Torrid Holdings Inc. (NYSE:CURV) Q4 2022 Earnings Call Transcript

Torrid Holdings Inc. (NYSE:CURV) Q4 2022 Earnings Call Transcript March 23, 2023

Operator: Greetings. Welcome to Torrid Holdings, Incorporated Fourth Quarter Fiscal 2022 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to Paula Dempsey, Senior Vice President of Finance and Investor Relations. Thank you. You may begin.

Paula Dempsey: Good afternoon, everyone, and thank you for joining Torrid’s call today to discuss the fourth quarter and fiscal year 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 Tim Martin, 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 include, but are not limited to, statements containing the words expect, believe, plan, will, may, should, estimate and some other expressions.

All forward-looking statements are based on current expectations and assumptions as of today, March 23, 2023. These statements are subject to risks and uncertainties that could cause actual results to differ materially. 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. 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: Thanks, Paula. Good afternoon, everyone, and thank you for joining us for a discussion of our fourth quarter and full year results. Before I begin, I’d like to thank the Torrid team for their dedication in providing our customers with exciting new products and a compelling customer experience. We’ve navigated a year of retail challenges with new leadership in many parts of the organization, elevated inventory levels resulting in a higher promotional environment and decreased customer discretionary spend. Despite all of this, the team has accomplished a great deal in a short time. I believe that the changes we’ve made have been essential to reignite profitable long-term growth. I’m also very happy to announce the return of Mark Mizicko to Torrid as Chief Commercial Officer.

Mark previously served as the Chief Operational Officer of Torrid back in 2016. And prior to that, he served us as Chief Planning Officer of both Hot Topic and Torrid. He brings a wealth of experience and expertise in retailing and we are excited to have him rejoin the team. Mark will be leading all aspects of margin optimization, inventory planning and buying as well as working with Vivian Alhorn, our Chief Marketing Officer on marketing and e-commerce activities. Essentially focusing on all things that drive product sales for the company, we believe that with Liz Munoz focused on design, Vivian’s expertise in marketing and e-commerce, my involvement in product selection as well as Mark’s leadership of inventory planning, marketing, e-commerce and planning functions we have a strong team focused on delivering the very best product for our customers.

Now moving into our fourth quarter performance. We delivered net sales at the upper end of our guidance range. Customers responded favorably to our Black Friday and Cyber Monday events, taking the pressure off to our cash later in the quarter. Our gross margins began to stabilize in the fourth quarter as the rate of gross margin declined significantly lower than the third quarter. This sequential improvement in gross margin enabled us to exceed the upper end of our guidance, delivering an adjusted EBITDA of $16 million. Our primary focus for ’22 was on enhancing the organization’s focus in order to reignite sustainable long-term growth. We brought on Tim Martin, our Chief Operating Officer and Chief Financial Officer; Han Park, Chief Technology Officer; Bridgett Zeterberg, Chief Human Resources Officer and Chief Legal Officer; we promoted Vivian Alhorn to Chief Marketing Officer, and we have now brought on Mark Mizicko as our Chief Commercial Officer.

These new leaders have a wealth of experience from public and private retail and consumer-facing companies, and they will be instrumental in bringing our teams into alignment and driving our strategic initiatives. We also invested in new technology across the business that will enable us to provide customers with a more seamless experience moving forward. In the distribution center, we put in place new technology that has increased our capacity and allows us to deliver product to our customers faster than ever before, much improved over last year. Our new ERP system provides the foundation for an improved shopping experience on the website and enhanced data integration across the organization. Within inventory and product, we prioritized rightsizing our inventory with the goal of entering 2023 with adequate levels to support demand and the environment.

Although we had to be more promotional to move these units last year, we were successful in these efforts, and ended the year with inventory up only 6% compared to prior year, with the year-over-year increase coming solely from basics and early spring receipts. Normalizing for these categories, we were down 5% to the prior year representing the most efficient levels of inventory we have seen in some time. We know that new product consistently drives customer anticipation and demand. We delivered new collections to her this year with the successful relaunch of our Studio collection, relaunch of testing and other collaboration with Betsey Johnson and a refined focus on delivering more colors and fashion forward pieces that drove frequency and demand from our loyal customer base.

And finally, we focus on expanding our customer file through reengagement of lapsed customers and new customer acquisition. We shifted our marketing efforts toward customer retention, bringing back lapsed clusters and reaffirmed our commitment to attract new customers into our brand through our store channel. These efforts allowed us to deliver an increase in our active customer file this year. Overall, 2022 was a year of new learnings transformation and laying the groundwork for the brand’s continued success and expansion. We believe that the changes we made this past year were critical to set us up for future growth. As we look ahead to 2023, we will continue to expand our store footprint driving customer file growth, delivering exciting merchandise to fill every need in our closet and enhance our customer relationships.

With these key areas in mind, we will keep investing in optimizing and growing our store footprint to acquire new customers into the brand and expand our customer file. Our store base is profitable, and they remain our primary new customer acquisition channel. New stores drive significant web sales from newly acquired customers and the net spend of these customers in the first year is approximately 25% higher than that of web acquired customers in their first year. Customers developed a connection with our product and brand by interacting with us in our stores. We are committed to bringing customers into our stores where we believe a compelling and personalized experience will increase engagement and loyalty. We plan to open between 30 and 40 new stores in 2023 as stores are a proven competitive advantage for this business.

We understand the customer loyalty is determined by our ability to provide her with new and innovative products that increase our frequency of purchases. In 2023, we plan on launching a steady stream of new products across multiple categories to peak her interest and increase her engagement with the brand. The new products we introduced generated positive feedback in customer interest, and we will build on this throughout the year. In terms of marketing and promotional strategies, we are focused on improving our promotional cadence. We plan to offer a more consistent flow of smaller, exciting events to engage our customer and drive spend frequency. As part of this, we are redesigning our toward cash promotion from a quarterly event to smaller and shorter events throughout the year.

This change will reduce our reliance on large toward cash events at the end of every quarter. While there is a lot of discussion in the retail industry about the macro environment, we will remain laser-focused on what we can control. We believe that the product and operational improvements we’ve made will position us for success and allow us to focus on key areas that we know will drive the business, such as enhancing the customer experience, driving productive growth in our customer file and delivering exceptional product. I am thrilled to see our team continue to provide our customers with world-class fitting products that are truly life-changing as well as unmatched in store customer experience. With that, I’ll turn the call over to Tim, who will provide more detailed quarterly and annual financials.

Tim Martin: Thank you, Lisa, and good afternoon to all of you. Before I begin, I’d like to recognize the Torrid team for how much they’ve accomplished while navigating through uncertainties associated with all the changes they dealt with this past year. We implemented operational and strategic changes that have improved the foundational health of our business, and we focused on controlling what we can control. I believe that the changes we made will allow us to increase shareholder value and deliver long-term growth. I would like to begin by highlighting the accounting policy change that you may have seen in today’s press release. In the fourth quarter of fiscal 2022, we made a voluntary change in our accounting policy regarding the classification of private label credit card funds.

Historically, we recorded PLCC funds as a reduction to SG&A expenses. Under the new policy, we record PLCC in net sales, and all metrics reported using net sales will be impacted. We believe the recognition of the PLCC funds in net sales is preferable because it will enhance the comparability of our financial statements with those of many of our industry peers and provide greater transparency into the performance metrics related to our industry. This reclassification has been retrospectively applied to all periods discussed in today’s prepared remarks. I will now provide a detailed discussion of our financial results followed by our outlook. Starting with the fourth quarter results. Net sales came in at $301 million compared to $318 million last year.

Comparable sales in the quarter declined 5.4%. We had a strong start to the quarter as customers were eager to shop doing our Black Friday and Cyber Monday events, which took the pressure off our Torrid cash event later in the quarter. Gross profit for the fourth quarter was $96 million or 31.9% of net sales compared to $104 million or 32.6% of net sales in the fourth quarter of last year. The 70 basis point decline was primarily driven by promotional events and higher inflationary costs, partially offset by the higher PLCC funds. Selling, general and administrative expenses in the quarter were $78 million compared to $70 million for the fourth quarter in the prior year. As a percentage of sales, SG&A increased from to 25.8% from 22.0% compared to the fourth quarter of last year.

The increase of 380 basis points was primarily driven by higher wages onetime expenses related to employee separation agreements and disposal of assets and other miscellaneous items. I should note that approximately 110 basis points of our increase is related to unusual items with 70 basis points related to severance, which is in our adjusted EBITDA add-back and 40 basis points related to the disposal of assets. We continue to be focused on controlling the controllables and leveraging SG&A as we see sales volume increase going forward. Marketing expenses in the quarter came in at $16 million compared to $17 million last year. As a percentage of sales, marketing expense was relatively flat last year at 5.3% compared to 5.5% in the fourth quarter of last year.

Net loss for the quarter was $4 million or a loss of $0.04 per share compared to a net loss of $23 million or a loss of $0.21 per share for the same period last year. We did not have any adjustments to net income in the fourth quarter of 2022. But for comparison purchases, adjusted net income last year was $10 million or $0.09 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 in above our guidance range at $16 million or 5.4% of net sales compared to $28 million in the fourth quarter of last year or 8.9% of net sales. Now turning to our fiscal 2020 results. For the full year, net sales were down 1% to $1.29 billion compared to $1.30 billion last year, and comparable sales were down 3.4% to last year.

Although we delivered an increase in transactions and units sold, we saw lower average order values that impacted our total sales. Our total customer base grew by 2% in fiscal 2022 to 3.9 million customers and net sales per customer was down 3% to last year. The size of our loyalty program, our customer loyalty program grew from 3.5 million customers in 2021 to 3.7 million customers in 2022 as they represented 95% of our total sales. We continue to be focused on delivering product anchored in a compelling fit, which we believe delivers an industry-leading return rate and speaks to the quality of our fit and assortment as evidenced by our 10% return rate. As mentioned in prior calls, we renegotiated a new private label credit card agreement this year and continue to see growth and positive reception to the program.

In 2022, over 30% of our sales came from the private label credit card. And we saw higher tender share rates coming from our most valuable VIP customers and new customers shopping the brand. Our private label credit card has been instrumental in helping drive frequency and retention from our customers as evidenced by our credit cardholders spending more than 2x more than noncredit card holders this past year. We opened six Torrid stores and six Curve stores in the fourth quarter, and we closed two Torrid stores. We opened a total of 18 Torrid stores and 8 Curve stores in fiscal 2022, and we closed 11 Torrid stores. Our stores continue to be our primary acquisition channel to bring customers into the brand, and customers acquired through our stores are more likely to shop in both channels and be found omnichannel customers.

This behavior strengthens our channel mix contributing to a 61% e-commerce penetration rate in 2022 and compared to the 63% we delivered last year. Our omnichannel customers also shop 3.4x more than a single channel customer and drove over half of our total sales across the brand. Gross profit in fiscal ’22 was $460 million or 35.7% of net sales. Adjusted EBITDA was $152 million or 11.8% of net sales compared to $246 million or 19.0% of net sales in 2021. Although we were promotional in order to clear our inventory and what the retail industry has referred to as a difficult macro environment, we still delivered double-digit adjusted EBITDA margins, which speaks to the strength of our brand and its ability to drive profitability. Net income for the year was $50 million, or $0.48 per share compared to a net loss of $40 million or $0.27 per share for the same period last year.

For comparison purposes, adjusted net income for fiscal 2021 was $121 million or $1.10 per share. Turning to the balance sheet. Our cash and cash equivalents at the end of fiscal 2022 totaled $14 million. Total liquidity at the end of the year, including available credit was $147.8 million. Total debt at the end of the year was $329 million, compared to $341 million at the end of 2021. Our net debt to adjusted EBITDA was 2.1x at year-end. Inventory at the end of the quarter was $180 million, an increase of 6% compared to the $171 million in the prior year. The increase is from early spring receipts and basics, which have a longer life. We are very pleased with the quality of our inventory and excluding the spring and basics, our inventory levels were down 5% to last year, putting us in a good position as we enter 2023.

Turning to the outlook for the year. Our outlook is based on our current understanding of the environment and business trends. However, we continue to operate in an uncertain macro environment in 2023 and material changes beyond our control may have an impact to our projections. For the full year, which is a 53-week for 2023, we expect net sales to be between $1.265 billion and $1.320 billion. We anticipate that growth will be secured towards the second half of the year owing primarily to the net new stores and 53rd week reporting period in the fourth quarter. We estimate that adjusted EBITDA to be between $140 million and $152 million. Although we expect to see gross margin stabilization for the full year, we are funding a slight increase in SG&A primarily due to incentive compensation plans.

In the first quarter of 2023, we expect net sales to be between $305 million and $313 million. Our guidance incorporates deceleration of demand trends we’ve seen in the most recent quarters as we navigate through the current environment. We estimate that adjusted EBITDA in the first quarter to be between $35 million and $40 million. This assumes the same continued pressure on our gross margin rate as we comped a tighter comparison to last year. Capital expenditures are projected to be between $40 million and $45 million for fiscal ’23 and reflecting infrastructure improvements and investments in between 30 and 40 new store openings. Our new stores in 2023 are planned late in the third and fourth quarter with the majority of the stores opening in the fourth quarter.

We are also planning to close five stores this year. In closing, we navigated a number of challenges still delivered a double-digit adjusted EBITDA margins and profitable net income for the year as well as growth in our customer file. As we look ahead into 2023, we believe that the changes implemented in the past year will position us to deliver positive long-term growth for our shareholders. We will remain focused on the results that we can control, emphasizing a customer experience, productive customer file growth and ensuring we have the best quality of product. With that, I will now turn the call over to the operator for questions.

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Q&A Session

Operator: Our first question is from Lorraine Hutchinson with Bank of America. Please proceed.

Lorraine Hutchinson: Thanks. Good afternoon. I wanted to follow up on the changes you’re making to Torrid cash. Have you been able to test these? And what’s the customer reaction look like?

Lisa Harper: So we’ve just tested our — we’re in the midst of testing our first shift in the first quarter. So normally, we would have the redemption rate towards the end of the quarter. This year, we’ve had an earlier toward cash redemption time period about, I guess, 10 days ago, it ended, and we’ll have another one towards the end of the quarter. A lot of the shipping for that redemption rate will happen and move end of the second quarter. So we’ll have a better indication of how we see that moving forward. Lorraine, I would say that we’re offsetting kind of the historical strength of the Torrid Cash program, which has softened in the last year with other types of promotional stories for the customer. And we’ve been testing many of these over the past since I arrived at the company, hampered a bit by the large inventory position that we had last year.

But have accumulated a lot of very positive learnings in terms of how to promote and then compel the customer at a much more positive and healthy gross margin return on that. And so one of the reasons we’re bringing — I’m very excited about bringing Mark into the company as he has an extensive amount of experience and not just inventory management and planning but also in margin optimization through these promotional elements. So, more to come on this, but what we’ve done is really this year, mitigated the risk of the program as we saw it softening over time by switching it to fix smaller time period and also augmenting that with other promotional activity that has been very margin accretive at this point in the testing stage.

Lorraine Hutchinson: Thank you. And then on the gross margin front, can you speak a bit about the product cost inflation that you expect and any transportation savings that you think will flow through this year.

Lisa Harper: Sure. So we do feel that and have plans that we will have some recovery in gross margin this year. As we are moving towards the back of the year, we’re starting to see some improvement in first cost on product, and we’re also starting to see some improvement as we have been seeing and we’ll continue to see in freight. But that is an inbound freight and outbound freight related to customer delivery is still growing and expanding. So it offsets some level of that. But we are seeing some improvement in costing. We also brought in a new SVP of product development and sourcing last year. And his strategies are in terms of new vendor bases and new country of origins that have the quality that we expect are being able to be integrated into our sourcing strategies and those are also helping our cost of goods as we move forward.

Lorraine Hutchinson: Thank you.

Lisa Harper: Thank you.

Operator: Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed.

Dana Telsey: Good afternoon, everyone. And nice to see the progress that you’re making. Can you give us an update on the Studio line, what you’ve seen from the Studio line, how it’s performing relative to your expectations? And as you went through the fourth quarter, how was the exit rate? And Lisa, how would you define the health of the consumer? And then just lastly, with the SG&A uptick slightly, how do you think of that cadence through the year if you unpack the measures of the margins going forward? Thank you