Q4 2021 Torrid Holdings Inc Earnings Call
Greetings and welcome to toward Holdings incorporated fourth quarter fiscal 2021 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Jean Fontana with ICR. Thank you you may.
Again.
Good afternoon, everyone and thank you for joining towards call today to discuss fourth quarter and full year financial results for 2021, which we released this afternoon and can be found on our website at investors dot toward dot com.
With me today on the call are.
Chief Executive Officer for it and George Weightless, Chief Financial Officer, before we get started I'd 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.
These statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially for a further discussion of risks related to our business to 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 measure are included in the earnings release furnished to the FTC and available on our website with that I'll turn the call over to lessen that.
Good afternoon, everyone and thank you for joining us for the discussion of our fourth quarter and full year results. Firstly I want to thank our employees for their incredible performance and commitment to our brands our customers and our mission I would like to especially acknowledge our employees and the distribution center.
And in our stores, who basically came into work throughout the pandemic. This dedication to our customer is at the core of everything we do and we are so grateful for their service.
There are three things I want you to take away from today's call first we delivered record performance in 2021, achieving top line sales growth and strong profitability.
Our exceeding our long term target.
Second we made significant progress across all of our growth strategies and third despite macro headwinds in 2022, we remain as confident as ever in our ability to achieve our long term target.
Starting with our 2021 performance net sales grew 31% versus 2020, and 23% versus 2019, adjusted EBITDA increased by 144% over last year, and 86% versus 2019 and adjusted EBITDA.
Margin reached 19%.
Importantly, we achieved these results in the face of pervasive supply chain challenges and cost pressures demonstrating the strength of our brand and strong execution against our growth strategy.
In Q4, we delivered 5% comparable sales growth despite the impact of omicron on our business, especially during the toward cash that in January the fourth quarter marked.
Our 38 positive comp in the past 40 quarters and.
Demand for our brand remains strong and despite the gross margin pressures related to these macro issues, we delivered 28 million and adjusted EBITDA, which was a 58% increase in pre Covid 2019 levels Importantly, we ended the quarter in a strong inventory.
Position heading into the spring selling season second we made significant progress on our growth strategies in 2021, and we are well positioned to advance. These further in 2022.
Physically we grew our current business by 42% to nearly $310 million in sale far exceeding plan. We grew active customer count by an impressive 20% to $3 8 million a record high we delivered product innovation that contributed to a 9% increase in spend per car.
And we continued to advance our unified Commerce model delivering e-commerce growth of 18% while stores remains our number one way of acquiring new customers to the brand. We are extremely proud of this performance as we continue to expand our customer reach within this underserved 85 billion.
Dollar market and now I would like to further highlight our progress on advancing our growth strategy.
First curve curve is our largest growth opportunity and we continue to be very excited about the pace and the consistency of its growth curve revenue grew 42% in 2021, and we see this becoming a $1 billion business during the fourth quarter, we rolled out and.
Banded assortment of current to 74 stores sales in these stores achieved a mid teens lift in performance to date, resulting in comp growth ahead of our fleet average. We also continue to see strong reception to our wire free bra offering that delivers both comfort and sexiness and we were.
Main focused on assuring customers into our brands to drive both retention and average spend.
Looking ahead by the end of the second quarter, we plan to launch a dedicated online.
Iran.
Which will enhance the way our customer experience a curb on our website.
We will also roll out our expanded curb assortment to as much as one third of the fleet over the course of the year.
And we are very excited about a pilot of up to 10 current standalone stores in the second half of 2022 focusing on markets, where we see strong demand for internet.
In 2022, we will continue to build our product offering and drive growth with innovation and launches that we know she wanted in Q1, we launched our happy Camper collection within curve, which brought much needed outdoor wear torque Earl the collection has driven 830 point.
Increase in activewear sales comps in the four weeks post launch and is a testament to our unique understanding of our customers' needs.
This early success further demonstrate our ability to incubate and bring new ideas to market, where we believe our customer is underserved.
Our second strategy is focused on building brand awareness to acquire new customers as we continue to grow market share.
Our funding talk.
Our marketing investments to drive customer acquisition with spend focused on channel. She engaged with them. This past quarter, we tested billboards in select markets and have seen a meaningful lift in acquisition in these test locations recently, we segmented our total addressable market of 90 million women enjoy stuff.
A $20 million.
It's been identified as look alikes to our core customer in the first half of 2022, we are focusing our marketing efforts around this 20 million subset by increasing our media investment to the top 17 markets, where she led we are also testing on TV, where she still has a strong presence.
And our TV spot called they yes is launching next month or two.
Third strategy is focused on increasing wallet share with existing customers by continually expanding our product offering through launches introduction and innovation as well as enhancing the customer experience online in stores and with the new App. We once again delivered growth in every single.
Oh category, illustrating our ability to identify and deliver product.
With unparalleled fit that addresses every occasion of her life.
The consistency and superiority of our state.
Amplified by our industry, leading 9% return rate, which include difficult took like categories like swim in broth.
The quality of our fit and our offering is further demonstrated by the fact that one third of our revenue comes from size of 10 to 16. These.
These customers can shop, just about anywhere and they choose to shop at target.
We have a large and growing loyalty program with $3 5 million members, representing 95% of our customers.
We spent one plus program into three tiers, our highest two tiers the loyalists and VIP.
Spend over three times more than the average toward customer and we grew their average spend by 28% last year. Additionally, we are actively expanding our base of toward credit cardholders, who make up over a third of brand sales and spend more than two times compared.
To non cardholders.
Our strong loyalty is further driven by our ability to consistently deliver product innovation and create excitement for the customer.
In fall 2022, we will relaunch studio, which is modern work we're focused on a refined comfort based offering across our core categories. This collection is the biggest launch in our brand history, because it reaches across a number of categories and highlight new one.
And where fabrication we are especially excited about this launch as she prepares for her return to work.
Our fourth strategy is to advance our unified commerce model offering our customer and inspiring experience wherever and however, she wants to shop. Our brands. We will continue to invest in marketing stores remain the number one way in which new customers discover toward this is part of the reason we are.
To maintain attractive customer acquisition costs.
We continue to expand our store base with the addition of 22 stores this year, which have collectively performed better than expectation.
Our stores provide an unparalleled shopping and fitting room experience combined with passionate and knowledgeable associates, enabling us to interact with customers in a deeply personal and powerful way.
This experience fuels, our E Commerce channel, which accounted for 63% of net sales in 2021 and has grown at a 31% CAGR over the past five years, we know that our unified Commerce model drive higher revenue per customer and increased retention evidenced by the omnichannel customer.
Who shop, three four times more than a single channel customer.
We enhanced our digital shopping experience with the recent launch of our next generation mobile App. The new App offers expanded search functionality personalized notification an additional payment option. While it remains early we are already seeing an increase in product news and higher order values.
On the App, we will continue to invest in our mobile app experience by expanding omnichannel capabilities, such as bogus and shop by store better integrating loyalty feature and creating a curve tab directly within the app.
We will also be launching SMS texting in may.
We believe that both the App and text messaging, our strong tools for us to drive sales and engagement and a more personalized way.
And finally, we continue to leverage our organization and infrastructure investments, including the launch of a new technology in our distribution center that will increase throughput and efficiency to help offset labor challenges. We expect it to go live in Q2 and will enable us to more than double our.
Throughput.
We are also addressing supply chain challenges, which we expect to persist into 2022.
Managing areas that are within our control as part of these efforts. We have formed a committee where we are analyzing our full production cycle in order to reduce lead times and increase efficiency.
Sustainability and social impact is front of mind for us and we have engaged an outside agency to help us refine our efforts in established goals. We are still in the early stages, but we are starting to look at how we are producing our apparel and make changes where we see opportunity. For example, now we manufacture about a third of.
Our denim you utilizing laser technology instead of water. Additionally, we are proud of our accomplishments in the past year with diversity and inclusion which is important to me personally and important to our team.
Our workforce has completed over 3000 hours of training across the business to build deeper trust any quality within our team and we will continue to make DNI a focus like Tory.
And lastly, Victoria Foundation raised and distributed over 2.5 million across the Ywca glad and National breast cancer Foundation, and we remain committed to supporting these incredible organizations in the future.
Looking ahead, while we recognize that we are in an uncertain environment given the rapid rise with inflation and gas prices, we remain confident in our ability to drive high single digit annual net sales growth and low double digit operating income growth over the long term, we have an incredible brand and we are unique.
<unk> positioned to serve this customer with the product we know she wants and unparalleled that.
Finally, I would like to acknowledge that this is George his last call as our CFO, Georgia has been an incredible partner to me and to the entire team at tour. It and we will certainly certainly miss him and we thank him for his outstanding leadership and contributions and we wish him the very best in his retirement.
As I mentioned before George will remain in the CFO role through April and we have an ongoing search for a replacement considering both internal and external candidates.
I have the utmost confidence in the strength of our finance team and I am pleased that George has agreed to act as a strategic advisor to the company after his departure.
I know that if I ever need him he's only a phone call away and with that I will now hand, the call over to George to provide more detailed financials on the quarter and the year.
Thank you Liz and good afternoon, everyone before I begin I would like to share how extraordinarily proud I am of what our team has accomplished during the past year a.
Our results demonstrate the strength of our brand as we continue to grow market share through both new and existing customers and maintained our focus on our strategic growth priorities, all while managing supply chain and macro headwinds.
I will begin my discussion with a review of our financial results followed by our outlook.
In my remarks, I will make select comparisons to the fourth quarter and full year of 2019 to normalize for the anomalies created by COVID-19 in the prior year to provide a better understanding of our growth.
Net sales grew 5% to $314 million compared to 298 million in the fourth quarter last year and increased 16% compared to 2019.
Comparable sales grew four 5% in the fourth quarter, which was driven primarily by an increase in transactions. We continue to attract new customers to the brand leveraging our unified commerce model and delivering products that meet her needs.
Our results came in better than the updated guidance we provided in January.
Following a strong start to the fourth quarter. The increased prevalence of omicron in late December and January impacted both stores and our distribution center.
We saw a temporary store closures and reduced hours and over 10% of our stores during a portion of December and January.
In addition, labor shortages in our D. C related to omicron resulted in shipping delays to customers that impacted our sales by approximately $14 million.
This impact was $7 million better than expected as the recovery in productivity levels in our distribution center enabled us to meet a portion of customer demand sooner than anticipated.
Gross profit in the fourth quarter was $99 million or 31, 6% of net sales.
This compares to $114 million or 38, 2% of net sales in the fourth quarter of last year, representing a 660 basis point decline in our gross margin rate versus last year.
The gross margin decline compared to last year was largely due to a 340 basis point increase in transportation costs. In addition to higher product costs that were partially offset by price increases and lower promotions compared to last year.
The gross margin decline was also due to a realized benefit from rent abatements in the prior year that resulted in a 200 basis point increase in occupancy expense in the fourth quarter of 2021.
In addition, the returned to normalized reserves following benefits from reserves reported in the prior fourth quarter comprised of 120 basis points of the decline.
As compared to the fourth quarter of 2019 gross margin declined 270 basis points from 34, 3% due primarily to an increase in transportation costs higher discounts and product costs, which were partially offset by higher retail prices.
Selling general and administrative expenses in the quarter were $66 million compared to 98 million for the fourth quarter in the prior year and $69 million in 2019.
As a percentage of sales SG&A decreased 200 basis points to 29% compared to 32, 9% in the fourth quarter of last year, primarily due to leverage on lower share based compensation and performance bonus expense.
As compared to 2019, SG&A as a percentage of sales declined 470 basis points, primarily due to leverage on payroll expense related to the higher penetration of e-commerce sales and lower share based compensation.
Marketing expenses in the quarter were $17 million compared to $13 million for the fourth quarter in the prior year.
As a percentage of sales and marketing increased approximately 100 basis points to five 5% compared to four 5% in the fourth quarter of last year.
Higher marketing costs as a percentage of sales was driven by an increased investment in brand marketing test to drive new customer acquisition that list has already discussed.
Turning to profitability. In addition to GAAP measures, we believe that adjusted EBITDA and adjusted net income are important measures that we use to evaluate and manage our business.
The adjustments are particularly relevant this year due to a onetime noncash impact on GAAP earnings from the charges associated with revaluing, our legacy incentive units as part of our IPO in the second quarter.
Adjusted EBITDA was $28 million or nine 1% of net sales compared to $44 million or 14, 8% of net sales in the fourth quarter of 2020.
This compares to $18 million or six 7% net sales in the fourth quarter of 2019, which is a 58% increase.
For the quarter, our tax rate was 328% compared to a negative 297% in 2020.
The tax increase was related to nonrecurring noncash charges associated with revaluing, our legacy incentives.
Net loss for the quarter was $23 million or 21 cents per share compared to a net loss of $9 million or eight cents per share for the same period last year.
Adjusted net income was $10 million or <unk> per diluted share as compared to adjusted net income of $24 million or 22 cents per diluted share in the fourth quarter of 2020.
Now turning to our fiscal 'twenty one results.
For the full year net sales grew 31% to $1 3 billion compared to $974 million last year and increased 23% from 2019.
Comparable sales grew 30% driven by an increase in the number of transactions as well as higher <unk>.
As Liz mentioned, we saw a 20% growth in our customer base and a 9% growth in our spend per customer.
Gross profit in fiscal 'twenty, one was $519 million or <unk>, 46% of net sales.
This compares to $330 million or 33, 9% of net sales last year and $396 million or 38, 2% of net sales for 2019.
This 670 basis point expansion in gross margin was primarily driven by higher merchandise margin rate and leverage of store occupancy costs distribution costs merchandise payroll costs and store depreciation expense as a result of higher net sales volume.
Adjusted EBITDA was $246 million or 19, 2% of net sales compared to $101 million or 10, 4% of net sales in 2020.
This compares to $132 million or 12, 7% of net sales in 2019.
For the year, our tax rate was 289% compared to 39% in 2020 due to an increase in the amount of non deductible items associated with share based compensation.
This increase was largely driven by the nonrecurring non deductible $111 million noncash charge associated with revaluing, our legacy incentive units as part of our IPO.
Net loss for the year was $30 million or 27 per share compared to net income was $25 million or 22% 22 cents per share for the same period last year.
Adjusted net income was $121 million or $1 10 per diluted share an increase of 275% from adjusted income of $32 million or 29 cents per diluted share in 2020.
Now turning to the balance sheet.
Our cash and cash equivalents at the end of fiscal 'twenty, one totaled $29 million or.
Our cash flow from operations totaled $121 million in fiscal 2021, as we continue to drive profitable growth and efficiently manage our working capital needs.
During the quarter, we repurchased $23 4 million of common shares outstanding and had $76 6 million remaining on our stock repurchase program at the end of fiscal 'twenty one.
We will continue to opportunistically repurchase shares, reflecting our confidence in our long term growth outlook.
Total total debt at the end of the quarter was $341 million, reflecting the new term loan recorded in the second quarter compared to $205 million in 2020.
Our net debt to adjusted EBITDA was one three times at the end of the quarter.
Inventory at the end of the quarter was $171 million compared to $106 million last year and $120 million at the end of Q4 2019.
Excluding in transit inventory was 12% higher at the end of fiscal 'twenty, one versus fiscal 2019.
We are comfortable with both the level and the newness of our inventory are sufficient to support our first quarter sales outlook.
We opened 11 stores in the fourth quarter, bringing us to a total of 22 stores opened for the year.
Again, we're very pleased with the strong performance we delivered in 2021, and we continued to build on the progress we've made in executing our growth strategy into 2022, while continuing to manage the macro environmental headwinds.
Turning to the outlook for the year.
We expect net sales to be between $1 3 billion and $1 36 5 billion.
This outlook contemplates low single digits to positive low single digit growth in the first half compared to a 62% increase in sales in the first half of last year.
We expect to deliver high single to low teens net sales growth in the second half compared to last year as we lap inventory constrained and the impact of Crump areas.
We expect adjusted EBITDA to be between 195 million to $220 million.
Our EBITDA outlook factors in the margin pressure, resulting from higher product and transportation costs consistent with our industry peers.
As a result, we expect gross margin to be between 37%, 38% in 2020 to close to pre pandemic levels. We expect these factors to have a larger impact on the first half of 2022 and recover in the fourth quarter as we lap the higher cost in 2021.
In the first quarter of 2022, we expect net sales to be between 295 and $305 million.
Our guidance incorporates the tough comparisons to last year, we saw a meaningful benefit from both stimulus and pent up demand from consumers initially emerging from the pandemic in.
In addition, our toward cash event is planned to start later in Q1 and this is expected to shift approximately $30 million of sales into Q2.
That said, we continue to see strong consumer demand for our brand and.
And we are in a solid inventory position for spring should this demand proved to be better than we anticipated in our guidance.
We expect adjusted EBITDA in the first quarter to be $44 million to $48 million.
This assumes a gross margin rate of between 38, 539%.
We happen to decline versus the prior year is attributed to the continuation of elevated transportation costs with the remainder being a combination of increased product costs and higher promotions relative to last year when stimulus is driving significant demand.
We expect these pressures to be partially offset by select price increases.
In addition, we made a strategic decision to increase our marketing expense by an incremental $5 million in Q1 associated with the television campaign Tesla has discussed.
We believe we can achieve the highest return from acquiring customers earlier in the year when the advertising costs are seasonally lower.
We feel comfortable with both our current inventory position and the flow of shipments as we continued to take proactive measures to mitigate the impact of shipping delays and higher transportation costs.
We are placing orders earlier consolidate fabric orders again, where pricing is selectively taking price increases we.
We are confident in our ability to continue to navigate the supply chain challenges facing us and our industry.
Capital expenditures are expected to be approximately 30% to 35 million in fiscal 'twenty, two reflecting infrastructure investments and roughly 35, new store openings in 'twenty, two including up to 10 curve only test stores.
We also plan to close approximately five stores next year.
As we look into 2022, we're excited about the long term opportunity for tour and remain focused on advancing our strategic growth initiatives as.
As a reminder, I will continue to serve as CFO through the end of the first quarter 'twenty, two and will remain as an advisor to the company their effort to ensure a smooth transition.
We have incredible bench strength in our finance team and I'm confident in their abilities to support towards growth.
It has truly been an honor to serve as the CFO of this extraordinary company. During this pivotal time, including the completion of our IPO.
I'm truly excited about the future for this company.
With that I will now turn it over to the operator for questions.
Thank you if he would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Our first question is from Mark all Schweizer with Baird. Please proceed.
Great. Good afternoon, Thanks for taking my question.
I guess, just first off regarding the sales guidance for the year George I know you were giving some of the details on some of the revenue shifts but.
The plan seems to embed a pretty big ramp after Q1 could you maybe just give us a little bit more detail there because I know there were some sales that shifted out of Q4 into Q1 now you're sort of speaking to an additional shift so just any more color there on the confidence of that inflection through the year would be great.
Sure. So the shift primarily in Q1 was $30 million.
Then related toward cash shifting timing and that shifted into Q2. So that was a big big shift from between Q1 and Q2 for the year. We believe that we saw most of the pressure coming in the first half of the year, which was embedded related to the stimulus and the pent up demand that we saw in the first half of 2021 that we're up against.
In the first half of 2022 that easing out into Q3 into Q4, so that in conjunction with the inventory constraints that we also started getting in Q3, as well and having a better inventory position. This year gives us the confidence of where we are especially given the inventory position that we currently have going into Q1.
Going into Q2 after that.
Great Great. Thank you and then maybe for Liz great to see the momentum behind curve. It sounds like a lot of opportunities still ahead, there as well.
I'm curious in the near term here or are you seeing ongoing pent up demand for more occasion oriented styles and how are you thinking about balancing that opportunity in the near term as she returns to the events in to the office with a significant longer term opportunity with curve. Thank you.
So we're we're incredibly excited about curve, we're still in the very early stages of it.
As you May know a third of our customers come to the brand can curve curve customers spend three times more.
We.
We believe that we are benefiting from this mixing of comfort and sexiness that we've built our wire free bra.
It has been incredibly successful we think there's still tremendous opportunity for growth in curve one of the one of the really the big things. We're very excited about is only 50% of our customers.
Toward customers have bought into curve. So we see that as a really really important opportunity.
So we tested a 20 dollar reward for customers, who did not buy a bra and we doubled the percent of broad purchasers and that test group and that test was margin accretive. So we are pushing that whole program out. We're also going to test it on new customers, who haven't purchased abroad.
Sure.
We have great store events.
Customers loving and and we do think that there are a lot of custom people have put on weight in captivity and so are we.
We see customers needing to buy new branches.
We've also seen growth in all of our categories that said, where we're incredibly enthusiastic about.
Some of the other products that we have going on and the other thing I'll tell you is.
It's really important to note we are going to test 10 curve Standalone stores in 2022, which we are very very excited about.
We are going to launch a term.
Curve tab experienced in Q2, which we also think we will give a really amazing enhanced experience to the customer. So a lots going on with curves I will also just reiterate that draws are the number two leading Canada, leading product that brings new customers.
Customers to the brand. So I think the momentum that we have in curve will continue and not be impacted by all the other things that are going on.
Thank you I will jump back in the queue and George Best of luck to you.
Thank you.
Our next question is from Oliver Chen with Cowen and company. Please proceed.
Hi, George it's been great working with you best regards.
Regarding the guidance, you've had really nice momentum and spend per customer and also the customer base.
What's assumed in terms of those trends continuing any metrics or thoughts there.
Also I would love some color on that better than expected.
A D C.
Hello, I'm that was an upside surprise.
That was great to hear about it and then finally lids you spoke about supply chain opportunities in speed and throughput.
Just love some highlights about where you see the most opportunities there. Thank you.
Sure. So regarding your first question related to customers.
And spend we still see both of those growing into 2022, just at more modest rates to reflect the sales guidance that we have out there for 'twenty two but we still feel that there is ample room in both of those related to this our spend.
As Lisa said, we have everything in her closet. So we think there is opportunity there and moving them up between tiers from in our loyalty program as well.
Starting the D C.
We did see significant improvement in the last two weeks relates to a distribution center on absenteeism related Omicron, we were seeing significant absenteeism and starting in late December and Jan into early January and that shifted in the latter part of January back to more normal levels and that's how we were able to pick up.
The increased productivity throughput and shipping more orders.
And push that into Q4, rather than Q1.
And as far as supply chain.
We will continue to do the things that have worked for us that are in our control. We are writing orders earlier, we are consolidating and positioning fabrics were leveraging long term relationships with factory owners. We are mostly direct them. All that said, we also had a moment, where we said we cannot accept.
What is happening as our future. So we cannot allow these long lead times to become the default and so we need to get speed back and we formed a committee that is really thinking out of the box and coming up with different solutions around speed and we just did that so we'll give you a.
<unk> update once we get rolling on that.
In addition to that Oliver you did do some repositioning of our ports and so not exclusively using the west coast and moving towards some product to the east coast is less a spreadsheet.
Thanks, a lot and Liz I know you've been hard at work on pricing and looking across each item pretty surgically.
How has that gone and what is your framework for the next decisions you'll make.
And related to that is just if you could give us a sense of the promotional environment that youre seeing that would be helpful. Too. Thank you best regards.
Great. Thanks, Oliver So we as you know we have taken prices up to mitigate inflation and we continually review pricing and make changes where appropriate that's been a long term strategy. It for it because we've been building and improving the product over the years.
Quality and fit and value are important to her and she will pay for it. So for example, the average price of a blue gene it toward a $60 and I'll just give you. An example of some of the pricing things that we have done and what the what sort of the results. We got we recently repriced our denim Inc.
Creasing AI are across the board and sales units per day actually increased post re ticketing. So items that she sees tremendous value on she will pay for.
As far as the promotional activity, we see promotional activity.
To be similar to 'twenty one.
And we are focused on.
The promotional events that we know are part of our DNA and they form a bond with our customer they drive engagement and I will tell you that a lot of these promotional events are also really good new customer acquisition tools.
So things like toward cash and the love your broad event will continue and then we you know we use incentives to get customers into categories, we really want them to be in because they are very sticky like broth and blue jeans, and we've seen success in that so I.
I think it's going to continue as it's been and we will adjust and address as as it comes at us.
Just thoughts on what Louis said, yes, looking at 'twenty two to be more of a normalized year related that if youre looking compared to 2021 remember.
Remember that the first half of the year, we were much more impacted by the stimulus and the pent up demand there was less promotional activity going on because of what she was spending and she had available to spend.
This would be more of a normalized Matt as we look more towards the pre COVID-19 levels, but if youre comparing to 'twenty one more pressure in the first half of the year and that.
Moderating itself in the back half of the year.
Thank you best regards.
Our next question is from Brooke Roach with Goldman Sachs. Please proceed.
Good afternoon, and thank you so much for taking our question.
I'd love to hear a little bit overall about how you think about the health of your customer right. Now you mentioned inflation earlier and everyone's watching the rising food prices have you seen any change among your customers and how they are purchasing with the brand in the past few months, maybe among income cohorts are there any signs of <unk>.
Trading down within your good better best product architecture.
We have not seen any evidence of her trading down.
That said listen we know inflationary pressures are real they're real for all of us and we have honestly. The reality is that predicting her demand is going to be difficult. In these times that said, we've been conservative in our forecast and.
I think she's going to focus on things that are centered around value for her so she's going to shift.
She will look for products that have multiple end uses and multiple wear occasions thinks she can wear to work and wear out somewhere else. She will focus on products that have solutions things that enhance or body that make her field.
Did you know that are more comfortable or things focused around that and then I think she's going to buy into a highly emotional things and finally, we're going back to work so she will need to.
Replenish her wear to work.
Clothing, and I think that's gonna be a really big opportunity for us because comfort is going to be really important is what we do really well in our wear to work and as I mentioned, we are relaunching our studio sub brand in the back half of the year and we think that the steel.
Leo was really comfort based wear to work products across a lot of categories and we think it's the right product at the right time. So we're very excited about that as well.
Great. Thank you and then maybe one for George can you dive in a little bit more on your gross margin expectations for the year.
Help us shape, how youre thinking about the puts and takes between promotions.
Pricing in terms of what Youre doing for in terms of customer facing pricing higher unit cost and transportation expense. Thank you.
Sure from a transportation cost we believe that those will continue into 2022 the increases that we saw in Q4 as they will go all the way through 'twenty. Two we think we'll start anniversarying some of that in the latter part of Q4, comparing 'twenty one to 'twenty two from a product cost standpoint, those also will continue.
We also as I said continuing to look at price increases. So we will throughout the year be looking at that on an ongoing basis and increasing prices, where we see again the value for the customer from that standpoint.
And again related to what we're looking at as far as cadence again, Q1 and Q2 the most impacted.
Site, a site improvements and going into Q3, and then really lapping the cost in Q4, so turning positive from that standpoint from a gross margin standpoint.
Yes.
Thanks, So much I'll pass it on.
Our next question is from Lorraine Hutchinson with Bank of America. Please proceed.
Oh this is Alex on for their own Hutchinson. Thank you for taking my question can you talk about the performance of the E Commerce channel versus stores during Q and also if possible quarter to date and then what are your sales assumptions by channel for the airplanes.
So permit from Q4 perspective ecommerce performed very well.
And we're very happy with the results of our E Comm business.
As we've also said, we really look at it together with the stores and E comm business for our unified model simply support each other but just individually the channel did perform well it will be and we're looking at it to continue to perform into 2022, and we basically again combine the two when we're looking at our sales we don't separate it out by channel but.
It is something that we're going to be increasing our penetration rate was around 63% for 'twenty, one and we think it'll be somewhere around the 63% to 65% as we go into 2022, so growth in that channel.
Yes.
Thank you.
Our next question is from Kimberly Greenberger with Morgan Stanley. Please proceed.
Okay, great. Thank so much Liz I wanted to start with the active customer data.
Data that you put out today it looks like there was about a 14%.
The increase in active customers from yearend of 2019 to year end of 2021, and obviously customer spend is up as you noted I'm wondering if you can.
If you look at that.
The additional acquired customers just under 500000 is there any way to help us understand what portion of those customers are coming to tour. It through the stores and what portion found you online and then if you could just talk about some of your COO.
Customer acquisition strategies for 2022.
Online or in store understand understanding that some of the stepped up marketing like in TV.
Is it sort of meant to be a.
Channel agnostic.
Do you.
Okay. So first on I think question number one was how many customers came in through stores what percentage, it's about 50.
50% and I think the next question was what are we doing from a customer acquisition standpoint, all I'll tell you. The things we did in 'twenty, one that worked really well with.
We scaled investment in digital channels, where she spends the most time, which is Facebook Instagram Pinterest and Youtube that said, we also we believe that our stores are a significant competitive advantage. So we leveraged our 600 plus store fleet.
For new customer acquisition by launching Geo targeted digital marketing campaigns that generate local store awareness they drive store traffic and they highlight some of the benefits of going into a store like a bra fitting we.
We tested billboards as consumer behavior shifted out of captivity and more into real life and found success in that and then we we continually heavily invest in marketing.
That features broad and Bluejeans because those are the stickiest I think what we're also Super excited go forward is this 20 million women women subset that we've.
Identified that align from a demographic and Psychographic point of view and were reaching these women where they are the reason we're running TV ads is because this customer these $20 million.
A very large percent of the percentage of them are outsized TV watchers watching four plus hours of TV a day. So our mission is always to find her where she is and reach her in that way and then finally, we're going to continue to scale our investments in digital channels.
That have worked for us and we are running billboards in 17 markets that are in.
In the areas, where there's 20 million subset exist. So I'm excited about what we've accomplished in 'twenty, one and what's coming in 'twenty, two and Kimberly just as a follow up to that if you remember.
Liz said over 50% of new customers came through their stores.
Remember in 2020, when there's a lot of the stores were impacted by closures. We were at 30%. So we definitely saw as the stores reopen she did come back to stores she's loving the store experience.
So that piece of it it really really helpful as well as new stores that we opened we saw a really good lift as far as what they were doing as far as acquiring new customers and even from a sales performance, but they were performing at or better pre COVID-19 new store opening so from a whole store customer experience standpoint.
We're very happy with where she is kind of now coming back to the store interacting with the store and it's continuing her journey with us at the store and then we can convert her from a store customer into an omnichannel customer and that customer will spend much much more so.
Okay that is.
Great run down thank you both for that.
George I wanted to follow up on your comments on the higher transportation cost, you'll you'll lap those in the fourth quarter here in 2022.
Are there any pieces of the higher transportation cost that you experienced in the third and fourth quarter last year.
That strike you as transitory or temporary.
As compared to those that will be more permanent in the AR in the P&L and then I just had one question on inventory after that.
Yes, I think most of the transportation costs I wish was transitory, but every time, we think there might be something transitory that it just continues to something else happened. So.
We're not really thinking and haven't planned that way that there's going to be transitory.
The one is the amount of air freight that we spent in 2021.
But we're anticipating that we may not have been quite that much but yes, there could be a point that we might need to do that as well so that would be the only one that could be somewhat transitory.
Okay, great. Thank you so much.
And then a question on inventory.
It's for Liz.
It sounds like you're going to work on some speed.
Two two.
To sort of get back to perhaps more of a read and react model at some point in 2022 or 2023.
Perhaps just to help us understand the current level of inventory that you've got.
Could you maybe contrast, it it looks like inventories up.
<unk>.
About 40% compared to two years ago.
With sales up about 20% compared to two years ago in 2021.
Clearly you're looking for some additional sales growth here in the upcoming year. So maybe just using 2019 as a benchmark how much should we think about the inventory investment rising in 2022 as compared to the inventory you would have been buying in 2019.
Yeah. So from a comparison at the end of the year of 2021 compared to 2019, our inventory in total was up but if you look at it from an excluding in transit because again with this delay related to the supply chain and the transit times. It has increased what we have in transit.
The water not in our buildings you exclude that our we were up 12% compared to 19, so very in line with what we're looking at from a sales force.
Perspective, we feel very good about where we have inventory we feel good about the composition of what we have in the inventory and we feel good about what's coming in as well as what we factored in again as Lou said timing wise of trying to place orders earlier to get the product in so I think from an inventory perspective, we have the inventory.
To be able to support.
Higher sales than we have put into the guidance and I think from an inventory perspective, as we look throughout the year I think we're going to we will definitely be higher than we were at 19, but again it'll be moderated to what we think we can have from a investment standpoint of whats keeping ourself current and in line with our expectations of what we're going to be there.
Apart from a sales perspective.
Okay. Thanks, so much.
Our next question is from Dana Telsey with Telsey Advisors. Please proceed.
Good afternoon, everyone and George Best of luck on the retirement.
Thank you Daniel.
As we think about it sounds like you were talking in terms of whether its curve whether its the new work work clothing, whether it's also the new happy Camper I think items you described it feels like the assortment is adjusting and capturing more of the interest of the consumer what it what else do shall we expect.
The change is the new merchandise coming in at a higher margin than the old and what do you see as the opportunity on the accessory side footwear and other things how should we continue to see the merchandise assortment developed and what does it mean on the margin profile go forward. Thank you.
So we we.
We will see more expansion, but more focus on products.
Products I think theres, a big rebound from the pandemic right. She spent the last few years buying things to be in the house.
We see a very clear shift where she is starting to rebuild her wardrobe and prepare to go back to work.
We think that's going to be a big focus for the rest of the year for her in.
Credibly excited about studio because what we do with workwear is very different incredibly attractive.
Attractive fits great, but also very comfort related so I think the shift is going to be more into those kinds of products.
Don't know that its going to have any outsized impact on margin one way or the other on what she's buying there.
The other thing that we're going to do is.
What we do really well is identify areas in which she is wildly underserved. So happy camper was a result of us knowing that there is very little camping and hiking clothing for her I do you think.
And we will focus on dressy building, our dress business back up.
From sort of the downside that it had during the pandemic as a really big focus and then I would say from an accessories perspective shoes or something I'm very excited about and I think are a big opportunity. If you search wide with shoes for women, you'll see what's out there. It is a very big.
White space and we've spent the last three years really perfecting our fit our construction and what we're doing with shoes and we're very excited about them.
Got it and then just to follow up on your stores. It sounds like the store productivity in 2022 of the new stores was better than you expected. What does this mean for how you're planning the class of 2022 and is there a cadence to the store openings. This year. Thank you.
Sure. So our cadence that we're looking at his 25 towards doors in up to about 10 curve Standalone stores.
It could flex that number a bit.
B, if we have more opportunities.
Open to that piece of it we're not married to the exact number it's more what we're seeing in the environment and what we can make our criteria. When we're looking at from an investment standpoint, so there could be some more opportunities that we can take advantage of for that piece of it I don't think we're going to make any significant shifts at this point related to that but we are again very happy with the results that we saw in.
21 from our stores and we're evaluating those on an ongoing basis for 2022 as well.
Thank you.
Our next question is from Oliver Chen with Cowen and company. Please proceed.
Alright, Thanks again on ESG. It was a great topic that you brought up was just would love your initial thoughts on the opportunity indoor.
As the industry thinks about this a lot of water it seems like a big a big topic in terms of an opportunity to advance there. Thank you very much.
Yes, so like I said, we're in the early stages, we started down this road and then the pandemic occurred and we really had to redeploy our forces to navigate that but we're.
We're back on track we've brought in outside our organization to help us think about what the next five years look like and what we wanted to accomplish that said I know that water is a big deal and denim in particular is a big offender of wasting a lot of water. So this shift to laser <unk>.
<unk>, which I have to tell you you can't tell the difference between a gene that's been laser treated and one that's been stonewashed.
So what we're doing now is we're just opportunistic in areas, where we see we can do better we're doing it.
I think theres a lot less packaging that can go into garments, we're gonna take anywhere that we can take our hang tag or something that's on the garment. That's just going into the trash. We are eliminating we're looking at packaging that goes into stores and where the waste is so it's not just sustainability. It's also the.
Out of stuff that we put on our garments and that goes into the trash. So we're going to update you more on this as we roll forward and have a more concrete plan, but this is something that's important to this whole organization and we're excited about what we can do here.
Okay. Thank you and finally do you have a very loyal customer would just love your thoughts on the toward loyalty program and how that will integrate with your mobile app and the vision for some key opportunities there. Thanks a lot.
Yeah.
So the the mobile App has features that the new features that we didn't have before that really integrate the loyalty program that give her her information. She can pay her credit card bill there. She can check on whats going on and I think over the long haul what we want the app to be.
Is something that she checks every day, because it's it's sort of I don't want to say gamify. It because that's not the term, but something that she checks on is excited to see that there's new updates push notifications come through there. So I think our long term intent for the App is that we form a very close and intimate.
<unk> shipped with her on that but the loyalty has been integrated and it's and it looks really good and it functions really well.
Thank you very much.
We have reached the end of our question and answer session I would like to turn the conference back over to Liz for closing comments.
Okay, well first of all I would like to reiterate them a big Thank you to George for the.
The years of just amazing business amazing friendship and guidance and also to thank him for the extraordinary organization that he's built we have just such an incredible finance team, who has done a remarkable job and I am going to personally miss him very much and I'm just.
I want to thank you all for joining us for your interest in our remarkable brand and we look forward to telling you more about what's going on.
Our next call. So again, thank you and have a great day.
That concludes today's conference you may disconnect your lines at this time and thank you for your participation.
Okay.
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