Rent the Runway Debt Falls Subscriber Up

Rent the Runway(NASDAQ:RENT) reported Q2 2025 results on July 11, 2025, with revenue rose 2.5% year-over-year to $80.9 million and ending active subscribers up 13.4% year-over-year. A transformative recapitalization will reduce debt from over $340 million to approximately $120 million, as announced on Aug. 21, 2025, strong acceleration in inventory investment, and substantial gains in customer engagement metrics. Below, key insights unpack the earnings call’s implications for long-term investors.

Rent the Runway slashes debt in recapitalization

The balance sheet overhaul, announced Aug. 21, 2025, involves Aranda Principal Strategies, Story 3 Capital Partners, and Nexus Capital Management as stakeholders, combining debt conversion to equity, new capital injection, and extension of maturity to 2029. This move follows years of capital structure constraints that limited strategic flexibility post-COVID.

"Our long-time existing lender, Aranda Principal Strategies, or APS, is partnering with two highly respected private equity firms with deep experience in the consumer retail space: Story 3 Capital Partners and Nexus Capital Management on a plan that will reduce our total debt from over $340 million to approximately $120 million. APS will convert a substantial portion of its original debt into common equity ownership, and APS, Story 3, and Nexus will contribute new capital to further support the business and its growth initiatives. The maturity on the debt will also be extended to 2029, giving us years of additional runway."
-- Jennifer Y. Hyman, CEO

The recapitalization plan marks a significant step forward and positions the company for greater financial flexibility and a stronger balance sheet.

Active subscriber growth accelerates as inventory doubles

Ending active subscribers jumped to 146,373, up from negative growth (-4.9% year-over-year in Q4 2024), and coincided with a near doubling of inventory units and a 235%-323% year-over-year increase in monthly posted styles for May, June, and July. Related engagement metrics, including share of views (up 84% year-over-year) and Net Promoter Score (up 77% versus the prior year), reached three-year highs amid ongoing investments in assortment breadth and exclusives.

"Subscriber growth continued. We ended Q2 with 146,400 active subscribers, a 13.4% year-over-year increase, accelerating from negative 4.9% in Q4 2024 and 0.9% in Q1 2025. Q2 2025 year-over-year acquisition growth accelerated, as compared to Q1 2025 and Q4 2024. Retention continued to be higher than the prior year. These results show that we're adding more subscribers in a significant way and subscribers are more likely to stay with the service for longer periods of time."
-- Jennifer Y. Hyman, CEO

Subscriber and engagement momentum highlight the leverage and resonance of the revamped inventory strategy, though Increased fulfillment and revenue share costs pressured margins.

Gross margin and free cash flow deteriorate as inventory investment surges

Gross margin fell to 30%, down from 41.1% a year earlier as revenue share and fulfillment costs rose, while free cash flow was negative $20.5 million, compared to negative $4.5 million a year ago, reflecting heavier upfront investment in rental products. Adjusted EBITDA margin dropped to 4.4%, down from 17.4% a year earlier.

" Adjusted EBITDA for Q2 '25 was $3.6 million or 4.4% of revenue versus $13.7 million or 17.4% of revenue in Q2 2024. The decrease in adjusted EBITDA versus the prior year is primarily a result of higher revenue share expenses. Free cash flow for Q2 '25 was negative $20.5 million versus negative $4.5 million in Q2 2024. Free cash flow decreased versus the prior year primarily due to lower adjusted EBITDA and higher purchases of rental products on account of our inventory strategy for fiscal year 2025."
-- Siddharth B. Thacker, CFO

Heavier investment in inventory and platform upgrades signals management’s commitment to long-term scale but underscores the importance of successfully converting subscriber growth to operating leverage and cash flow improvement.

Looking Ahead

Management expects revenue of $82 million to $84 million for the next quarter and continues to project double-digit growth in ending active subscribers for the full year. Full-year free cash flow guidance is revised lower to below negative $40 million due to recapitalization costs. No additional quantitative outlook or strategic milestones beyond 2025 were provided in the call.

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This article was created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.