Q2 2022 Torrid Holdings Inc Earnings Call
Greetings and welcome to the toward Holdings, Inc. Second quarter fiscal 2022 earnings conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation if.
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Ill turn the conference over to your host Ms.
You may begin.
Good afternoon, everyone. Thank you for joining towards call today to discuss second quarter financial results for 2022, 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 lethal Harker, Chief Executive officer of Torrid and Tanner dire made interim Chief financial Officer.
Before we get started I would like to remind you of the company's safe Harbor language, which I'm sure you're familiar with.
Management may make forward looking statements, including guidance and underlying assumptions.
Forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.
For a further discussion of risks related to our business see our filings with the SEC.
This call will contain non-GAAP financial measures, such as adjusted EBITDA and adjusted EBITDA margin.
Reconciliation 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.
Thanks, Beth good afternoon, everyone and thanks for joining us.
Discussion of our second quarter result.
Before I start I'd like to take a moment to acknowledge and thank the team at tour. It that's been so resilient as we've navigated many important initiatives over the last quarter.
I've been back at Torrey for four months now and I'm continuously impressed by the passion and dedication of our employees.
During the second quarter, we made progress against the priorities that we laid out on our last call and we remain focused on making the necessary improvements to drive long term sustainable growth.
My top three priorities for the business are number one to enhance promotional and marketing strategies to better balance margin and sales growth number two to drive growth across multiple opportunities and number three to develop a more efficient and effective organization by realigning resources.
On today's call I'll update you on our second quarter results and provide details around the progress we've made around each of these priorities.
Starting with our second quarter results net sales grew 2% to $341 million, which was in line with the high end of our updated guidance, although we have a very loyal customer. It tore it we are not immune to the macro and industry wide challenges that have impacted consumer sentiment.
Or demand.
Stores experienced a decrease in year over year traffic as customers dealt with higher fuel prices and overall inflationary pressures that impacted demand.
Pleased however to see an increase in web traffic along with higher conversion rates.
We also rolled out plant upgrades to our distribution center during the quarter. They created temporarily unanticipated headwinds in our fulfillment process.
We were able to successfully complete the upgrade since July and their fulfillment center is now operational with order shifting within our service level agreement customers have noticed the improvement in delivery time, and we are receiving positive feedback across our social channels on the changes.
Gross margin rate was 34, 9% for the quarter and adjusted EBITDA came in at 52 million.
During the quarter, we focused on clearing through seasonal inventory, which led to higher promotions and markdowns that impacted our gross margin rate.
We will continue to focus on clearance through the first part of the third quarter and then we have bought we seek to be more balanced in the back half of the year.
In addition to managing our inventory and upgrading the capacity in our distribution Center. We also successfully launched a new ERP system. During the quarter. These are enormous accomplishment and the team and I'm proud of the progress that we've made.
This brings me to the three main priorities. Our first priority is to refine our marketing and our promotional strategy. We continue to believe that there's an opportunity to reduce site wide promotions.
We align our marketing and merchandising strategy.
As we move into the back half of the year, we'll be testing into more category focused promotions based on price elasticity with the goal of reducing discounts and styles with the strongest national demand.
We're implementing these changes on site and we started providing.
Percentage discounts based on inventory and demand as opposed to blanket policy. This is the first step in refining our promotional cadence and driving margin improvement.
In marketing, we were focused on capturing customers through our dressing room experiences in stores are our most valuable customers discover and fall in love with the brand.
Despite the pressure in the macro environment stores remain our number one acquisition channel and we know that customers acquired through the stores, it's been 25% more in their first year compared to those acquired on the web.
We also have the strategic advantage of a profitable store fleet that offers an unparalleled shopping and getting room experience with new customers going on to engage with tour it across both channels.
In addition to driving customers into our stores, we've been refining our online marketing strategy and we were able to deliver improved efficiencies in our spend while still building a healthy customer file through a focus on both acquisition and retention during the second quarter, we began targeting lapsed customers more aggressively through email campaign.
And our other digital channels and we saw a 600 basis point comp improvement and reactivated customers versus the first quarter trend.
We will continue to reevaluate our marketing spend throughout the year and reallocate to where we see the most opportunity to acquire and retain customers.
This brings me to my second priority, which is driving growth across categories. We have exciting launches coming in the third quarter that we believe will help accelerate our business.
Our modern workwear line studio by tour at lunch today, and it's the biggest launch in our brand's history. We're excited to bring her customer an elevated assortment through a refined comfort based offering as she prepares for her returned to work. We've also seen success with our woven pants sweaters and dresses and will.
Offering more fashion in these categories in the back half of the year.
While product remains a competitive strength, we do believe our assortment has been too reliant on basics and we are shifting our merchandising strategy to offer a better balance between fashion and basic styles.
Additionally, we will focus our assortment of more wear to work and products with a celebratory and use we're also adding more newness color and excitement for the upcoming fall assortment and we're elevating our marketing approach through better storytelling around their product and fit across all channels. These efforts kick off starting with our studio line.
And continue into the back half of the year with holiday.
Within curve, we're opening eight curb test stores between now and the end of the year, we still believe in the long term growth potential of curve and we have plans to innovate our assortment through an evolution in our bra and panty businesses.
My third priority is to improve our organizational structure.
Promise last quarter, we've made two key hires that they believe will be instrumental in helping us drive growth and scale in the business.
Tim Martin, our new Chief operating Officer, and Chief Financial Officer is a seasoned retail executive who brings more than 25 years of experience across a variety of consumer facing companies.
He has experience in the public markets and will be critical to unifying the operational and financial aspects of our business.
Han Park recently joined as our Chief Technology Officer reporting to Tim and he will lead the team in building an integrated technology platform.
<unk> also brings 25 years of information technology, and consulting experience across retail and direct to consumer companies and will be pivotal in helping to build more robust technology and digital capabilities.
With respect to infrastructure, we have made significant progress across the organization.
The changes to the distribution center have doubled their capacity and has more room to scale as part of our efforts to drive efficiency, we negotiated a new private label credit card agreement.
<unk> plans to streamline the cardholder experience.
Better marketing and technical enhancements.
The upgrades, we made to our Oracle ERP system will also allow for enhancements to our website and better integration of data across the organization.
In closing, we believe that the changes we are making to the business will position us for long term healthy growth, we expect to see the benefits of the changes as we move through the year and into fiscal 2023.
And with that I'd like to turn the call over to Tanner to provide more detailed financials on the quarter and our updated guidance.
Thank you Lisa and good afternoon, everyone.
We will begin with a detailed discussion of our financial results followed by an update on our outlook for the rest of the year Star.
Starting with the second quarter results.
Net sales grew 2% to $341 million compared to 333 million last year.
Terrible sales in the quarter were up 1%.
This is on top of a 30% comp in the second quarter of last year.
As Lisa discussed we experienced challenges related to the macro environment.
<unk> are expected demand this past quarter.
We also made upgrades to our distribution platform to increase capacity for E. Comm order fulfillment, which caused temporary shipping disruptions that we corrected by the end of the quarter.
Our fulfillment center is now fully operational and we are seeing improved throughput and capacity that will limit delivery backlogs moving forward.
Gross profit for the second quarter was $119 million or 34.9% of net sales.
This compares to $150 million or 45% of net sales in the second quarter of last year.
Approximately 600 basis points of the decline was due to higher discounts and promotions to clear inventory.
The remainder of the decline was inflationary and relates to increased product and transportation costs, partially offset by price increases.
As Lisa mentioned, we plan on higher promotional activity through the first part of the third quarter to clear through inventory.
Selling general and administrative expenses in the quarter were 66 million compared to 179 million for the second quarter of the prior year.
As a percentage of sales SG&A decreased to 19, 3% from 53, 8% compared to the second quarter of last year due to lower share based compensation and higher private label credit card income.
The decrease in share based compensation expense during the quarter was due to the remeasurement of our equity value during the second quarter of the prior year as part of our IPO.
Additionally, we renegotiated our new private label credit card agreement that resulted in additional card income and drove 230 basis points decrease in SG&A as a percentage of net sales.
Excluding share based compensation and private label credit card income, our SG&A increased by 180 basis points versus the prior year, primarily caused by inflationary pressures, including higher wages.
Marketing expenses in the quarter came in at one at 14 million compared to $11 million in the second quarter of last year.
As a percentage of sales and marketing expense increased approximately 80 basis points compared to three 2% in the second quarter of last year.
During the quarter, we focused on driving improved marketing optimization through a shift of our digital spend and the customer reactivation efforts, where we expect a greater return on investment.
This shift in strategy, along with a rationalization of marketing tests in the quarter drove efficiencies in our spend.
We will continue to invest in marketing, where we see the most opportunity including spend to drive new existing and lapsed customers into our highly profitable store environment.
Turning to profitability.
Net income for the quarter was $23 million or 22 per share versus net income of 39 million or <unk> 35 per share for the same period last year.
We had no adjustments to net income in the second quarter of 2022.
For comparison purposes, adjusted net income last year was $39 million or 36 cents per share.
Yeah.
In addition to GAAP measures, we believe that adjusted EBITDA and adjusted net income.
Portland measures that we use to evaluate and manage our business.
Adjusted EBITDA came in at 52 million or 15, 3% of net sales compared to $87 million or 26% of net sales in the second quarter of 2021.
Turning to the balance sheet.
Our cash and cash equivalents at the end of the quarter totaled 23 million.
Total liquidity at the end of the first quarter, including available credit was 162 million.
During the quarter, we repurchased 9 million common shares outstanding and had $45 million remaining on our stock repurchase program at the end of the quarter.
Total debt at the end of the quarter was $335 million compared to 341 million in the second quarter of 2021.
Our net debt to adjusted EBITDA was one seven times at quarter end.
Yeah.
Inventory at the end of the quarter was 181 million compared to $110 million in the prior year.
Excluding in transit total inventory at the end of Q2 was up 40% to pre pandemic 2019 compared to a 32% sales growth.
And increased product costs over that same time period.
As we move through the quarter, we remained focused on selling through excess inventory.
And with our current planned sales and receipts, we remain comfortable with our inventory levels are positioned for the remainder of the year.
We opened five towards stores and closed three stores in the second quarter and plan to open approximately 34 stores for the year, including eight stores.
Yes.
Turning to the outlook.
Given the uncertainty in the macro environment, we expect the second half of the year to fall similar demand trends, we've seen in the first half.
For the third quarter, we project net sales to be between $290 million and $305 million for the quarter.
And adjusted EBITDA to be between $32 million and $38 million.
This outlook assumes our gross margin rate will continue to be pressured as we clear through inventory.
For the full year, we're forecasting sales to be between 1.2 dollars 6 billion and $1 3 billion.
For adjusted EBITDA, we are projecting between $160 million and $175 million.
As a result of higher interest rates on our term loan we expect interest expense to be approximately $8 million in the third quarter.
Capital expenditures are projected to be between 30, and 33 million for fiscal 2022, reflecting infrastructure investments and our previously mentioned 34, new store openings.
We're also planning to close approximately 90 stores this year.
And finally this is my last call as interim CFO toward.
I'm incredibly honored to have served as CFO of such an inspiring company.
Want to thank Lisa and the entire team for their support.
To ensure a smooth transition for Tim I will continue to stay on with toward as a consultant.
With that I will now turn it over to the operator for questions.
And at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we poll for questions.
Our first our first question comes from the line of.
Mark Oswego with Baird. Please proceed with your question.
Good afternoon, Thanks for taking my question.
So just starting out with the sales guidance.
The guidance for the back half of the year. It doesn't appear to incorporate much improvement in trend from where the business has been tracking recently, but at the same time shipping disruptions have been corrected and you do sound pretty excited about the product flow for the back half. So I'm, hoping you can just walk us through your thinking a bit more on what the back.
Half of the year might look like.
Yeah I think.
Given the macroeconomic environment.
Okay.
When you do a little bit conservative with our forecasting back half of the year, we're projecting the back half to be on trend with what we've seen in the first half of the year and that's relatively flat to last year.
That being said we are.
I'm optimistic about all the things that we sort of mentioned in her commentary on product and operations and our ability to execute.
Yeah.
Okay. Thank you and then on the pricing and promotional strategies.
Much of the industry seems to be planning for more aggressive promotions in the back half. So I was hoping you could give us some perspective on how you're planning to navigate that and whether.
Theres been any change to the broader promotional environment has affected your plans at all regarding testing some new strategies. Thank you.
Sure.
I think it's very difficult to.
Extract the pressure of clearing through excess inventory that's been rampant in the sector for the first half, particularly in the second quarter.
Those impacts of the macro environment.
As I've said before the focus here is really not just pulling back on overall promotions, but in right sizing the promotion to the specific product category or even to the SKU level. So that our messaging can be up 2% of job instead of them.
Flat percentage off which has been our tradition.
Particularly on the web channel so, whereas historically, we've been up to 2025 30 35 off on web.
Now the messaging will switch to up to.
35 off and will determine the actual promotional discounts on the item based on the demand of those items. So the same modeling that we do to price our markdowns based on price elasticity and availability, we'll use we'll start we're starting to use them.
That for our pricing on our overall day day in and day out promotions I do feel like over time as we bring in more and more.
Newness in product categories based on what the customers been asking for that and as we adjust our inventory levels as we have done for the back half of this year and.
We'll be able to moderate that overtime, but we're certainly not espousing eliminating promotions or canceling promotions or just about optimizing them towards gross margin results.
Thank you and best of luck.
Yeah.
Our next question comes from the line of Kimberly Greenberger with Morgan Stanley . Please proceed with your question.
Hi, This is Amanda on for Kimberly can you. Please just speak to your monthly sales trends during the quarter as well as anything you're seeing quarter to date.
We have the same in the second quarter I think we were very consistent with what we've heard from the market, which was on June 13th when the average gas price in the U S at $5, but definitely had an impact and the direct correlation to overall traffic.
At the same time, it's only accelerated promotions to deal with the over inventory situations. So that was kind of a combination I'm once again very difficult to extract broad tobacco trends from the results that we had I see you are dealing with the inventory situation.
We as we mentioned in our comments, we did have positive.
Traffic trends.
Online not in stores, but we had good conversion trends across the board in the second quarter.
Third quarter results I won't get into at this point, but we're still deeply through the middle of this month another week or two focus on clearing through these goods as we get out of the labor day holiday and into setting fall and so will we.
I have seen similar trends as we've dealt with clearance.
And promotion on our excess inventory and we expect to see.
<unk> and <unk>, both traffic and conversion on both channels as they move forward to the back half of the quarter again I would reinforce generally that we do have a conservative approach to the back half of the year and we're not looking for dramatic improvement and either traffic or conversion as we move to the back of the year, but back half.
Of the year, but we do have I think very strong product and a very.
Strong inventories, where we bought down about 7% in dollars in the back half and about a low teens in unit. So we feel like we have an opportunity to drive them drive traffic with and conversion at a healthier margin as we move through the back half of the year, but we're.
Not baking in a lot of that upside yet.
Great. Thank you so much and then just one more from me I'm, we've seen in our store checks that your assortment. It feels like it's broadening out in its appeal and I know you just mentioned that you launched your expansion to work wear. So can you kind of just talk about how youre thinking about your merchandise strategy overall and long term should we expect a meaningful shift there.
Did you say broadly now and the appeal.
Yes, that's correct okay.
So yeah, I think that once again, it's worth it.
And the market position that we can provide our customer everything in their closet, we focus on a 34 year old customer in terms of mindset. So that ranges through in terms of cycle graphics to a younger looking.
And then as well more more fashion oriented, but we're very focused on the launch of things like studio that it gets into a lot of flexibility and alternatives in her dressing. So it is a broader assortment.
Generally because she doesn't have choices in the marketplace and we know every new category that we've added every concept that we've added has had very strong appeal because we can provide everything in her closet.
Changing the focus of the customer.
Demographic or psychographic perspective, but giving her more options and more choices to make within the assortment.
Great is that is my question.
Yeah.
Yes definitely thank you.
Yeah.
Yeah.
Our next question comes from the line of Oliver Chen with Cowen. Please proceed with your question.
Hi, Thank you I'm looking ahead in terms of the assortment and changes you're making you know how would you prioritize the biggest opportunities and how are you broadly thinking about about pricing and average unit retail is just to be sure that you're offering a compelling value.
Nearer term is we understand the clearance and the inventory you need to get through how many more quarters.
Will that take and what are the right guardrails just to.
To minimize impact to long term brand equity in terms of offering discounting. Thank you.
Sure. So I'll answer the last question last part of your question first which is I would say right now that we're really comfortable with the mix of inventory between clearance and regular price online and we're at a 2019 levels and stores between the mix of clearance and regular price. What do you think that it is getting from.
I simply better and as Ive mentioned were.
The inventory purchased in the back half of the year is down 7% year over year. So we.
We feel like that this quarter is the quarter, where we were really dealing the last quarter, where we're dealing with this excess inventory issue. It will improve as we go into the back half of the third quarter as well isn't it fourth quarter.
I didn't write down the first part of your question Oh, the pricing promotional pricing promotion thing.
So once again, we're not really taking pricing up any more in the back half of the year over what we did in the front half of the year and so when.
When you look at an item by item basis, and the market value. What we are after seem to be the value to the customer and the comparable pricing in the marketplace. That's we're making all of our retail decisions on.
On the promotion side once again, I think from a product basis on studio and things that we've done for the back half of the year, which are more focused on celebration on better mix of.
Dressy sexy wear to work combined with our right.
Regular casual assortment I think that it gives us more breadth of price and mix and an opportunity to to consciously pulled back on the depth of the discount, but still am I understanding that the macro challenge is professionally personally happy I will say that fundamental.
The customer is very dedicated to tour it looks at new and now everyday on the windows side shops us constantly and win win we get great feedback as soon as we introduce new looks and new categories of business and where we're starting to see that as we go into the <unk>.
Later, there is back up in the third quarter and into fourth quarter. So.
From a pricing basis.
Market driven value oriented in terms of the values of the customer and then from the product mix and innovation I feel like we are offering the customer a lot of newness in the back half of this year.
Okay, and then as you think about what's happening in the business and the tweaks and opportunities you're pursuing what about store count.
And growing the store base is that still the right time for that and that opportunity would love to hear your thoughts there.
And then lastly, Curt curve has always been a big opportunity.
Would love your thoughts on toward curve in some key priorities of what you see work for what's next there I'm not assortment. Thank you.
It tested so and in terms of store growth what I will say is that our store fleet is very profitable.
And it generates a very very.
Desirable economic model in terms of customer acquisition, and the lifetime value of that customer and the quality of that customer as I mentioned in my comments, if they come through the store channel, which is where we get most of our new customers. They spend more 25% more in the first year and they become I think 60% of them become omni customer.
Buy their second year and so they are by far our most valuable customers. Our net promoter scores and our stores are some of the highest I've ever seen it seen in retail. So it is a great experience for our customer to.
Interestingly the store channel that being said yeah. It as it's profitable it's great for customer acquisition and so definitely it's part of our strategic review as we move forward in determining how we should be looking at stores and rolling out for it.
So it's definitely on the.
The map and definitely part of how we are looking at growing strategically and.
In the future I think that.
Yeah. It is actually a competitive advantage for us, particularly because our customer asked us that driven in that dressing room experience really converts them and makes them a very valuable customer is critical to our business we feel.
As.
As far as curve I believe very thoughtfully and I can see signs that it has a dramatic growth opportunity I feel like I know that where we're opening that as far as the first of all I'll open. The first week of October and they'll all be open by the.
The first week of December and we have a point of view on that and we'll be able to actually test and react to how the customer responds to that experience I feel like we can offer and they'll focus on offering them a broader range of product categories and and that next.
Yeah, and appealing to a broader range of customers. So the opportunity to acquire a slightly younger customer through that concept is an opportunity for us. The other thing that we think about with that is.
Okay.
How are we how do we focus on category businesses and how we use that to grow in conjunction with torrid and graduating from her into the torrid next so there's a lot.
There's a lot of strategic work being done right now to ensure the way that we test and learn and react and analyze that business as appropriate to supporting long term growth and internet side of the business. Once again as I mentioned in earlier comments earlier answer that this is.
This customer wants to buy everything in their closet from us and we have an opportunity to continue to build the breadth and depth and the growth of this category. So I'm still very positive about it I just wanted to make sure that we're doing all the appropriate analytics and planning that and.
A an aggressive but responsible way.
And more to come on that so definitely clearly at the top of the list in terms of strategic expansion and investment.
And we will continue to move forward with that.
Thanks, So much Lisa best regards.
Thank you so much.
Yes.
And just as a reminder, if anyone has any questions. You May press star one to join the question and execute our next question comes from the line of.
Dana Telsey Telsey Advisory group.
Proceed with your question.
Good afternoon, everyone.
Lisa I think if you think about hi, as you think about the buckets underneath the margin, whether it's product costs transportation costs and marketing expense just the drivers how do you envision the back half of the year and is there a difference between the first half in the second half and then with the work wear line that you entered into.
<unk>.
Any initial reaction to what percent of the store is it meeting expectations does it does sales velocity differ by region or by channel. Thank you.
So Dana I'll answer the second question first and at lunch today I can tell you that you know the top eight or.
Of the 10 items that were sold so far this morning, we're in that line. So that's a good sign but way too early to kind of give you that regional or or channel breakdown again, its our largest launch ever and it's very broad and we are excited to really provide.
The type of product that she has been asking for them. So I'm excited about that the margin conversation I think is there's not a lot of difference and kind of what's underlying that in terms of transportation costs year over year or cost of good year over year that's it.
Pretty much baked in at this point I think the opportunity for the back half of the year and we don't have a lot baked into our model, let's be honest about it because we are a little bit of a wait and see at this point as we make sure that she responds appropriately in it and the way that we expect her to to the new inventory.
Inventory levels as well as our assortment.
So the big the biggest opportunity for margin movement in the back half of the year is not having it.
The amount of inventory to clear and then the desirability of the product and being able to adjust our promotional stance and depth based on that so.
The back half of this year of it it's not cost of goods changing dramatically, it's really not a big change in freight.
We have some advantage in the fourth quarter, but in general it.
We were conservative as we're thinking about that it's really about inventory levels and units being down in the low teens from last year.
Dollars being down mid two 7% and then the opportunity to really bring in new categories that she has been asking for and builds the desirability a little bit off I think trend of the broader marketplace. But these are really important things that I think we've added to our assortment for the back half of the year that she's been asking for.
And will the opportunity for margin expansion is from the demand on the demand and desirability of the product.
And just one other quick thing as we approach the upcoming holiday season sooner rather than later any shifts that you're making whether it's marketing or how you're thinking about holiday for this year.
I would just say broadly our storytelling and marketing our launches and marketing are top of mind, we're doing more launches in the back half of this year than we've done in a while and I think we've always had great response, there are a couple of new pants and studios we have.
Some little black dresses that were bringing in and we have some more dressy in Texas. The options that we haven't really had for a while and so I think more focus on storytelling. The other piece that I highlighted in my comments, it's really the focus on.
Retention and reactivation that we're seeing positive results and with our customer file as we bring in these new categories of business, bringing them back to the store back to the tort experience back to the fitting room is something that we're focused on and some marketing both digitally and then also from brand marketing has been moved.
Forward.
Thank you does that answer your question, yes. It does thank you great. Thanks Dana.
And we have reached the end of the question and answer session I'll now turn the call back over to diesel Harper for closing remarks.
Great I do want to highlight something that I didn't answer the question the amount of improvements we've made to the infrastructure in the quarter, the doubling up of capacity and a distribution center and delivering on S. L. A and the relaunch of an ERP, which is not I'm not for the week of heart well, what's the comp.
By the team in the second quarter, So I really want to congratulate them on that I also want to thank Tanner for his leadership and guidance as we've moved through those last four months and really enjoyed working with you and looking forward to continuing that experience.
And we look forward to talking to all of you guys again in the third quarter call them very soon.
Sure.
Yes.
Yeah.
And this concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
[music].
Yeah.