Torrid Holdings Inc. (NYSE:CURV) Q3 2022 Earnings Call Transcript

Torrid Holdings Inc. (NYSE:CURV) Q3 2022 Earnings Call Transcript December 8, 2022

Torrid Holdings Inc. misses on earnings expectations. Reported EPS is $0.07 EPS, expectations were $0.12.

Operator: Greetings and welcome to Torrid Holdings Third Quarter Fiscal 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. It is now my pleasure to introduce your host Vince Adams, SVP Finance. Thank you, Vince. You may begin.

Vince Adams: Good afternoon, everyone. Thank you for joining Torrid’s call today to discuss third quarter financial results for 2022, which we released this afternoon and can be found on our website at investors.torrid.com. With me today on the call are Lisa Harper, Chief Executive Officer of Torrid; and Tan MacDiarmid, Chief Operating Officer and Chief Financial Officer. Before we get started, I would like to remind you of the company’s Safe Harbor language, which I’m sure you’re familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.

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For a further discussion of risks related to our business, see our filings with the SEC. This call will contain non-GAAP financial measures, such as adjusted EBITDA and adjusted EBITDA margin. Reconciliations to these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC and available on our website. With that, I will now turn the call over to Lisa.

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Lisa Harper: Thanks Vince. Good afternoon, everyone, and thanks for joining us for a discussion of our third quarter results. I’d like to start the call by recognizing the Torrid teams that are complete dedication for the business as we face a choppy macroeconomic backdrop. Despite external pressures, we’ve remained steadfast in our goal to deliver exceptional product, anchored on our world-class fit. I’d also like to officially introduce Tim Martin, who is joining today’s call as our Chief Operating Officer and Chief Financial Officer. Tim brings a wealth of experience to Torrid and he will be instrumental and helping us deliver on our strategic priorities. I look forward to you learning more about Tim and Torrid as we move forward.

Now moving into our third quarter results; despite the challenging environment in late Q3, our net sales and adjusted EBITDA were within our expectations. During the quarter, we saw the customer respond favorably to new product introductions, including the launch of our studio line of where to work styles. However, similar to the trends experienced at other retailers, we saw a slowdown in consumer demand during the month of October that coincided with our Torrid cash event, which typically makes up a large portion of quarterly sales. As a result of the softness, the comparable Torrid cash event was down double digits versus last year and prior quarters, which negatively impacted performance. As we worked to right size our inventory levels in the third quarter, we added incremental discounts and promotions, which pressured margins.

We were able to make headway clearing through inventory, ending the quarter with total inventory of 25% from last year. While this was a significant improvement relative to the second quarter, it is still somewhat higher than we would like, primarily due to the softer demand we experienced late in the quarter. We are focused on ending the year with clean inventory and expect to be promotional in the fourth quarter to end the year well positions for 2023. We also continue to work on the priorities that I laid out previously. Key among these was enhancing our promotional and marketing strategies to better balance margin and sales growth. We are still in the test and learn stage of our promotional changes and there continues to be significant opportunities for us to improve margins.

Elevated inventory levels have limited our ability to pull back heavily on promotions this year. As we moved into 2023, we expect inventory levels to be much more balanced, which should enable us to further adjust our promotional strategy with the goal of expanding margin. We have had an opportunity to test different types of margin-enhancing promotion that we will be able to implement more fully next year. In terms of marketing, we are focused on driving customers to store and building the quality and quantity of our customer files. We know that stores are where the majority of new customers first discover and fall in love with our brand and we view stores as a critical acquisition and engagement vehicle. For example, during the quarter, approximately 30% of the customers shopping in new stores were new to the Torrid brand, and these customers typically spend 25% more in their first year compared to those acquired on the web.

Stores and store acquisition is clearly an important strategy of growth for us. In order to build a healthy customer file, we are focused on reengagement of lapse customers and improving retention. Our marketing efforts to re-engage lapsed customers continue to show promise and we generated another 500 basis point improvement in reactivated customers on top of the improvement seen last quarter. On social media, we’re more focused than ever on product. We saw 160% increase in product conversations versus the prior quarter, largely driven by the success of our studio collection and the strong reception to the watch. We also executed an influencer campaign last quarter focused on genes, which highlighted our world-class fit. Customers consistently note that our fit is what compels them to shop a Torrid and we continue to see low return rates, which speak to the integrity of that fit.

Turning to merchandising and product, we introduced new growth categories within the product assortment starting with the launch of the Studio collection in September, which was executed with a full 360 degree integrated marketing campaigns that span all channels. Given the shift in customer preference for where to work styles, this was the ideal time for the launch. The collection was very strong and drove a 30 percentage point improvement in workwear sales growth versus the prior quarter. We also launched a new collection called Festi that was announced with to the iconic trends that defined the 2000. This collection featured classic styles including babies ties and retro graphics, and we saw our most loyal customers respond to the product with a VIP customer penetration that was more than double our typical VIP penetration across other categories.

As we moved through the quarter, we offered new fashion and color, including cozy and cold weather product and novelty fabrics and prints. We are encouraged to see her response to new product and we have even more newness slated for the fourth quarter. Our holiday assortment features an expanded breadth of product focusing on glitz, glam and pretty for all of our holiday occasions. Our most loyal customers respond well to our special collections and we have many planned for this fourth quarter, including a Retro Chic collection. a new Curve assortment with holiday colors and we’ve added another drop of our Betsey Johnson collection. In closing, our team remains focused on making product and operational improvements that will position us deliver sustainable long term growth.

We’re seeing science strategy refinements are working and we’re excited about what product as we continue to capture her interest with relevant fashion and perfect sitting base. The positive feedback and momentum that we received with our Studio launch is carrying forward into next year as we bring our customer compelling assortment anchored on an exceptional fit. Our new product launches and seamless customer experience, the relevancy with our customer, which should lead to increased visit frequency and higher conversion rates. We are excited about our changes and how they build going into next year. And with that, I’ll turn the call over to Tim to provide more detailed financials on the quarter and updated guidance.

Tim Martin: Thank you, Lisa and good afternoon, everyone. I’m incredibly excited to be joining the company as Torrid’s Chief Operating Officer and Chief Financial Officer. Torrid is an amazing brand with strong potential and I look forward to being part of its success. We have a significant opportunity for growth and I am happy to be working with Lisa and the Torrid team as we strive to consistently deliver on the company’s potential. I will begin with a detailed discussion of our financial results followed by an update on our outlook for the rest of the year. Starting with the third quarter results, net sales came in at the low end of our guidance at $290 million, which was down 5% compared to $306 million last year. Comparable sales in the quarter declined 8% compared to a 14% increase in the third quarter of 2021.

As a first comparable, we were about 9% to the 2019. Similar to trends reported at other retailers, we experienced a slowdown during the month of October. This coincided with the timing of our quarterly Torrid cash event, which negatively impacted our third quarter results. However, we were pleased to see our customer respond favorably to new product offerings during the quarter, including the Studio collection and demand early in the quarter was more in line with our expectations. Gross profit for the third quarter was $92 million or 31.6% of net sales. This compares to $125 million or 40.9% of net sales in the third quarter of last year. During the quarter, we continue to focus on right sizing our inventory levels, which resulted in an increase in discounts and promotions over the last year.

Approximately, 850 basis points of the decline was due to higher discounts and promotions to clear inventory. The remainder of the decline was inflationary and related to higher product and transportation costs, partially offset by price increases. Selling, general and administrative expenses in the quarter were $59 million compared to $66 million for the third quarter in the prior year. As a percentage of sales, SG&A decreased to 20.4% from 21.7% compared to the third quarter of last year, due to higher private label credit card income and lower performance bonus expense. As a reminder, the terms of our new private label credit card agreement provide a benefit to SG&A expense compared to a year ago. This benefit was partially offset by higher store and web payroll, primarily caused by inflationary pressures, including higher wages.

Excluding the benefit from private label credit card income, SG&A as a percentage of sales increased 70 basis points driven by the deleverage in sales. Marketing expenses in the quarter came in at $13 million compared to $15 million last year. As a percentage of sales, marketing expense was 4.4% and decreased approximately 50 basis points compared to 4.9% in the third quarter of last year. As we navigate a difficult macroeconomic backdrop, we remain disciplined in our marketing investments and made the strategic decision to allocate expenses towards customer reactivation where we are seeing better returns. As a result, we’ve been able to drive improved spend efficiency versus the prior. Turning to profitability, net income for the quarter was $7 million or $0.07 per share compared to a net loss of $59 million or a loss of $0.54 per share for the same period last year.

We did not have any adjustments to net income in the third quarter of ’22, but for comparison purposes, adjusted net income last year was $28 million or $0.25 per share. In addition to the GAAP measures, we believe that adjusted EBITDA is an important measure that we use to evaluate and manage our business. Adjusted EBITDA came into the low end of our guidance range at $32 million or 11.1% of net sales. Turning to the balance sheet, our cash and cash equivalents at the end of the quarter totaled $19 million. Total liquidity at the end of the third quarter, including available credit, was $159.4 million. Total debt at the end of the quarter was $327 million compared to $341 million in the third quarter of 2021. Our net debt to adjusted EBITDA was 1.9 times at quarter end.

Inventory at the end of the quarter was $200 million, an increase of 25% compared to $159 million in the prior year. This is a significant improvement compared to the 64% growth at the end of the second quarter. We continue to focus on reducing our inventory levels and expect to clear through any remaining seasonal inventory by the end of the year. While we plan to end the year with inventory up to last year, it will be clean and comprised mostly of basics and early spring receipts. We opened five stores in the third quarter, including two curve stores, and we closed three stores. We have opened fourteen stores year to date. We now plan to open approximately 27 total stores for the year, including eight Curve stores. Turning to the outlook, given the challenging macroeconomic environment and the volatility in our demand trend, we’re updating our outlook for the remainder of the year.

For the fourth quarter, we project net sales to be between $285 million and $300 million and adjusted EBITDA to be between $9 million and $14 million. The outlook for our gross margin rate will remain pressured as we continue to reduce inventory to bring levels in line with demand. For the full year, we are forecasting sales to be between $1.244 billion and $1.259 billion. For the adjusted EBITDA, we are now projecting it to be between $145 million and $150 million. Capital expenditures are projected to be between $27 million and $30 million for fiscal ’22, reflecting infrastructure investments and approximately 27 new store openings. We are also planning to close 13 stores this year. In closing, we are facing an uncertain and dynamic environment and Torrid is certainly not immune to these challenges.

Well, I’ve only been at the company a short time, I have been impressed with the strength of the Torrid brand, its relationship with the customer and the Torrid team. I believe we are putting the right strategies and priorities in place to deliver consistent long term growth. In the near term, we are going to focus on controlling the controllables and setting the company after success going forward. With that, I will now turn it over to the operator for questions.

Q&A Session

Operator: Our first question is from Oliver Chen with Cowen. Please proceed with your question.

Oliver Chen: Hi, thanks very much, Lisa and Tim. On the inventory situation now, what are the main strategies to clear through it? And also is there a risk in terms of the depth of promotions you may need to take? What are you seeing in the consumer environment that give you a conviction, you can get through it. As we look ahead to modeling inventory in the new year would love your take on how you see that in terms of the growth rate relative to sales. And then the second question, Lisa zooming out, what’s your hypothesis for driving greater consistency in terms of what the brand and indoor strategies that may need to take place for that to happen. And Tim lastly on the debt, what’s your target ratio would love your refreshment on your priorities in terms of the debt level and the debt to EBITDA ratio you seek to maintain. Thank you very much.

Lisa Harper: Okay, thanks, Oliver. I’ll start with the inventory question. Our aging on our inventory is actually very, very positive, meaning we have very current inventory. There is a lot of moving pieces with inventory, particularly the only bulk of inventory that has a long trajectory in terms of clearing is basics and that’s primarily basics in bras and denim and other bottoms and we are of course not promoting that heavily and not burning down that inventory, but we’ll land the plane on that and feel comfortable that we can manage that appropriately. The other increase in inventory is actually receiving our spring product in the correct time table because last year we consider a resort which just set in the stores to be a spring line and so we count that in our spring inventory.

So we receded that on time and we’re receding spring one, which will set the end of December on time as well and so last year those lines were late. So I’m not worried about the timeliness of managing the inventory. We are just very committed to making sure that we stay on top of it and that we turn it quickly. I think actually the opportunity for us is we are much cleaner than we’ve been all year and the inventory is very current and that week and moderate promotions as we move forward. So I don’t actually expect in the first quarter to have to accelerate any more than we have and I think that we have some possibility of being able to moderate that as we deliver a new product and have the customer respond to that, but overall with inventory, I’m comfortable with the aging.

It’s actually quite clean. There’s moving pieces associated with it. We’re just committed to making sure that we stay on top of it and keep it as current as possible so that we are not kicking a problem down the road. On my hypothesis for consistency, if I understand what that means. So I’ve been here a few months and one of the things that we’ve really focused on aside from building the right team and building the right operational foundation for the business is the process for developing our product assortment flow and those assortments by channel and some of that discipline had been lost over the pandemic time period and we’ve reinstated processes that are very straightforward that are very typical and well known in kind of this environment and moving more of our analysis and development earlier in the process, meaning a template for the development and then being able to really test and react more appropriately as we move down the path.