Rent the Runway is on track for its best week ever after putting up meme-stock-like gains, but the stock is still way down overall

By Bill Peters and James Rogers

'In a heavily bet-against stock ... that shift in sentiment was enough to create this short-term squeeze to the upside,' analyst says

Rent the Runway Inc., an online clothing-rental platform whose stock has plummeted over the past three years as it wrangles with debt and weaker clothing demand, is up some 360% this week, putting the shares on pace for their best week on record.

The exact reason for the spike in price was not immediately clear. But the launch higher sparked comparisons with the meme-stock rallies that have added an element of unpredictability to dormant, down-and-out stocks since the 2021 frenzy surrounding GameStop Corp. (GME).

The movement in Rent the Runway's (RENT) share price accelerated after the company reported quarterly earnings earlier this week, and trading volumes jumped. However, the stock was well up even before those results.

Shares nearly cracked the $28 barrier earlier Friday. That rally cooled later on, but the stock was still up 18.4% and trading at around $23 during the afternoon, following bigger double-digit gains that started at the beginning of the week. On Monday, trading opened at $4.82.

Rent the Runway has a market value of around $80 million. The S&P 500 SPX, meanwhile, was down 1.7% on Friday.

Around a quarter of the company's publicly tradable shares were shorted, according to MarketWatch data, and this week's spike represented almost certain dyspepsia for short sellers, who bet on stocks to fall. When those stocks don't fall as expected, sometimes short sellers buy them back to cover losses, driving the share price higher.

This week's gains for Rent the Runway also follow something of a revival of the "stonks" fervor of 2021, reinforced by artificial intelligence, the initial public offering of Reddit (RDDT) - often credited as the birthplace of the meme-stock crusade - and whatever is happening with Trump Media & Technology Group (DJT), which owns Truth Social. During Rent the Runway's earnings call on Wednesday, the company mentioned "AI search" when discussing improvements it made to its online platform last year.

Rent the Runway did not immediately respond to a request for comment. The stock began trading in 2021 at more than $300 a share. The company last month announced a 1-for-20 reverse stock split to stay on the Nasdaq.

Some of Rent the Runway's recent troubles are the same as those faced by the apparel industry in general. In particular, higher prices for food and other basics over the past two years have made shoppers more cautious about buying clothes.

But Rent the Runway's fourth-quarter results on Wednesday also offered some signs of breathing room, as the company cuts costs and tries to get a handle on debt it took on when the economy was in the grip of the pandemic. The clothing platform has also taken steps aimed at ensuring that it has the newer styles that people want in stock, after struggling to do so in months past and turning off customers in the process.

While the sales outlook that Rent the Runway offered up on Wednesday was below that of Wall Street, executives forecast break-even free cash flow this year. And management said it was optimistic about its ability to bring customers back to the platform.

The company has also grown its "try before you buy" resale business as well as its "concierge" styling-advice service, and it has launched a segment dedicated to luxury evening wear. It has also retooled its website and app to focus on helping shoppers find what to wear for specific occasions, such as work, vacations and parties.

"People don't come to our site to buy a subscription to fashion," co-founder and Chief Executive Jennifer Hyman said during the company's earnings call on Wednesday. "They come to Rent the Runway because they need solutions."

She continued: "They're trying to solve functional problems, like how do I get dressed for work, special occasions, vacation, every day. And they're also trying to solve emotional problems, like how do I express myself through fashion and feel amazing."

Hyman said this year's focus would be on more digital investments and marketing via social-media influencers and celebrities. She said that now was the right time to go on the offensive and added that she hoped the company's financials had restored faith on Wall Street.

"What we hope this conveys to current and potential investors is that we're nimble in running our business, can pivot due to our data-driven culture, and we have the focus and execution prowess to find solutions quickly," she said.

Stocktwits, a social platform for investors and traders, said that Rent the Runway is another beaten-down company that has managed to stabilize its earnings and revenue growth after many quarters of declines.

"The company's push into the personal concierge business has helped it on that front," Tom Bruni, Stocktwits' head of market research, told MarketWatch via email. "Although the macro environment is expected to remain challenging for the company, it's forecasting break-even cash flows during fiscal 2024."

"In a heavily bet-against stock like [Rent the Runway], that shift in sentiment was enough to create this short-term squeeze to the upside," Bruni added.

Rent the Runway's shares rose 36.3% Wednesday before the company released its results. They skyrocketed 161.9% on Thursday.

"As with every other 'meme stock,' the upside momentum is attracting many short-term traders looking to take advantage of the volatility," Bruni wrote. "Whether or not the company can actually pull off this fundamental turnaround and get to break-even cash-flow levels this year is still up for debate. That will determine its long-term trajectory."

Bruni told MarketWatch that while Stocktwits doesn't have sentiment data available for Rent the Runway, the stock has seen a spike in activity levels this week.

"On Wednesday, it was the 17th most newly followed stock on our platform, jumping to #1 yesterday and sitting at #6 as of today," he said. "So there is continued interest, and retail traders [and] investors are putting the stock back on their radars in a material way. Nearly 2,000 people now follow the stock, more than doubling from a week ago."

Tommy Tranfo, head of community at Stocktwits, added that the Rent the Runway play was "entirely off the radar" of most traders, underlining the importance of trading communities.

"The chances of you identifying and then profiting off this move without being early is close to zero," he added.

-Bill Peters -James Rogers

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04-12-24 1546ET

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