Q4 due to the asset impairment. Let's now shift to fiscal 23 guidance. As I outlined earlier, key highlights are the significant acceleration in expected subscriber growth and substantial reduction in cash consumption. Higher subscribers are the most important input towards free cash flow profitability. We're very pleased to have started fiscal 23 on strong footing. Let me walk through the details. Let's start with subscribers and revenue. We expect the extra item plan to have a positive impact on subscriber retention and have incorporated this change along with the impacts of our customer experience initiative into our guidance for fiscal 23.
We expect ending active subscriber growth in excess of 25% compared to end of fiscal 2022, with average active subscriber growth for the year in the range of 16%–18%. We see average active subscriber growth being back half weighted as we build subscribers throughout fiscal 2023 and due to the anticipated impact of our customer experience initiatives in the second half. Let me touch on seasonality again. Typically, we see our highest subscriber acquisition in March through May and September through November. We therefore expect the highest sequential growth in active subscribers in Q1 and Q3. We believe the price increase last year significantly impacted Q2, leading to the first sequential decline in active subscribers in Q2 in the last 4 years. This year, we expect to see Q2 active subs flat to slightly higher than Q1.
As for Q4, we have for the last two years seen a sequential decrease in active subs and have assumed the same for fiscal 2023. You can take a look at the slide we added in our earnings deck to highlight seasonality. We expect ARPU for full year 2023 to be down approximately 4% versus fiscal 2022. We anticipate continued high add-on purchases, though at a lower rate than last year. We have also incorporated a slightly higher mix of our lower price program into our expectations for this year versus last year, reflecting recent trends. Combining these elements, we are guiding to full year revenue for fiscal 2023 of $320 –$330 million, representing 10% growth at the midpoint of the range versus full year 2022.
We expect that 2023 will be a story of two halves, with stronger revenue growth in the second half of the year. The first half of 23 is impacted by the strong subscriber growth we saw in Q1 of 22 post Omicron. Note that we expect higher revenue growth in Q1 23 versus Q2 23, as Q1 23 will still benefit from the price increase we took last April. Given our focus on growing and promoting subscription, we expect to see lower reserve revenue this year versus fiscal 22. For Q1 23, we expect revenue of $72– $74 million, representing a 9% year-over-year growth at the midpoint versus Q1 22. We anticipate gross margin for the year to be slightly down versus fiscal 22's 40% with typical pressure in Q1 and Q3 due to seasonal product acquisition.
Though we're offering customers an extra item per shipment, we do not expect an increase in transportation costs due to minimal weight increases of shipments. We intend to continue transportation optimization to absorb carrier price increases. When it comes to labor, we expect continued efficiencies and productivity to mostly offset the additional labor to process additional units. These factors, combined with anticipated lower reserve revenue, mean we expect fulfillment costs as a percentage of revenue to be sligh tly higher than in fiscal 2022. In terms of Adjusted EBITDA, we anticipate significant improvement in fiscal 2023. We intend to keep marketing spend at about 10% of revenue for the year, excluding employee-related costs. Having said that, if our initiatives this year result in higher organic growth, there could be an opportunity for a reduction in paid marketing.
We plan to maintain discipline in our fixed costs, resulting in significant leverage in our operating expenses as we benefit from approximately $25 million in restructuring savings for a full year versus the Q2 2022 run rate. For Adjusted EBITDA for fiscal 2023, we expect a range of 7%–8% margin. For Q1 2023, we expect Adjusted EBITDA margin of 2%–3% due to seasonal investments in marketing and timing of revenue share payments against lower revenue at the beginning of the year. In terms of free cash flow, let me give you the main elements. We anticipate approximately 22% of revenue or $69 –$72 million in product spend based on our fiscal 2023 guidance.
Combined with our strong guidance on Adjusted EBITDA and the $15 million reduction in cash interest in fiscal 2023 from our recent debt restructuring, we anticipate substantially reducing cash burn this year to below $50 million. Bear in mind that our free cash flow guidance is dependent on product spend, which may shift with subscriber growth. We've provided full year expectations for a few other items, please refer to the guidance page of our earnings deck on our website. Now I'd like to hand it over to Sid Thacker, our SVP of FP&A, to walk you through details around the capital requirements of our business and our path to free cash flow profitability.
Thank you, Scarlett. We recognize that it can be difficult to understand the capital requirements of our business. As a result, we want to take a moment and give you the tools to do so and have added some illustrative slides in our Q4 2022 earnings deck. As a reminder, we incur upfront product spend for each of our new subscribers. Given that we utilize our rental product over a three-year period, our subscribers require considerably less central product spend in each subsequent year. We believe that our business is making rapid strides towards becoming free cash flow positive. In fact, we think we are approaching an inflection point where our existing subscriber base will generate cash flow that exceeds both our fixed costs as well as the amount of product spend they will require.
At this point, we expect those subscribers will begin to contribute to funding the capital requirements for growth in new subscribers. Before I walk through the details, I want to outline that this analysis is meant to be illustrative. Let's begin with slide 29. As Scarlett has outlined, we expect cash consumption in fiscal 2023 to be better than $50 million. This number is the sum of the cash required or generated by our existing base of subscribers and the cash required for growth. Slide 30 outlines the underlying cash of fiscal 2022's ending base of approximately 127,000 active subscribers would require on a maintenance basis. The assumptions driving this analysis are listed on the slide.
In summary, we assume our fiscal 2023 expected annual revenue per subscriber along with expected reserve revenue, variable cost items consistent with fiscal 2022 levels as a percentage of revenue, the post-restructuring fixed cost base, and $30 million in marketing spend. Our product spend requirements for maintenance purposes is estimated to range from $300-$350 per subscriber per year after their first year. As you can see, these 127,000 subscribers are expected to require approximately $42 million in cash annually. Slide 31 demonstrates the rapid progress we believe we can make with growth in our subscriber base. At a minimum guidance level of 25% growth in active subscribers or approximately 158,000 average subscribers per year, we believe that our cash consumption can improve by more than $20 million on an annualized basis.
With 185,000 average subscribers, we anticipate that we would be free cash flow breakeven on a maintenance basis, meaning that we fully cover our variable costs, our fixed costs, as well as the product replenishment spend required for these subscribers. Note that we don't assume any growth in our reserve business or flow-through margins. At that point, our capital requirements are primarily to fund growth in new subscribers. Slides 16 and 32 illustrate that our business benefits from strong revenue retention across historical cohorts, as well as favorable customer acquisition costs. Let's start with slide 16. We have a large and loyal base of customers that support revenue each year. In fact, over one-third of fiscal 2022 revenue was generated by cohorts that are more than five years old. Let's speak for a moment about subscriber growth.
As Jen outlined, our strategies to grow revolve around improving the customer experience and driving retention and organic acquisition. As outlined on slide 32, we believe our cumulative LTV to cash indicates that our paid marketing spend has been efficient. Our data shows that we break even on our paid marketing spend within 12 months, with the exception of cohorts impacted by COVID. We would be happy to walk through this in detail with any of you. With that, I'll turn it back to Scarlett.
Thank you, Sid. We believe that we can grow at a 25% sustainable revenue growth rate in the long term and continue to be intently focused on balancing robust growth with profitability. We will seek to strike the right balance to attain both objectives and maximize the long-term value of Rent the Runway. Before I hand it back to Jen, I wanted to acknowledge the news we announced earlier today. I'm going to be transitioning out of the CFO role over the next few months, and Sid Thacker, our SVP of FP&A, will be promoted to CFO. My nearly eight years here have been among the most meaningful of my life, and I have experienced incredible professional and personal growth at Rent the Runway. Partnering with Jen, this leadership team, and the board has been an honor and a privilege.
I appreciate their continued belief in me and support of my decision. I could not be prouder of what we built and accomplished together, having moved from an à la carte business model to a subscription-first offering, leading the business through the pandemic and transforming the business financially so that we're well-positioned for free cash flow profitability. From day one, I've been a huge believer in the vision of a Closet in the Cloud. We created an industry that is growing and thriving, and I have deep conviction that the opportunity for Rent the Runway has never been greater. It has been a pleasure working with our investors and analysts. I value the relationships we've built, and I appreciate the perspective you continue to bring to the business.
I have every confidence that Sid will be an exceptional financial leader for Rent the Runway at this point in our journey, and I'm so excited to see the business continue to win.
Thanks, Scarlett. Scarlett has been instrumental in bringing Rent the Runway to where we are today. Scarlett leaves Rent the Runway a fundamentally different, larger, and financially stronger business than when she joined us nearly eight years ago. She's a true strategic partner, a passionate business leader, and she's just a fantastic human being. Her hard work has set us up to focus squarely on the customer experience, and she's passing the baton to a new leader at an important inflection point, where we've reached a record high number of active subscribers and have demonstrated significant progress on our path to profitability. Thank you, Scarlett, for always acting like a true founder of the business. With that, I'm excited to introduce you to Scarlett's successor, Sid Thacker, whom you just heard from today.
We brought him on over nine months ago, and he has already made a deep impact on our business. Sid comes to Rent the Runway on the heels of a 20-plus year career as a public company investor and brings with him data-driven analytical thinking, amazing curiosity, and fresh eyes challenging us to look at our business in new ways. What impresses me most about Sid is his inherent understanding that the best financial outcomes for Rent the Runway will come from staying laser-focused on our customer and improving her experience. I believe deeply in his ability to serve as our finance leader through this next chapter, and I'm looking forward to you all getting to know him in the months and years to come. With that, we're happy to open it up for questions.
Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you'd like to ask a question, you may 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 key. In the interest of time, please limit yourself to one question and one follow-up. Our first question comes from the line of Ross Sandler with Barclays. Please proceed with your question.
Hey, everybody. Just a question on the extra items slides. Thanks for all that color on the higher retention rate. Looks like, you know, it's actually having a huge impact given the uptick in active subs as of April. Just a question on, I guess, the overall way to think about the unit economics of adding that one extra item per shipment or two per month. We're retaining better. It's not really costing us any more in transportation costs, that's all net positive. It looks like maybe some of the subs are coming in at that lower price tier versus the $144 plan.
Could you just walk us through with a little more detail, I guess, what you've seen since the change, and is that the right take in terms of the improvement in unit economics that you're seeing from the extra items? Thanks a lot.
Let me start it off. First of all, we're seeing incredible customer response. You know, there's a record high number of active subscribers as of April eighth, 141,000 subscribers, that's kind of a net addition of 14,000 subscribers in just the first two months of the quarter. Not only are we seeing higher loyalty improvements than we originally even anticipated amongst our full customer base, we're seeing improvements in our rejoin rate, those are the folks that had previously churned. They're coming back. We've seen a decline in the pause population. We've seen some of the highest traffic peaks, in kind of company history. We've seen higher customer engagement, we're seeing higher shipment volume, which means that they are engaged in these new, you know, enhanced program.
In terms of the financial impact and the relationship to gross margin, I'll just start off to say that the slight decrease that we're expecting in gross margins in fiscal 2023 does not have to do with the extra item program. It has to do primarily with our belief that we'll see some lower reserve revenue this year because of our focus on promoting subscription and marketing subscription. Sid or Scarlett can take you through the exact reasons why the extra item program has had minimal impact to the gross margin.
Sure. I'll kick it off. Ross, thank you for the question. You know, as Jen mentioned, we don't expect to see much in terms of impact on the gross margin from the five-item program. As you already called out, the transportation is largely covered because there's no additional weight for the additional item. We do see a little bit of extra labor, which is mostly offset by our efficiencies, as we talked about on the call. You know, when you think about product, the thing that we're doing is that we don't need to purchase an extra unit to support this additional item, right? We're seeing, obviously, the benefits of continued mix towards capital-efficient models. We are optimizing utilization.
What that means is that we're actually favoring her having more items at home rather than on our shelves, that's great for us and for the business. Even from a product standpoint, we're able to absorb that within the gross margin, which is why really is, you know, this recent trend on reserve that we've been seeing, we wanted to be prudent, incorporated that in our guidance for this year, that's why we see, you know, as I said, a slight decrease in the gross margin versus last year. I do wanna just touch on one other point that you brought up, which is that you asked about the penetration of the One-Swap Program. I actually mentioned this on the last call, right? We were seeing a slightly higher proportion of subscribers coming into our One- Swap program.
That is not a new trend, but it was something that we felt was appropriate to incorporate into our guidance for this year. The very large majority of subscribers are still coming in to our Two- Swap program at $144.
Just so we're clear, I mean, we haven't seen any noticeable change in the One- Swap penetration prior to 5-item and now. There's nothing that five-item is doing that changes that so far.
Thank you. Our next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.
Yes. Hi, good evening. This is Kate on for Ike. Thanks for taking our question. I was hoping if you could just maybe elaborate with the strong Q1's trends that you're seeing. I'm curious if you're seeing any impact from the on the add the extra item onto the swaps, just given the change in the plan dynamics there. Just, you know, at a higher level, as we're looking out to next year, you know, how should we think about ARPU just at a higher level as we're lapping maybe some of the plan initiative change here? You know, how should we think about the spread between average subs and revenues once we lap that time? Thanks.
Thanks, Kate, for the question. Maybe I'll kick it off. As we mentioned, we are expecting to see an ARPU that is down about 4% this year for 2023 versus fiscal 2022. We are continuing to see high on add-on purchases, but we did model a slightly lower rate this year into our guidance. As I mentioned, obviously, we are including a slightly higher mix with a lower price program. That's what we see in terms of the ARPU impact. On your question of the revenue lag relative to subscription, I do think that's a bit of a dynamic of this year and lapping against last year and also the subscriber count that we entered the year with.
That is not a dynamic that I would expect to persist in the future, and you should see kind of a more even correlation between subscriber growth and revenue growth in the future.
Yes. In fact, as we outlined, we expect revenue growth to be significantly stronger in the back half of the year versus the front half of the year. That directly addresses your question on, you know, we should see that go away through the course of the year.
Yeah, I'm sorry. I should clarify. I mean, average active subscribers, right? As we said earlier in the call, revenue is correlated to average active subscribers and less so to the end of the year number.
Great. Thanks very much.
Our next question comes from the line of Lauren Schenk with Morgan Stanley. Please proceed with your question.
Hey, you've got Nathan Feather for Lauren. I just wanted to dig in a touch more on the extra slots. Clearly seeing a lot of benefits without that much investment from a gross margin perspective. I guess, where does that put the product utilization at today? Is there still excess capacity, in product utilization? As you go forward, you know, understandably, there's a digestion period, but is five items per swap the right number, or would you hope to continue growing that over time? Thank you.
We've seen some healthy increases to product utilization, related to our five-item program. As I mentioned, one of the most important strategic initiatives this year is getting o ur customer is more of the inventory she wants when she wants it. You know, she just simply comes to Rent the Runway for fashion. Giving her more items directly impacts her loyalty. When she has more items, more items fit her, she wears more items, and she stays with us significantly longer. One of the things that we went into in more detail in this earnings deck that we published was that, you know, over 50% of subscriber churn happens in the first 90 days after she joins us, and so much of that is actually just related to how many items she wears from us.
We're really encouraged that by focusing on not only adding new brands, new styles, but also upping her utilization of the product that we have, that we are increasing her loyalty rates, which also helps us increase the organic growth of Rent the Runway.
I mean, if you think about our inventory, you know, what Five Item has allowed us to do is, do a number of things that work well for us and our customers, right? The first thing it does is, it allows us to bring a lot of newness, a lot of freshness to our inventory, right? Every piece of inventory is not created the same. As we grow our subscriber base, and that is clearly something that Five Item is allowing us to do, we bring in a lot of new inventory for our customers. That creates a tremendous amount of excitement with our customer base.
The other thing we outlined, that Jen outlined in her remarks, is we're working to improve and optimize depth in our assortment so that our customers can more easily find the items that they're looking for. I think we're being strategic about our choices on inventory, and I think our customers are noticing.
I think that the question of, like, is this the right number? You know, our strategy is, we need to tangibly improve her customer experience and the customer value that we're delivering every quarter. It should be obvious to customers that we're innovating and her experience is getting better. We don't know what that will mean for the future, if it means that five items at a time is the right number. We know that we'll very quickly see the data with our customers and know, you know, how we should continue to push and innovate. We feel very confident that the three pillars, the three strategic pillars that we've really aligned our resources to this year are going to contribute to even higher retention and even higher organic growth of our business because they align with the top reasons why customers have told us they--
The top opportunities for us to improve their experience and the top reasons why customers stay.
Super helpful. Thank you.
Our next question comes from the line of Andrew Boone with JMP Securities. Please proceed with your question.
Good afternoon, Scarlett, all the best in whatever comes next. Two from me, please. One is, Jen, you talked about a change in the onboarding process. Can you just flesh that out for us? Is there any keys that you're really focused on to getting subs past that 90-day mark with this new onboarding? Secondly, really a big picture question is, Jen, let's step back, right? It's been about a year or more since the IPO. Can you talk about the TAM and just any changes that you feel in terms of the overall opportunity as you've just seen more of the market and investors have talked to you more? Thanks so much.
I think that the TAM is really proving itself out to be a much bigger and more robust and faster-growing market than even when we IPO'd 18 months ago. You know, one of the things that we're really excited about is that we're not the only game in town, and that there are other companies that are offering subscriptions to fashion. It's really proving out that hundreds of thousands of women in the United States every single year want to subscribe to fashion, and that this is a real market, and it's growing really quickly. What we're excited about is that we really hold the place as the premier player in fashion designer rental. What that means to us is we have the highest value brands, we have the highest spend customer base, and it sets us up really well for the current macro.
Our customer strategies are focused on delivering for the customer and delivering her more value, which, by the way, these strategies are working. These strategies are also in tune with: how do we take the competitive advantages that we have, and how do we continue to expand them and continue to drive more value at this kind of premium end of the market that we uniquely own? We feel fantastic about this market and our shift towards putting the majority of our company resources into improving and innovating the customer experience comes at a time when I think the customer overall is more open to considering a fashion, a subscription to fashion than she's ever been. The change in the onboarding process is something that we're really excited about. It will be launching over the next few weeks.
It is going to be one-to-one communication between customer service associates and subscribers, ensuring that their first 60 days with us is perfect, that they have someone to ask questions to, that we're sending them proactive videos and content that we know is appropriate for their kind of stage in the journey. We, again, occupy this premium positioning in fashion designer rental. Buying a subscription to Rent the Runway should feel like a luxury experience. It should feel like you have your own personal concierge that is guiding you through and ensuring that they are cementing this behavior and teaching you how to rent. We think that the impact that new onboarding can have, can be high. We're very excited by it, and we'll be excited to come back and share results as we implement and iterate.
Great. Thank you.
Our next question comes from the line of Ed Yruma with Piper Sandler. Please proceed with your question.
Hey, guys. Thanks for taking the questions. Scarlett, thank you for all the help through the entire process. I guess, just to click back on this extra item, and sorry to belabor the point, but just so make sure we're not conflating two things. When you saw the higher number of subs at the lower price point, do you believe at this stage that that was driven by the higher item, or do you think that there's just something in the consumer today that's causing new subs to gravitate to the lower price point plan? As a follow-up, I just wanna make sure I'm crystal clear. You're not anticipating incremental capital usage as a result of the extra item? It's just kind of, I guess, sweating the existing assets you have a little bit harder?
How should we really think about the cash, cost of the extra item over time? Thank you.
Ed, thank you. Thank you for the kind words. I'll kick it off. As we mentioned earlier, we actually started seeing a little bit higher penetration of the 1 Swap program even before we had the extra item. I do not believe that those are correlated, and that was already something that we had mentioned in Q4, so you should not interpret that in any way related to the five items. In terms of cash consumption, I think, look, the best things that I can point you to is the rental product purchases as a % of revenue, right? In spite of the fact that we are adding just an additional item in customer shipments, you know, our product spend last year as a % of revenue was 21%, and I've guided to it being approximately 22%.
A little bit higher, but you can see that we feel still really good about being able to deliver this incredible additional value and still maintaining a very similar percentage of revenue.
Maybe one more if I could sneak one in. On the Amazon pilot, any kind of update? Will you move forward with it? Any learnings? Thanks so much.
Just as a reminder, first, like why do we work with partners like Amazon? The first is that it really proves out the market. You know, arguably, the most important retailer in the U.S. and one of the most important retailers globally is making resale a part of their strategy, and we wanted to be a part of that, and it's validating secondhand clothing. Of course, we wanna maintain the salvage value that we've always shared with you that we derive from our products after they go through their rental lifecycle on our site and really prove out the sustainability and the long, useful life of the clothing and accessories we have on our platform. We've gained some really interesting learnings from the Amazon pilot that is gonna help us inform our strategy going forward.
It's still early days, so, you know, stay tuned for data, you know, as we move forward.
Thank you.
Our next question comes from the line of Rick Patel with Raymond James. Please proceed with your question.
Thank you. Good afternoon, everyone. Question on the strategy to accelerate active subs to at least 25% growth this year. Does guidance assume that both new customer acquisition and retention rates accelerate, or does it reflect a much more meaningful contribution from retention? We're trying to better understand the assumptions behind the contributions from new customers versus reducing churn.
Sure. I think the two primary assumptions that underlie the extra item logic are, number one, we expect a significant retention benefit as customers see this value and actually are able to use this extra item as part of their everyday life. The second thing we've assumed and seen is a significant increase in the percentage of former customers rejoining and restarting their subscriptions, right? Those are the two underpinnings of the extra item launch. Of course, we've seen higher traffic. I mean, we've seen lots of other benefits. We've seen lots of excitement among our customer base. I think I'd go back to the statistics that we outlined in our earnings deck. 60% of all our customers hear from us from a friend or from someone they know, right?
I think the more excitement we can generate, the more value we provide, the better the customer experience, the more people are likely to talk about us then. You know, ultimately, we do think that will lead to better organic acquisition, though that is not something we've assumed, in our numbers.
Maybe we can take a step back and just think about the bigger picture, like, the strategy to grow new customers. How do we think about the white space in terms of people that don't know about Rent the Runway that could learn from it and become customers? For those that know about it and haven't signed on yet, which levers do you have the highest conviction on in terms of getting them off the fence?
We think investing in improving the customer experience is the very best way to drive organic growth of the business. We shared during our IPO that 80% of our acquisitions historically have come to us organically. We shared in the earnings presentation today that in the past few years, it's maintained that 80% of our acquisitions have come to us organically. As we continue to improve experience, as we continue to improve her retention, we see a direct correlation to even higher rates of organic acquisition. Again, people use this subscription multiple times a week. When they are happier, they post more reviews, they share it more frequently, and it leads to more new customers finding out about us and joining.
We really think that the key to growth in new customers is this continued investment into customer experience, which drives retention, which then drives organic acquisition.
Yeah, just to be clear, Rick, you know, our 25% plus active subscriber growth guidance that we're giving is a combination of those two things, right? It's both the retention, but also obviously continuing to bring in new customers into the business.
Great. Wish you all the best, Scarlett, and Sid, congrats on the new role. Thank you.
Thank you, Rick.
Thanks.
There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Thank you so much to everyone who joined us today. I'm excited about our plans to accelerate our path to profitability and the long runway for growth ahead. We look forward to continuing to update you on our progress on our Q1 2023 call in June. Thanks again for joining us.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful, have a wonderful day.