Rent the Runway, Inc. (RENT) is engaged in offering a shared designer closet called Closet in the Cloud. By enabling women to wear whatever they want without possessing it, the company offers a selection of more than 19,000 designs from more than 780 designer labels. The company outperformed the top and bottom lines analysts’ estimates in its recent quarterly release.

According to Goldman Sachs Group Inc. (GS) analyst Eric Sheridan, RENT will be more economically resilient as luxury buyers seek more inexpensive and flexible solutions in a more challenging economic climate. Long term, he continues to see RENT as the leader in the subscription-based endeavor to encourage the adoption of the sharing economy concept in the garment sector.

However, the stock has declined 58.4% year-to-date and 12.2% over the past month to close yesterday’s trading session at $3.39. In addition, the stock is currently trading 86.3% below its 52-week high of $24.77, which it hit on October 27, 2021.

Additionally, investors' apprehension has led to significant stock market sell-offs due to worries that the continuing macroeconomic headwinds may eventually trigger a recession in the U.S. economy. This could further weigh on the company’s price performance.

Here's what could shape RENT's performance in the near term:

Inadequate Financials

RENT's revenue increased 100.3% year-over-year to $67.1 million for the first quarter ended April 30, 2022. However, its total costs and expenses increased 62.3% from the year-ago value to $100.3 million. 

Its operating loss grew 17.3% from the prior-year quarter to $33.2 million. The company’s net loss increased marginally year-over-year to $42.5 million. Its loss per share amounted to $0.67.

Negative Profit Margins

RENT's trailing-12-month asset turnover ratio of 0.53% is 48.3% lower than the industry average of 1.02%. Also, its trailing-12-month ROA, ROC, and net income margin are negative 50.9%, 25.4%, and 89.5%, respectively. 

Moreover, its trailing-12-month negative EBIT margin of 53.2% compares to its industry average of 9.02%. In addition, its net cash used in operating activities came in at $17.4, representing an increase of 93.3% for the three months ended April 30, 2022.

POWR Ratings Reflect Bleak Outlook

RENT has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. RENT has a D for Quality. Its poor profitability is consistent with the Stability grade.

Of the 45 stocks in the C-rated Specialty Retailers industry, RENT is ranked #41.

Beyond what I've stated above, you can view RENT ratings for Growth, Value, Stability, Momentum, and Sentiment here.

Bottom Line

RENT’s stock has declined considerably year-to-date owing to current market sell-offs and investors' pessimism surrounding the economic growth. Furthermore, analysts expect its EPS to remain negative in the current quarter and next year. 

Moreover, the stock is currently trading below its 50-day and 200-day moving averages of $4.72 and $6.24, respectively, indicating a downtrend. So, we think the stock is best avoided now.

How Does Rent the Runway (RENT) Stack Up Against its Peers?

While RENT has an overall D rating, one might want to consider its industry peers, TravelCenters of America (TA), ODP Corp. (ODP), and Aaron’s Inc. (AAN), which have an overall B (Buy) rating.

RENT shares were trading at $3.59 per share on Thursday morning, up $0.20 (+5.90%). Year-to-date, RENT has declined -55.95%, versus a -20.19% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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