Rent the Runway recent data suggests ‘meaningful October slowdown’

By Sam Boughedda

Rent the Runway Inc (NASDAQ:) was downgraded to Equal-Weight from Overweight, with the price target on the stock slashed to $2.50 from $10 per share by Morgan Stanley on Friday.

Analysts moved to downgrade the stock and cut its price target after recent data suggested a “meaningful October slowdown” and a third-quarter sub miss after an encouraging September. In addition, they believe the business has proven to be more volatile than originally anticipated.

“Recent data shows a concerning reversal, with web traffic decelerating from +45% y/y growth in September to just +7% in October,” wrote the analysts. “The post-July trends were tracking quite strong, accelerating up to a +45% y/y growth rate in September, which kept us Overweight post the last print. However, that trend has now reversed at a striking magnitude in October decelerating to just +7% y/y with trends deteriorating through the month, leading to a weekly peak to trough decline of -38%.”

They added that when looking at the full quarter, Q3 web traffic “decelerated vs. 2Q by ~750 bps implying that 3Q net adds likely miss.”

“As a result, we now project just +6K net adds in 3Q, below our prior estimate/consensus at +14K/+11K. Notably, app data and search volume both corroborate the October deceleration, giving us more confidence that the data is at minimum directionally accurate,” explained the analysts.

As a result, Morgan Stanley believes Rent the Runway’s business is more volatile than it originally anticipated, “leading it to take longer to build the cohorts needed to reach profitability.”

“We don’t have a definitive explanation as to why October has slowed, though it is consistent with the rest of eCommerce/retail commentary around consumer spending pullback. It’s also possible greater hybrid work, slowing reopening tailwinds, and/or inventory mix are also possible impacts,” Morgan Stanley continued.

Rent the Runway shares plummeted over 13% Friday.