Investors should hold off on buying Rent the Runway until it can show significant active subscriber growth again, according to Credit Suisse. Analyst Michael Binetti downgraded Rent the Runway to neutral from outperform and cut his the price target, saying he overestimated the impact a return to social events would have on the fashion rental company’s active subscriber growth in its second quarter . “The significant deterioration in Active Customer trends in the quarter (QoQ active sub growth slowed to -8% in 2Q vs Street +7%, decelerating from +17% in 1Q) suggest that RENT is more susceptible to macro pressure on the aspirational consumer than we expected,” Binetti wrote in a Monday note. “Said differently, consumers aren’t viewing RENT as a way to save money (despite very clear value messaging in 2Q marketing) vs a traditional wardrobe ownership model…rather, consumers are protecting household budgets by crossing off recurring monthly discretionary charges like RENT.” The stock dropped 22% in Tuesday premarket trading after Rent the Runway said it’s laying off 24% its corporate workforce, as more consumers paused or ended their subscriptions to the rental service. Rent the Runway reported 124,131 active subscribers for the previous quarter. Additionally, the company decided to cut $25 million to $27 million in fixed costs to deal with an uncertain macro backdrop, a decision that the analyst worried could be premature for the growth company. Shares of Rent the Runway have tumbled nearly 40% year to date and are 80% off their 52-week high, and the analyst does not expect they’ll rise from here until the company can reverse its active consumer growth trends. “We don’t think RENT’s valuation will re-rate higher until it can prove that active customer growth trends can re-accelerate sustainably, and reducing corporate staff by 24% weighs on our confidence that improving trends in Aug/Sept will be sustainable,” Binetti wrote. “We prefer to move to the sidelines ahead of better evidence that the consumer sees apparel rental as a strong enough value to trade away from the more controllable costs associated with a traditional apparel ownership model,” Binetti added. The firm’s price target, which was dropped to $4 from $7, implies roughly 18.9% downside for Rent The Runway from Monday’s closing price of $4.93. —CNBC’s Michael Bloom contributed to this report.
© heardonwallstreet.com