Torrid Holdings Inc. (NYSE:CURV) Q4 2023 Earnings Call Transcript

Torrid Holdings Inc. (NYSE:CURV) Q4 2023 Earnings Call Transcript March 28, 2024

Torrid Holdings Inc. beats earnings expectations. Reported EPS is $-0.04, expectations were $-0.08. Torrid Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Torrid Holdings Inc. Fourth Quarter Fiscal 2023 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. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host Chinwe Abaelu, Chief Accounting Officer. Thank you, you may begin.

Chinwe Abaelu: Good afternoon everyone and thank you for joining Torrid's call today to discuss our financial results for the fourth quarter and full year of fiscal 2023, 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, Torrid's Chief Executive Officer of Torrid; Mark Mizicko, Torrid's Chief Commercial Officer; and Paula Dempsey, Torrid's our new 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 may include, but are not limited to, statements containing the words expect, believe, plan, anticipate, will, may, should, estimates, and other words in terms of similar meaning.

All forward-looking statements are based on current expectations and assumptions as of today, March 28, 2024. These statements are subject to risks and uncertainties that could cause actual results to differ materially. For 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. 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 turn the call over to Lisa.

Lisa Harper: Good afternoon and thank you for joining us to discuss our fourth quarter results today. I will begin with a review of our fourth quarter performance, highlight our accomplishments during the year, and then discuss our strategies for 2024. Then I'll turn the call over to Mark Mizicko who will review our merchandising strategies and marketing plans. Paula will then review the financials and provide our outlook for fiscal 2024. We are pleased to report that our fourth quarter sales and EBITDA came in ahead of our guidance. While we are not immune to the current macro environment, we are focused on the levers we can control. Our disciplined inventory management enabled us to reduce promotions and drive higher full-price sales.

For the quarter, we generated $294 million in net sales and $16 million in adjusted EBITDA. During the quarter, we observe strong customer engagement and a positive response to events like Black Friday and Torrid Cash, both of which exceeded our expectations. We saw positive regular price comp momentum in graphic tees, knit tops, and bottoms, categories that we will continue to build on in 2024. Looking back on fiscal 2023, we made significant changes to improve the fundamentals of our business. We have touched just about every aspect from merchandising to marketing to sourcing. We are pleased to see sequential improvement in our regular price business as customers responded favorably to our holiday and early spring merchandise collections.

Key highlights from 2023 are our improved assortment and optimized channel investments to maximize regular price sell-through resulting in margin expansion; reducing our inventory levels ending the year down 21% compared to a year ago; consolidating our sourcing base, positioning us to meaningfully reduce product costs in 2024; launching a new digital marketing platform, leading to an increase in reactivated customers compared to a year ago. We made a great deal of progress in 2023 and now have a strong foundation in place as we move into 2024. We will build on the work we have done by remaining focused on our strategic priorities, improving our merchandise assortment, strengthening our marketing messaging, and optimizing our working capital through cost and inventory management.

In terms of our merchandising, we will continue to evolve and elevate our collections to give our customers a broad assortment of relevant styles and sets. Our collection will reflect a better balance of casual and dresses that appeal to a wider age demographic. We will build on the success we saw with Trio denim launch, expanding offering of graphic tees and our core knit program. Additionally, we are thrilled to re-launch a popular casual application Sally, which is extremely versatile and supports an opening price point offering across our tops, bottoms and dresses. We are pleased with the initial positive response we received seeing from our customers. And Curve, our intimate apparel brand. We will see the launch of new brands and innovation for the first time in many years.

We will continue to invest in key items and core programs. We know our price points skewed higher over the past few years, as we moved away from a balance of casual and the assortment. Spring collections introduced a more casual assortment and broader pricing architecture, across good, better and best cost engineered in a way that offer value to our customer, while remaining margin accretive. Moving to marketing, we are focused on increasing customer engagement and acquisition, by leveraging insights from our new Digital Marketing platform. We are delighted to announce our casting call model search to find the new face of Torrid for 2025. Mark, will provide more details in a few minutes. Turning to working capital, we are driving profitability and strengthening our balance sheet by improving our working capital strategy through product cost efficiencies and inventory optimization.

Central to our cost efficiency drive, we have renegotiated our supply contracts, consolidated our supplier base, securing cost advantages that directly bolster our bottom-line. This effort is complemented by our focus on design-to-value strategies and production efficiencies, where we scrutinize every aspect of design and manufacturing to pinpoint cost saving opportunities without compromising our quality standards. Parallel to these cost efficiencies, our inventory management leverages data analytics, to accurately forecast demand allowing for more strategic inventory procurement and reducing the risk of overstocking. This is bolstered by our product rationalization process where we continuously evaluate and trim underperforming products, enhancing inventory turnover and focusing on productive SKU offerings.

Our mindset to chase inventory, supported by strengthen our supplier relationships minimizes the necessity for large inventory holdings, increasing our market agility and reducing carrying costs. These measures are expected to drive sustainable growth and significantly improve our working capital efficiency, while creating significant value for our shareholders, underscoring our unwavering commitment to operational excellence and financial performance. In closing, I am confident that the strategic transformations we've put in place, position us for a future marked by sustained growth and a strong foundation in 2024. Before I hand over the floor to Mark, it's essential to recognize the relentless dedication and commitment of our team. Your tireless efforts and unwavering dedication to our customers are truly let's set Torrid apart, creating an unparalleled and exceptional environment.

Your contributions go beyond being recognized, they are profoundly valued. Thank you all for what you do, now, turning it to, Mark.

Mark Mizicko: Thanks, Lisa. I'd like to start today by sharing the progress we have made on a few of our key initiatives in merchandising, product margin expansion, inventory productivity and buy accuracy as well as marketing. And then I will briefly discuss some of the highlights of the fourth quarter. Our merchandising and planning teams remain focused on maximizing product margin expansion, through better enterprise sell-through optimize assortment investments by channel and continued improvements in pricing and promotion. We continued to build upon the results of the third quarter with improvement in regular price sell-through and lower -- lower overall discounts, resulting in year-over-year product margin expansion of 140 basis points in the fourth quarter.

We believe that our ending inventory position down 21%, as Lisa noted, positions us well to continue building on this momentum throughout 2024. We shared with you in our last call, the early success we saw in the testing of clearance store conversions. We continue to be pleased with their performance and believe they will play a key role, in our continued priority of maximizing inventory productivity. These clearance stores are allowing us to consolidate store markdowns and sell them more profitably as well as freeing up space in our standard format stores, to showcase a wider breadth of our otherwise e-Commerce exclusive assortment. This advantage allows these clearance feeder stores to see incremental margin productivity, from a combination of less markdown competition and additional regular price assortment.

We believe this strategy will contribute to improvement in store traffic over time as well with the wider breadth of assortment choice. Given the continuing success of these initial tests, we plan to convert additional stores to this format in 2024. Additionally the optimization of assortment depth and breadth by channel began to pay off in the fourth quarter and will continue to be a strategic initiative for merchandising and planning teams throughout fiscal 2024 and beyond, particularly reducing the depth of e-commerce buys and allowing for omnichannel fulfillment programs like ship from store to fulfill web demand is still facilitating enterprise-wide higher regular price sell-throughs and producing higher product margins through markdown avoidance.

Lastly, we continue to see measurable improvement in the profitability and customer engagement of our promotional events, which in the fourth quarter included a Black Friday and Cyber Weekend event that met our expectations and saw a significant margin expansion year-over-year, as well as a very successful toward cash in January that further built on the momentum of October's event. Turning to marketing, we continue to see improved customer response to our marketing campaigns and touch points as we leverage the data from our new data platform and in partnership with our new digital marketing agency. We were able to take responsive action throughout the fourth quarter and optimizing our allocation of marketing spend across channels in order to maximize profitability and return and increase the performance of our customer file.

We will maintain an emphasis on driving customers to our stores through cohesive omnichannel messaging, special in-store experiences and dedicated loyalty events. Additionally, we will continue to leverage social media content to drive engagement and better connect with our customers. Our stores are the leading gateway for introducing customers to our brand. Those who first engage with us in store are more inclined to utilize both our physical and online channels becoming valuable omnichannel customers and spending three times more than single channel shoppers. Finally, we are thrilled to be bringing back toward casting call in 2020 for a nationwide model search for the next official face of Torrid. We ran this wildly successful campaign in 2019 and this year's will kick off in April and conclude in September.

This will include multi-city casting calls, photo shoots and styling consultations. Finally, culminating with a group of finalists who will gain invaluable mentorship from seasoned industry professionals who will engage the contestants in professional development activities aimed at kickstarting their modeling careers. The ultimate winner will become the 2025 face of Torrid. To summarize, our team continues to make progress in our merchandising, planning and marketing processes. We believe that many of the successes we began to see in the business in the fourth quarter will continue to lead greater margin expansion and improved customer file growth in 2024. And with that, I will now turn the call over to Paula.

Paula Dempsey: Thank you, Mark. Good afternoon everyone and thank you for joining us today. Fiscal 2023 was a year of robust execution for our company. Despite encountering a softer demand environment than we had initially anticipated. Our focus and resilience have been paramount especially as we navigated through the challenges of the first half of the year in 2023. The second half, however, marked a critical turning point in our journey. We took strategic actions to establish a strong foundation for the future. Our performance improved in the latter months of 2023. While we execute on our core initiatives that we believe will drive our long-term success. I will now begin with a detailed discussion of our fourth quarter and full year followed by our outlook for fiscal 2024.

Our fourth quarter results came in ahead of our expectations on both the top and bottom line. We generated meaningful year-over-year gross profit expansion driven by improved product margins as we began to see the impact of our product cost initiatives. We remain disciplined with inventory management ending the year with healthy inventory levels. For the fourth quarter net sales came in at $294 million compared to $301 million last year. This includes sales for the 53rd week, which were processed approximately $22 million comparable sales decline 9%. Gross profit increased to $101 million from $96 million last year, reflecting a gross margin increase of 250 basis points to 34.5%, driven by lower product costs and fewer markdowns. Store occupancy expenses were flat compared to a year ago.

SG&A expenses in the quarter were $80.6 million or 27.5% of net sales compared to $77.8 million or 25.8% of net sales last year. The increase is related to a onetime 1.6 million expense reversal in the prior year related to performance incentives. Marketing expenses in the quarter were $16.5 million compared to $15.8 million in the fourth quarter of last year. As a percentage of net sales, marketing increased 30 basis points to 5.6% compared to 5.3% in the fourth quarter of last year. This increase is a result of a slightly higher investment in digital marketing. Our net loss for the quarter was $4.1 million or a loss of $0.04 per share versus a net loss of $3.9 million or $0.04 per share for the same period last year. In addition to GAAP measures, we believe that adjusted EBITDA is an important measure that we use to evaluate and manage our business.

Adjusted EBITDA was $16.4 million or 5.6% of net sales compared to $16.4 million or 5.4% of net sales in the fourth quarter of 2022. This includes the 53rd week impact of approximately $2.5 million. Turning to our fiscal 2023 results for the full year. Net sales were $1.15 billion. We opened 36 storage stores and closed 20 stores ending the period with 655 stores. Gross profit in fiscal 2023 was $406 million or 35.2% of net sales. Adjusted EBITDA was $106 million or 9.2% of net sales compared to $152 million or 11.8% of net sales in 2022. Despite facing some initial challenges in the beginning of the year, we experienced a turnaround in the second half that was marked by more stable traffic trends, robust product margins and remarkable reduction in inventory levels.

In addition, our focused efforts on digital marketing strategies in Q4 successfully reengage our customer base, leading to a 4% increase in customer reactivation. Net income for the year was $12 million or $0.11 per share compared to a net income of $15 million or $0.48 per share for the same period last year. Moving to the balance sheet. Our cash and cash equivalents were $12 million at the end of the quarter. Our total liquidity, including available borrowing capacity under our revolving credit agreement was $115 million. Total debt at the end of the quarter was $312 million compared to $329 million in the fourth quarter of 2022. Our net debt to adjusted EBITDA was 2.9 times at quarter end. We made significant progress with our inventory levels ending the year with inventory down 21% to $142 million compared to $180 million a year ago.

Turning to our outlook for 2024. We expect consumers to remain cautious with their spending given elevated interest rate and inflation levels. While we believe this will limit our top line sales growth, we expect to realize the benefits of our product cost initiatives. We estimate full year revenue of between $1.135 billion to $1.155 billion. In fiscal 2024, we expect to open 15 to 20 storage stores and closed 10 to 15 stores. As a reminder, fiscal 2024, is a 52 week year compared to a 53 week year in 2023, sales for the 53rd week for approximately $22 million resulting in $2.5 million of EBITDA. We expect adjusted EBITDA of between $106 million to $116 million. This includes investments are expected to increase SG&A as a percentage of sales by 100 to 120 basis points compared to last year.

The increase is driven primarily due to the expectation that we meet our targets and have accrued for incentive compensation in 2024. We did not accrue for incentive compensation in 2023 and we continue with investments in technology including new product lifecycles and product allocation system. Capital expenditure is expected to be between $20 million to $25 million, which includes investments in new systems and technology as well as the opening of 15 to 20 new stores. Our guidance does not reflect the Consumer Financial Protection Bureau or CFPBs ruling to lower the maximum allowable charge for late fees, as it is subject to ongoing legal challenges initiated on March 7, 2024, should the court granted a stay in this ruling, we anticipate an impact on our net sales and EBITDA in the range of $11 million to $15 million for the last eight months of fiscal 2024.

In response, we're actually collaborating with our credit card partners to lessen the impact, if this goes into effect. Let me provide some comments on our expectations for the quarterly cadence for the year. For the first quarter, we project net sales to be in the range of $277 million to $282 million and adjusted EBITDA to be between $31 million and $34 million. There are a few factors impacting our first quarter sales. We have one toward cash event planned for the quarter compared to events last year. And given our more disciplined inventory management, we plan to move through less clearance inventory, which impacts top line sales but is margin accretive. We anticipate the sales volumes will remain relatively consistent throughout each quarter and adjusted EBITDA to remain relatively consistent for the first three quarters with a normal seasonal decline in the fourth quarter.

This cadence is more aligned with our seasonality in 2019, a more normalized year for our business. Our guidance assumes continued traffic pressure impacting top line. The estimate also incorporates gross profit expansion throughout the year. We expect the combined effect of increased margins and sustained reductions in inventory levels to lead to improvements in working capital. As we look forward to the upcoming year, our journey reflects a path of strategic decisions disciplined financial management and a commitment to driving shareholder value. The past year has laid a strong foundation, setting the stage for sustained growth and continued innovation. With the continued support of our shareholders, the loyalty of our customers and the hard work of our team, we're eager for the prospects to lay ahead.

I will now turn the call over to the operator to begin the question-and-answer portion of our call.

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