Q3 2022 Torrid Holdings Inc Earnings Call
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[music].
Greetings and welcome to the Tor and Holdings third 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 anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Vince Adams SVP finance.
You may begin.
Good afternoon, everyone. Thank you for joining Schwartz call today to discuss third quarter financial results for 2022, which we released this afternoon and can be found on our website at investors Dot torrid Dot com.
With me today on the call are Lesa 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 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.
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.
Thanks, Brent good afternoon, everyone and thanks for joining us for a discussion of our third quarter results.
Like to start the call by recognizing the team he's dedication, but the business as we face a choppy macroeconomic backdrop.
By the external pressures, we remain steadfast in our goal to deliver exceptional product anchored on our world class asset.
I'd also like to officially introduce Tim Martin who is joining today's call is our chief operating officer, and Chief Financial Officer, Tim brings a wealth of experience to tour it and he will be instrumental and helping us deliver on our strategic priorities I look forward to learning more about Tim and tour it as we move forward.
Now moving to our third quarter results. Despite the challenging environment in late Q3, our net sales and adjusted EBITDA well within our expectation.
During the quarter, we called the customer respond favorably to new product introductions, including the launch of our studio line of wear to work styles.
However, similar to the trend experienced at other retailers, we saw a slowdown in consumer demand during the month of October that coincided with our toward cash event.
Which typically it makes up a large portion of quarterly sale.
As a result of the softness the comparable toward cash event was down double digits versus last year and prior quarters, which negatively impacted performance.
As we work to rightsize, our inventory levels in the third quarter, we added incremental discounts and promotions, which pressured margins.
We were able to make headway clearing through inventory ending the quarter with total inventory up 25% to last year.
Well this was a significant improvement relative to the second quarter.
Still somewhat higher than we would like primarily due to the softer demand we experienced late in the quarter.
We are focused on ending the year with clean inventory and expect to be promotional in the fourth quarter to end the year well positioned for 2023.
We also continue to work on the priorities that I laid out previously.
Among these was enhancing our promotional and marketing strategy to better balance margin and sales curve.
We are still in the test and learn stage of a promotional changes.
And there continues to be significant opportunity for us to improve margins.
The weighted inventory levels have limited our ability to pull back heavily on promotions. This year as we moved into 2023, we expect inventory levels to be much more balanced which should enable us to further adjust our promotional strategy with the goal of expanding margin. We have had an opportunity to test different types of margin enhancing.
Ocean that we will be able to implement more fully next year.
In terms of marketing, we are focused on driving customers to the store and building the quality and quantity of our customer file.
We know that stores are where the majority of new customers first discover and fall in love with our brand and we'd use stores as a critical acquisition and engagement vehicle.
For example, during the quarter approximately 30% of the customers shopping in the stores, we're new to the toy brand and these customers typically spend 25% more in their first year compared to those acquired on the web.
Stores and store acquisition is clearly an important strategy of growth for us.
In order to build a healthy customer file we are focused on a reengagement of lapsed customers and improving retention.
Marketing efforts to Reengage lapsed customers continued to show promise.
Generated another 500 basis point improvement in reactivated customers on top of the improvement seen last quarter.
On social media, we're more focused than ever on product mix.
160% increase in product conversation versus the prior quarter, largely driven by the success of our studio collection and the strong reception to the watch.
We also executed an influencer campaign last quarter focus on jeans, which highlighted our world class asset.
Customers consistently note that our FIC as what compels them to shop, a tour it and we continue to see low return rates, which speak to the integrity of that debt.
Turning to merchandising and product.
This new growth category, but then the product assortment starting with the launch of the studio collection in September which was executed with a full 360 degree integrated marketing campaigns that span all channels.
Given the shift in customer preference for work wear to work styles. This what's the ideal time for lunch.
The collection was very strong and drove a 30 percentage point improvement in workwear shells growth versus the prior quarter.
We also launched a new collection called Dusty that wasn't obviously iconic trends that defined the two thousands.
This collection, featuring classic styles, including Baby Tees, and retro graphics, and we saw our most loyal customers respond to the product with a VIP customer penetration that was more than double our typical VIP penetration across other categories.
As we moved through the quarter, we offered new fashion and color, including cozy and cold weather product and novelty fabrics and trends.
We are encouraged to see her response to new product and we have even more newness slated for the fourth quarter.
Our holiday assortment features an expanded breadth of product focusing on glitz glamour and pretty for all of her holiday occasions.
Most loyal customers respond well to our special collection and we have many plans for this fourth quarter, including a retro chic collection, a new curve assortment with holiday colors, and we've added another drop of our Betsey Johnson collection.
In closing our team remains focused on making product and operational improvements that will position us to deliver sustainable long term growth. We're feeding time strategy refinements are working and we're excited about what product I mean, that's continued to capture her interests with relevant fashion and perfect fitting base.
The positive feedback and momentum that we received with our studio launch is carrying forward into next year as we bring her customer compelling assortment anchored on an exceptional fit.
Our new product launches and seamless customer experience the relevancy with our customer which should lead to increased visit frequency and higher conversion rates. We are excited about our changes and how they build going into next year.
And with that I'll turn the call over to attempt to provide more detailed financials on the quarter and our updated guidance.
Thank you Lisa and good afternoon, everyone I'm incredibly excited to be joining the company is towards Chief operating officer, and Chief Financial Officer.
Tore it is an amazing brand with strong potential and I look forward to being part of its success.
We have a significant opportunity for growth and I'm happy to be working with visa and the tour a team as we strive to consistently deliver on the company's potential.
I will begin with a detailed discussion of our financial results followed by an update on our outlook for the rest of the year.
Starting with the third quarter results.
Net sales came in at the low end of our guidance of $290 million, which was down 5% compared to 306 million last year.
Comparable sales in the quarter declined 8% compared to a 14% increase in the third quarter of 2021.
As a further comparable we were up 9% studio to 2019.
Similar to trends reported at other retailers, we experienced a slowdown during the month of October .
This coincided with the timing of our quarterly toward cash events, which negatively impacted our third quarter results.
However, we were pleased to see our customer respond favorably to new product offerings during the quarter, including the studio collection and demand early in the quarter was more in line with our expectations.
Gross profit for the third quarter was $92 million or 31, 6% of net sales.
This compares to $125 million or 49% of net sales in the third quarter of last year.
During the quarter, we continued to focus on right sizing our inventory levels, which resulted in an increase in discounts and promotions over the last year.
Approximately 850 basis points of the decline.
Was due to higher discounts and promotions to clear inventory.
The remainder of the decline was inflationary and related to higher product and transportation costs, partially offset by price increases.
Selling general and administrative expenses in the quarter were $59 million compared to 66 million for the third quarter in the prior year.
As a percentage of sales SG&A decreased to 24% from 21, 7% compared to the third quarter of last year due to a higher private label credit card income and lower performance bonus expense.
As a reminder, the terms of our new private label credit card agreement provide a benefit to SG&A expense compared to a year ago.
This benefit was partially offset by higher store and web payroll, primarily caused by inflationary pressures, including higher wages.
Excluding the benefit from private label credit card income SG&A as a percentage of sales increased 70 basis points driven by the deleverage in sales.
Marketing expenses in the quarter came in at $13 million compared to $15 million last year.
As a percentage of sales and marketing expenses for 0.4% and decreased approximately 50 basis points compared to four 9% in the third quarter of last year.
As we navigate a difficult macroeconomic backdrop, we remain disciplined on our marketing investments.
And made the strategic decision to allocate expenses towards customer reactivation, where we received better returns.
As a result, we've been able to drive improved spend efficiency versus the prior year.
Turning to profitability net income for the quarter was $7 million or seven cents per share compared to a net loss of $59 million or a loss of 54 cents per share for the same period last year.
We did not have any adjustments to net income in the third quarter of 'twenty two but for comparison purposes. Adjusted net income last year was $28 million or 25 per share.
In addition to the GAAP measures, we believe that adjusted EBITDA is an important measure that we use to evaluate and manage our business. Adjusted EBITDA came in at the low end of our guidance range at $32 million or 11, 1% of net sales.
Turning to the.
Balance sheet.
Our cash and cash equivalents at the end of the quarter totaled $19 million total liquidity at the end of the third quarter, including available credit was $159 4 million.
Total debt at the end of the quarter was $327 million compared to 341 million in the third quarter of 2021.
Our net debt to adjusted EBITDA was one nine times at quarter end.
Inventory at the end of the quarter was $200 million, an increase of 25% compared to 159 million in the prior year.
This is a significant improvement compared to the 64% growth at the end of the second quarter.
We continue to focus on reducing our inventory levels and expect to clear through any remaining seasonal inventory by the end of the year.
While we plan to end the year with inventory up to last year, it will be clean and comprised mostly of basics in early spring receipts.
We opened five stores in the third quarter, including two curve stores and we closed three stores.
We have opened 14 stores year to date.
We now plan to open approximately 27 total stores for the year, including eight curve stores.
Turning to the outlook, given the challenging macroeconomic environment and the volatility in our demand trends, we're updating our outlook for the remainder of the year for the fourth quarter, We project net sales to be between $285 million and $300 million and adjusted EBITDA to be between $9 million.
And $14 million.
Outlook for our gross margin rate will remain pressured as we continue to reduce inventory at spring levels in line with demand.
For the full year, we are forecasting sales to be between one point to four 4 billion and 1.259 billion.
For the adjusted EBITDA, we're now projecting it to be between 145 million.
50 million.
Capital expenditures are projected to be between 27 and $30 million for fiscal 'twenty to reflect and infrastructure investments and approximately 27 new store openings.
We are also planning to close 13 stores this year.
In closing, we are facing an uncertain and dynamic environment.
And tore it is certainly not immune to these challenges.
I've only been at the company is short time I have been impressed with the strength of the toward brand.
Its relationship with the customer and the tour team.
I believe we are putting the right strategies and priorities in place to deliver consistent long term growth.
In the near term, we're going to focus on controlling the controllable and setting the company after success going forward.
With that I will now turn it over to the operator for questions.
Yeah.
Yeah.
Thank you we will now be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question queue. You May press star two if he would like to remove your question from the queue.
Participants using speaker equipment, and it would be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you. Our first question is from Oliver Chen with Cowen. Please proceed with your question.
Hi, Thanks, very much Lisa and Tim on the inventory situation now and what are the main strategy to clear through it.
And also is there a risk in terms of the depth of promotions you may need to take what are you seeing in the consumer environment that gives you a conviction you can get through it as we look ahead to our modeling inventory and the new year would love your take on how you see that in terms of the growth rate relative to sales.
And then a second question Lisa zooming out on what's your hypothesis for driving greater consistency in terms of what the brand endorsed strategies may need to take place for that to happen.
And then lastly on the debt, but what's your target ratio would love your your refreshment on on your priorities in terms of the debt level and the debt to EBITDA ratio you'd seek to maintain thank you very much.
Okay. Thanks, Oliver I'll start with the inventory question or aging on our inventory is actually very very positive meaning are we have very current inventory is theres a lot of moving pieces with inventory, particularly the only.
Bulk of inventory that has all alone trajectory in terms of clearing is basics and that's primarily basics in bras and denim and other bottoms and we are of course, not promoting that heavily and not burning down that inventory, but well land the plane on that end.
We feel comfortable that we can manage that appropriately the other increase in inventories actually receiving our spring product and the correct time table because last year, we consider resort, which just set in the stores to be a spring line and so we count that in our spring.
Tori so when we see that that on time, and we're receiving spring one which was at the end of December on time, as well and so last year those lines were late.
So I'm not worried about that.
Timeliness of managing the inventory we are just very committed to making sure that we stay on top of it and that we turn it quickly I think actually the.
The opportunity for US is we are much cleaner than we've been all year.
And and the inventory is very current and that week and moderate promotions as we move forward. So I don't actually expect in the first quarter to have to accelerate any more than we have them and I think that we have some.
Possibility of being able to moderate that as we deliver new product and have the customer respond to that but overall with the inventory I'm comfortable with the aging that's actually quite clean there's moving pieces associated with that we're just committed to making sure that we stay on top of it and keep it as.
As current as possible. So that we are not kicking a problem down the road.
Uh-huh processes for consistency, if I understand what that means so I've been here a few months and one of the things that we've really focused on aside from building the right team in and building the right operational foundation for the business is the process for developing our product assortment flow.
And those assortments by channel and some of that discipline had been lost over the pandemic time period, and we have reinstated processes that are very straight forward that are very typical.
Typically well known and in this environment and moving more of our analysis and development earlier in the process, meaning a template for that.
Element, and then being able to really test and react more appropriately as we move down the path. So we've changed the process for development, where and we're also have reinstated our chase mode. Our chase capabilities of the business that we're being able to chase as we go into first quarter.
And just basically put some core disciplines into place, particularly in our assortment by category and by channel, meaning stores versus online assortment. So I feel very comfortable with the disciplines that we've put in place that will help deliver some consistency as we move.
Into spring and throughout the balance of next year.
Putting chase back in place, leaving liquidity in our in our inventory will allow us to react to the customer more appropriately and help build some of that consistency.
And I'm turning the last whenever this happens the last one.
So already also answer a little bit of a question you had on inventory we believe our guidance appropriately reflects any of the promotional activity, we will need to do in the fourth quarter to keep that inventory as clean as Lisa mentioned and position us for success going into the first quarter of 2023, which kind of dovetails into the conversation around debt levels.
We can generate as a business pretty healthy returns on operating cash flows when our working capital and inventory are aligned with sales and demand as such we're going to generate a lot of our free cash flow in the future of this business will look to invest that in the growth opportunities that we see we have a significant amount of incremental store opportunities both in Canada and.
U S that will want to invest in and continue to grow this business at the appropriate times and we also will look at investing in technology, where necessary or other things to bring the customer experience.
To a higher level.
As such though we're comfortable with our overall debt level. We're at this point in time and I don't see any need to do anything in the short term to do that but if we have extra cash flow beyond our investment capability to grow the business. We will look at doing something at that time.
Thank you happy holidays and best regards.
Thank you as well.
Thank you. Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Hi, everyone can you expand upon the customer base and the improving retention where are you now in terms of retention. How does it look does it look different online versus in store and can you expand on the product conversion into different categories. It sounds like the studio collection you got a strong response to why do you.
You're seeing them in the other categories and lastly, with the impact of inflation. What are you seeing Reed I, both on a channel basis and regionally with your core customer is how does it differ thank you.
Thanks Dana.
I'll just talk generally as we haven't approached or a customer spoken about it before and we're maintaining a consistent approach here is we have new customer acquisition that we pay attention to retention and frequency and reactivation, we talked on the prepared remarks that our reactivation.
<unk> continued to yield very positive results our retention numbers are actually quite strong.
Do think we can improve on that a couple of hundred basis points as we move into next year and what we're trying to do and in addition to retention is to build frequency what we've found and what we know is that every time, we have a lunch like studio like Festy like a new bra frame that that engages our core customer.
At the highest levels and drives them to build frequency. So next year, we have most of them are multiple.
Launch plan that will have launches four to five major launches throughout the year of new product categories that really do drive frequency with that core customer and then on the new customer piece is.
As we mentioned in the remarks, it's primarily driven through store acquisition.
The other piece of that but we are also we also have new customer acquisitions that would be driven through digital campaigns that sure well so have.
Happy with the retention of a building frequency among those customers and their.
Focused on reactivation in the short term, but next year, we'll continue with a full 360 degree approach to building that customer file and maintaining the quality of that customer.
On the product conversion and I think I spoke a little bit to that in terms of new product, Yes studio works very well for us.
Continues to work well.
Very happy with the product that the team delivered for holiday in terms of a balance between cozy and then glitz and glamour and feminine, but I'm really responded to the correct timing and I think our stores look.
I think they look very very good and hum.
And our customers actually have been asking us if we remodeled and I think that is a great great comment on the quality of the merchandising assortment and.
And how that was presented to the customer so we are seeing asset.
We are bringing in relevant fashion product for the season and at the right level I'm presuming it appropriately that the customer response, among not just new not just our existing customer about among new customers is positive and so we're excited and think that that's a great indicator of some of the things that could be in store for us next year.
From a product perspective.
The installation channel quest.
Question, one of the things that.
We've been talking about is that in the.
First to first several quarters of this year that the inflationary impact really was most prominent in our lower household income customers and for the first time in the third quarter. It impacted all categories with the customer. So they had been immune the upper income levels had been immune up and.
Till the end of third quarter, and we did see that for the first time impacting that level.
Thank you.
Thanks Dana.
Okay.
Thank you. Our next question is from Lorraine Hutchinson with Bank of America. Please proceed with your question.
Hi, This is Alex on for Lorraine Hutchinson Hutchinson. Thanks for taking our question I had a quick follow up on Oliver's question can you give us a more detailed breakdown of your inventory composition and just percentages of inventory in each category, whether it's you know basics evergreens versus fashion versus thing.
You need to clear and then secondly on the upgrade updated development process. You mentioned just now how much are you, leaving open to chase Q1versus what you'd normally what at least open to chase. Thank you.
Yeah, I'll I'll take the first portion we don't break out the total detail level of inventory both as Lisa mentioned, what we've seen over the deepest in right now are things that are mostly basics and evergreen categories that we have the time to work through we are very clean on seasonal and suit liability product. So we're.
We're confident that we're going to continue to maintain that and that's what we're very much focused on I'll turn it over to you and the rest of the question on the development process we are.
And I'm not going to like the percentage is but we're leaving more open on a liquid basis in order to test and react.
We also are testing a.
Product in the first quarter with the idea of reordering not product into subsequent quarters. So it's.
There's a quick turn aspect of liquidity and then there's also a test and then holding liquidity later as we get the results of the test to buy into that specific category. So it's a multi pronged approach.
I'm comfortable with the amount that we have open at this point and our sourcing team is working diligently and finding opportunities for us to be more efficient and react more quickly to some of these wins.
Thank you and then lastly does the updated guidance for sales really assume performance kind of in line with the exit rate or are you contemplating any more incremental macroeconomic pressure.
I would say that our guidance contemplates a couple of different things. One is the trend that we've seen going through the third quarter. The uncertainty of the overall macroeconomic environment and our desire to maintain a cleanliness and our inventory position and set us up for a 2023 that we're pretty optimistic.
Where our product development as we roll into spring will position us for.
Thank you.
Thank you. Our next question is from Mark All Swogger with Baird. Please proceed with your question.
Hi, This is Amy tusky onto Mark. Thank you for taking my question can you give us any commentary on your Black Friday performance and how that informs your view on that.
What do you see then and then with respect to the updated guidance what are the underlying assumptions that you've baked in for January as you cycle last year's supply chain disruption.
Oh I'll take the first part of your question related to Black Friday, what we did see as Lisa mentioned, we are seeing the customer respond to some of the newness.
Unfortunately, given our inventory position, we were still very promotional throughout the holiday, we did see actually a pretty.
Surprising and slightly better than we expected response in store, but I think as Lisa mentioned the way the new product is resonating in the stores has been well received by the customer began we had to be highly promotions would continue to clear through product.
Our January expectations are that the trend that we've been dealing with over the last quarter would retain itself through the holiday less around the supply chain disruption that really didn't impact us all that much as a comparable benefit. So we've kind of just assume basically the current trend of the business from carryforward in our guidance.
Okay. Thank you.
And.
Then if I could ask one more when you're approaching 2023 internally what scenarios are you baking into your operational planning.
Sorry can you repeat that question I was want to make sure I followed you.
Yeah, so not asking about 2023 guidance when you're approaching your internally what macro scenario are you baking into your operational planning.
We're maintaining as much flexibility as we can right now with the Goodman the uncertainties in the overall macroeconomic environment, we're going to continue to focus on maintaining our inventory investments in line with demand trends and as Lisa mentioned by keeping a little bit more open in our open to buy process that allows us flexibility to throttle up or throttle back.
As needed to react to the demand.
Okay. Thank you.
Sure.
Yeah.
Yeah.
Thank you. Our next question is from Alex <unk> with Morgan Stanley . Please proceed with your question.
Hi, This is Katie delahunt on for Alex Straightened. Thank you for taking my question I was wondering how you view. The consumer are you seeing maybe any different impact in terms of income level and are you seeing any sites signed a trade down. Thank you.
For the first two quarters of 'twenty, two we only saw an impact to our lower income customer.
And that was pretty consistent and for the first time.
In third quarter, we saw an impact through all income.
Income levels.
I don't have the data for fourth quarter, but we'll talk about that as we move at our next call, but for the first time as I mentioned in the third quarter, we did see it impact all income levels.
And then to answer your question about if the customers trading down we have not seen them actively trading down when the product is right and they're responding to the newness. We've seen some strong response, there regardless of price. However, we have been so highly promotional that our average unit retail was is lower than it had been his store.
We saw she hasn't actually had to trade down.
Okay. Thank you.
Okay.
Thank you there are no further questions at this time I.
I'd like to turn the floor back over to management for any closing comments.
Thanks to everyone for joining us for this call. We look forward to turning on the fourth quarter and full year call and I want to wish everyone. A happy holiday season. So thanks, so much all the best to you and yours.
This concludes today's call.
May disconnect your lines at this time, thank you for your participation.
Yeah.
Yeah.
Yeah.