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The Ratings Game: Rent the Runway stock suffers record drop, but analysts find reasons to stay bullish

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Shares of Rent the Runway were suffering a record plunge Tuesday, but Wall Street analysts still managed to find the positives in the fashion rental company’s disappointing earnings report and outlook, and plan to cut nearly one-quarter of the workforce.

The company reported late Monday a narrower-than-expected loss and revenue that rose above forecasts, but active subscribers that missed, a revenue outlook that was below forecasts, and a cost-cutting plan that included laying off 24% of its workforce.

Don’t miss: Rent the Runway executives thought people were ready to dress up again, but it looks like they were wrong.

The stock
RENT,
-35.09%

tumbled 31.7% in midday trading, putting it on track to surpass the previous record for a one-day decline of 16.9% on May 12, 2022.

The stock, which went public on Oct. 27, 2021, is now trading about 84% below its initial public offering price of $21. The company’s valuation at the IPO price was about $1.28 billion, compared with the current market capitalization of $215.6 million.

No less than eight of the 11 analysts surveyed by FactSet who cover the company cut their price targets in the wake of the disappointing results and job cuts announcement, but nine analysts remained bullish on the stock and the other two were neutral. There are no bears.

The average analyst price target is now $7.80, is down from $10.60 at the end of August, and from $77.78 at the end of November 2021. But the new average is still about 131% above current prices.

FactSet

Wells Fargo analyst Ike Boruchow slashed his stock price target to $8 from $12, but he reiterated his overweight rating as he found the positives in the report to keep his price target well more than double the current price.

Boruchow said the subscriber number was “bad,” but noted that there was some improvement later in the quarter. And for the restructuring that leads to the loss of nearly one-quarter of its employees, Boruchow called that a “positive,” as it improves the longer-term profitability outlook.

Regarding the downbeat revenue outlook, Boruchow said management was “being cautious” given the “dynamic” customer backdrop.

Raymond James analyst Rick Patel cut his price target to $8 from $9, saying he was “disappointed” with the subscribers data, and although trends are improving in the current quarter, visibility is lower.

He reiterated his outperform rating, however, as the stock’s tumble this year suggests “a lot of the bad news and uncertainty” may already be priced in.

And Jefferies’ Ashley Helgans cut her price target by 23%, to $10 from $13, as the company is “still trying to diagnose” the reason for the sudden dropoff in subscribers in June. But she also reiterated her buy rating, saying the stock’s reaction to the results was likely “overdone,” given that profitability, excluding a host of costs, such as interest, taxes, depreciation and amortization (Ebitda), was achieved earlier than anticipated.

The stock has plummeted 58.7% year to date, while the S&P 500 index
SPX,
-2.94%

has lost 16.4%.

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