Rent the Runway is being outsmarted by Nuuly from Urban Outfitters.

Philadelphia-based Inc., or URBN, has been quietly constructing a new division near its headquarters.

Since its launch in 2019, Nuuly has been offering a subscription service for clothing rentals, featuring Urban Outfitters, Free People, Anthropologie, and over 400 other brands and designers.

Nuuly's expansion of flagship brands is not detrimental to the company's wholesale profitability, according to URBN leaders.

Dave Hayne, Nuuly President and URBN Chief Technology Officer, stated that the individuals are being exposed to our family of brands and are more likely to purchase from our sister brands.

Nuuly is projected to achieve profitability in its third or fourth fiscal quarter of 2023. Despite being a relatively new service, it has experienced significant growth. Its revenue increased by almost 100% year over year in URBN's second quarter, thanks to an impressive 85% increase in active subscribers.

In 2019, the company started with no revenue. It is predicted that this concept will reach profitability quickly, making it one of the fastest to break even, according to Adrienne Yih, a consumer discretionary analyst at Barclays.

Nuuly's subscriber count is rapidly increasing, with 198,000 subscribers as of Nov. 3, just 2,000 away from their end-of-year goal.

Hayne stated that they have been consistently running ahead of the timeframes they had set up until now.

URBN is projected to gain $1 billion in value from Nuuly within the next three to five years, according to analysts.

The company plans to open a $60 million facility in Kansas City, Missouri, in January 2024 to support its growing subscriber base of over 600,000.

Hayne stated that the objective is to triple the overall business, and Kansas City is the key to achieving this goal.

Despite being one of the first rental services, analysts believe there is still a lot of potential in the emerging market.

Rental is gaining popularity among consumers, particularly among the current millennial and Gen Z generations who value sustainability and novelty. A McKinsey & Company report reveals that 15% of this group are open to trying clothing rental, while 48% are willing to purchase secondhand apparel.

By 2030, the rental industry is expected to account for 3% of the total retail market, while re-commerce, or secondhand sales, will likely account for 12%.

Yih stated that Nuuly's parent company has invested over $100 million in its development, effectively accelerating the growth process by at least three years, according to analysts.

As Nuuly gains traction in the market, another company experiences a decline. Rent the Runway's stock price has fallen by approximately 97% since its public debut in late October 2021. In its second quarter this year, the company reported $75.5 million in revenue, which is a 1% decrease from the same quarter the previous year.

According to an industry source, the success of Rent the Runway's rental platform is not indicative of the overall rental market, as other companies such as Express, Vince Camuto, and Banana Republic also launched rental platforms in recent years, though they only offer their own labels.

Experts agree that the potential of the emerging segment is huge, with McKinsey & Company predicting it could reach $2.1 billion by 2025.