Q1 2023 Torrid Holdings Inc. Earnings Call
Greetings and welcome to the Tort Holdings, Inc. First quarter fiscal 2023 earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference call is being recorded.
It is now my pleasure to introduce your host.
So in a way of Belo Chief accounting officer of toward Holdings.
You you may begin.
Good afternoon, everyone and thank you for joining towards call today to discuss our financial results for the first quarter of fiscal 2023 which we released this afternoon and can be found on our website at investors start point Dot com.
With me today on the call Alicia Hopper, Chief Executive Officer that was poor it Mark Massaro, Chief commercial officer and pull it Dempsey, our 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 all familiar with.
Management may make forward looking statements, including guidance and underlying assumptions forward. Looking statements may include but are not limited to statements containing the words expect believe.
Plan anticipate well may should <unk>.
Estimate and other words in terms of similar meaning.
These statements are subject to risks and uncertainties that could cause actual results to differ materially.
For further discussion of risks related to our business see our filings with the SEC.
This call will contain non-GAAP financial measures such as adjusted EBITDA.
With that I will turn the call over to Alicia. Thanks, Charlie Good afternoon, everyone and thank you for joining us for a discussion of our first quarter performance.
Joining me on the call today is mark with Veeco, Chief commercial officer.
Mark will provide an overview of the recent developments in our key focus areas in merchandising and marketing also on the call with me is Paul of Dempsey, our interim CFO .
Paula has extensive experience in the retail sector, where she has held senior leadership roles and publicly held companies and finance and financial planning and analysis and I'm excited to work closely with her she will provide an overview of our first quarter financial results as well as our guidance for the remainder of fiscal 2012.
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During the quarter, we managed our business prudently and delivered adjusted EBITDA results in line with our expectations. Despite the headwinds created by the economic landscape and whether well traffic was volatile and challenging both in store and online we experienced good momentum in terms of conversion and average.
Unit retail.
These positive indicators demonstrate the effectiveness of our strategies to enhance customer engagement and loyalty.
Our commitment to operational efficiency and prudent cost management enabled us to generate solid operating profits despite lower traffic trends during the quarter. We made the strategic decision to pull back on certain promotions given the inconsistent traffic patterns.
Our focus in the first quarter continued to be aligning our inventory levels and we are pleased with the progress. We made we ended the quarter with inventory levels down 2% compared to the same period last year.
Excluding approximately 10 million of early inventory receipts, our inventory was down 8% compared to Q1 of fiscal 2022.
We are committed to maintaining optimal inventory levels diligently monitoring them and adopting a dynamic approach to adapt to the ever changing environment.
During this challenging period of trying to best predict customer behavior. We have remained steadfast in our commitment to make the right investments for the long term, we continue to invest in strategies that will drive growth and enhance our market position there.
This includes strengthening our product offerings to cater to evolving customer preferences, optimizing our customer file and expanding our store footprint.
As part of our efforts to improve and enhance our product offering we announced the return of Martin with V go as a member of the toward leadership team.
In his role as Chief commercial officer, Mark leads merchandising merchandise planning and allocation marketing and ecommerce I'm confident in his leadership and vision for the brand our focus is to optimize our assortments to meet the needs of our customers and align our marketing with our offerings to create.
Compelling and consistent messaging to our clients.
We have prioritized customer engagement and loyalty.
We're in the process of evolving our promotional activities, including our toward cash events and our loyalty program.
We intend to revitalize our promotional cadence by leveraging data driven insights and ensuring that our offers resonate with our customers on a deeper level.
Loyalty program will also undergo a significant transformation focusing on enhancing customer engagement fostering a sense of community and rewarding our most dedicated patrons.
Through these initiatives, we are confident that we will strengthen our market position and build stronger long lasting relationships with our valued customers.
And finally, we remain committed to our brick and mortar stores and are on track to open 30 to 40 stores for the year.
Our stores play a crucial role in building brand recognition and increasing our customer file.
She initiates a relationship with tour it by visiting the store to see touch and try on products for a perfect fit as well as to receive personalized recommendations from our sales associates. This provides a tangible experience that can foster customer trust and strengthen her buck with the brand we know that once our customer.
Finds us she extends for shopping with us through our online capabilities, resulting in a strong omni channel.
In the first quarter online sales continue to account for more than half of our total net sales.
The ability to cater to our customers' preferences for both physical and digital shopping experiences creates a seamless and convenient journey ultimately strengthening the brand customer relationship and driving business growth through our customer file expansion.
Our top priority is to maintain an unwavering dedication to our customers by providing unmatched offerings and services. They understand the importance of meeting and exceeding their expectations, especially when her wallet may be constrained.
By delivering exceptional experiences we cannot only retain our existing customers, but also attract new ones further solidifying our brand.
As a leadership team, we recognize the significance of improving and streamlining our processes. It is our goal to ensure that our company remains agile efficient and adaptable to the evolving market conditions to that end, we will continue to evaluate our cost structure to identify areas, where we can optimize our spending while maintaining our competitive edge.
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The objective is to align our expenses with our strategic priorities and revenue potential.
In conclusion, while the first quarter presented us with some challenges we remain optimistic about our future our focus on driving store growth and loyalty remains unwavering and we will continue to adapt to the ever evolving retail landscape.
We are confident that our strategies will enable us to navigate through the current environment and position us for success in the long run.
But before I turn the call over to Mark I'd like to express my sincere gratitude to our dedicated employees, who have demonstrated remarkable resilience and commitment and their hard work and dedication of the driving force behind our achievements and I am immensely proud to lead such a talented team.
Thanks, Lisa it's great to be back and I'm excited by all of the opportunity that we have as a brand.
I'll start by highlighting a few of the initiatives. Our teams are working on and then we'll briefly discuss some of the product highlights for the quarter are.
Our merchandising and planning teams are focused on driving gross margin expansion through better balancing our assortment to customer demand.
Proving product sell through an improvement in the efficiency with which we price and promote our product by channel and location.
We have begun to see a small amount of traction in our margin trends online and have more recently begun specific promotional pricing in stores. We expect that we will begin realizing additional margin expansion in the back half through better assortment balance and our targeting of higher online sell throughs aided in part.
By a change to our store fulfillment strategy.
In marketing, we believe that there are significant opportunities for us to better engage our existing and potential customer base through optimization of our marketing investment.
Reinvention of our promotional calendar and cadence and expansion of customer lifetime value through personalized customer journeys and improve the loyalty program and through fostering a community through store events and social media.
We have begun making changes to our marketing investment and have seen some improvements in short term ROI.
In the third quarter, we expect to be up and running with a new data platform with our deep digital agency that will allow us to even further optimize our marketing investment.
Loyalty, both as a program and in terms of customer lifetime value is a big opportunity for US. We are currently testing changes to our promotions and customer discounts will begin engaging the customers through in store events. This summer and are in the early stages of developing customer journeys.
That will lead to increased engagement and higher lifetime value.
Turning to a few first quarter highlights while the overall results were not what we were hoping for we nonetheless saw many bright spots in the business and have many opportunities to build upon these successes for the balance of this year and for next year.
In apparel, we successfully launched four new fabrics, all four were well received by the customer and we see potential for expansion across all of these fabrications.
By apparel category non denim bottoms and jackets were very good performance for the quarter.
These categories were both driven by our studio collection of workwear.
In general are more put together looks were better received than our casual offerings, though there were bright spots in casual dressing as well.
In casual dressing, we see future upside and offering more edgy lux and increasing our investment in graphic and licensed cheese.
For tops in general in many cases, we swung too far from the successes of prior years and fabrics, such as gods, and challis and from color and print into neutrals correcting these investments will be a significant opportunity for us as we move forward.
And the curve business, we saw a strong quarter from swim swim apparel and cover ups, which was driven by new categories and beach wear as well as strength in novelty and prints.
We have opportunities next year to reflect our swim deliveries to evolve our assortment into fashion early in the season and to further optimize our swim pricing.
In active we saw strong performance in our outdoor active assortment that was driven by stretch woven rip stop and Super soft performance Jersey across all silhouettes.
We will continue our expansion into outdoor throughout this year and into next.
In summary, while we have strengths in the businesses that we will build on overall, we can do better aligning our inventory investments with customer demand at both an item and attribute level.
Balancing our assortment across fabrics colors and that will allow us to build the business on the back of Pax past success.
Again, I am very pleased to be back at toward and I strongly believe in the potential of the brand and in our ability to deliver our customers the assortment the experience and the community that she expects and deserves.
And with that I will now turn the call over to Paula.
Thank you Mark and good afternoon, everyone I'm pleased to be here today as the interim CFO of torrid I have spent my career working publicly and privately held companies holding roles in various finance capacities.
I look forward to working with Lisa and the leadership team.
It is an incredible brand that aims to be inclusive and fashionable while donating millions of dollars throughout toward foundation with the support of our customers and employees.
We will begin with a detailed discussion of our financial results followed by an update of our outlook for the second quarter and for the rest of the day here.
Let's start by discussing our topline performance.
During the first quarter net sales declined 11, 8%. She was 294 million compared to 333 million last year and comparable sales in the quarter decreased 14%.
Similar to other retailers, we experienced a traffic slow down starting midway through the quarter. The same factor out toward cash event and results for the first quarter.
However, as Lisa mentioned earlier, we were pleased with our positive average selling price compared to last year.
Moving to profitability gross profit margin was $37 seven compared to 39.0 in the first quarter of last year the.
The decrease of 134 basis points was mainly due to inflationary impact on product costs and increase in store occupancy and merchandising payroll, partly mitigated by enhanced pricing strategies and other favorable factors.
SG&A expenses in the quarter were 71 million compared to 72 million for the first quarter in the prior year.
As a percentage of sales SG&A was 24, 3% compared to 21, 7% in the prior year.
The increase as a percentage of net sales was primarily driven by store payroll due to wage pressures in our markets.
Marketing expenses in the quarter were 13 million compared to 18 million in the first quarter of last year.
As a percentage of net sales marketing decreased 85 basis points to four 5% compared to five 4% in the first quarter of last year.
The reduction in marketing costs was primarily driven by lower spending on the upper funnel activities such as TV advertising.
Turning to our bottom line performance, our net income for the quarter. It was 12 million or 11 cents per share versus net income of $24 million or 23 cents per share for the same period last year.
In addition to GAAP measures, we believe that adjusted EBITDA is an important measure that we use to evaluate and manage our business.
Adjusted EBITDA came in above the midpoint of our guidance at 38 million or 13.0% of net sales compared to 52 million or 15, 5% of net sales in the first quarter of 2022.
In terms of our balance sheet, we maintained a strong financial position during the first quarter, our cash and cash equivalents stood at 18 million at the end of the quarter totaled.
Total liquidity at the end of the first quarter, including available credit was 149 million.
Total debt at the end of the quarter was 329 million compared to 357 million in the first quarter of 2022.
Our net that suggest adjusted EBITDA was two two times at quarter end.
Inventory at the end of the quarter was 175 million compared to 179 million for the same period last year.
Excluding early inventory receipt of around 10 million at the end of Q1 inventory declined approximately 8% compared to Q1 of 'twenty 'twenty chip base.
Based on our projected sales for the remainder of the fiscal year, we're comfortable with our current inventory levels and will continue to exercise caution considering the prevailing demand conditions.
In the event of an improvement in demand, we will draw on our inventory receipt reserve.
In Q1, we opened five toward stores, while simultaneously closing six stores ending the quarter with 638 stores.
Our projected store openings for the year are estimated to be within the range of 30 to 40 stores.
Turning to the outlook.
Given the uncertainty in the macro environment, we expect the second quarter to follow a similar demand trends, we have seen in the first quarter for.
For the second quarter, we project net sales to be between $280 million and 295 million and adjusted EBITDA to be between $32 million and 38 million.
For the full year, we estimate our sales to be between 1.095 billion and 1.145 billion.
And adjusted EBITDA to be between 115 million to 130 million. This outlook assumes our gross margin improvement throughout the year when compared to fiscal 'twenty two.
Capital expenditures between 35, and 40 million for fiscal 2020 three.
Watching 30 to 40, new store openings and other investments the revised annual outlook takes into account a more challenging macroeconomic environment than our prior expectations.
Looking ahead, we remain optimistic about the future of our business, we have a robust pipeline of innovative merchandise and we will continue to invest to enhance the customer experience across all channels were committed to expanding our store footprint strategically both domestically and internationally and we see significant growth.
Okay sure.
Despite the progress of short time obstacles to long term view of our business remain positive and we continue to leverage our strategic initiatives adapt to evolving consumer demands and optimize operational efficiencies to drive sustainable growth. We are confident in our ability to create long term value for our.
Shareholders and.
And with that I will now turn it over to the operator for questions.
Thank you.
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One moment, please while we poll for questions.
Thank you.
Our first question is from Mark all swagger with Baird. Please proceed with your question.
Good afternoon, and thank you for taking my question. So it sounds like a pretty big change in trend topline trend from when we last spoke in late March maybe just help US unpack. What you think is macro consumer versus weather versus perhaps some company specific product or execution opportunities.
You know Relatedly I think the guide for the year implies.
Stable to maybe slightly worse trends in the in the back half versus the first half.
Looking at a multi year basis, I think you had previously seen some room to drive.
An improving trend through the years, that's some of the initiatives unfold. It's maybe just walk us through your framework with that New guide. Thank you.
Sure Hi, Mark them. So the situation that we experienced in first quarter was we actually had a nice February with positive trends and the middle of March we had shift in traffic trends that was relatively dry.
Attic that continued through April and into early May.
The good news is in the back half of May going into June , we're seeing improvement in traffic trends and customer behavior.
R O make it as simple as possible we are moving forward with a forecast that considers the trends that we experienced in the first quarter.
And we felt it was the most prudent thing to do based on the volatility that we've seen in four short months in terms of traffic trends that we've experienced for the customer it looks very it looked very good at the beginning of first quarter the middle of the quarter hits are more challenging traffic trends.
And we're starting to see it look good again and so it is a bit of a roller coaster of customer behavior. I would also say currently our trends are more predictive in terms of what we've seen historically in our business. So we're able to have a lot.
More confidence in the short term forecast of our business, but honestly, we made a decision to take what we had experienced in the first quarter.
And use that as a basis to forecast the balance of the year I will say that the first quarter was the most challenging from a year over year comparison basis, and we do think comparisons are getting better as we go later in the year. We continue to think our inventory is well positioned to up five margin.
While still delivering results.
And we'll keep you updated us I mean, our choices where to.
I'll give you the second quarter and not comment on the balance of the year about because we thought the most prudent thing to do was incorporate some of the trends that we've seen from a macro basis and.
And to the full year forecast.
That's very helpful. Thank you and it sounds like gross margin should improve as you move through the year here, but just given the change in the sales trajectory and the sales expectation.
Any comment on how we should think about markdowns over the next quarter or two here or is there are there any excess spring goods that need to be cleared.
I'll, let mark answer that so we're on top of the inventory levels.
As you heard there they're down they'll be down even further as at the end of this quarter, we're proactively managing the seasonal product and feel great about the way the inventory's positioned for the balance of the year.
Okay. Thank you maybe one last one for me and I'll pass it on.
Just despite the change in the sales expectation your adjusted EBITDA margin guidance or I guess, the implied EBITDA margin guidance I didn't move too much I mean, it sounds like lower marketing lower variable marketing might be a bigger driver there, but maybe help us understand where where are you driving the savings.
To offset and how much of this might be more structural.
Yeah.
Hi, Mark this is Paul arndt them see them. So yes, so you're absolutely right about some of the optimizations that are taking place right now so as you think through the rest of the ear and you looked at all of our expenses you start we should start seeing leverage them starting in the second quarter through the full year. So we.
We are currently doing several projects at the moment she mitigate some some of those.
Those expenses.
Such as you know things that we're currently doing we have partnered with some of our vendors currently renegotiated certain contracts all over at the organization also you know as Mark even mentioned earlier, we are taking a much more approach a much more.
Efficient approach our inventory management. So wishes first thing also improvement there. So overall, we're just optimizing our expenses for the remainder of the year. So we should see our EBITDA margin to be quite favorable herself.
That's great. Thank you and best of luck.
Thanks.
Thank you. Our next question is from Alex Cho with Bank of America. Please proceed with your question.
Hi, Thanks for taking my question on the gross margin puts and takes again can you help us walk through the magnitude of benefit from that freight in cost inflation normalization. We can expect this year and second half and then longer term how big of a benefit do you think is possible from some of the new sources.
<unk> strategies I'm, you know vendor bases, new countries of origin and also the assortment balancing and improved online sell through that you've talked about in your prepared remarks like how how big longer term is the benefit you think those are pieces can be.
Thanks.
Yeah, Hi, Alex It's Paul I am so I would say from a gross margin in the first quarter I would say that 85% of that decline that you saw him and first margin and its really due to inflationary pressures and I would also include our inbound freight so the majority of that.
The great majority of that is due to inflation at this point.
And then for upside as we move forward there is room and every line of the of our business to improve so we anticipate cost of goods improvement.
As we mentioned, we anticipate broadly leveraging SG&A for the balance of the year all of that being done with appropriate investments and to supporting the current business and growth in the business. So I think that we have started and are moving quickly.
On a path of rationalizing all expense lines, including cost of goods and other goods not.
That's not related to retail Oh, we're seeing quick progress there to be able to leverage this business and you know I think we have a very.
Meaningful EBITDA margin.
And I think that as I've said another calls we think that there's more room with that we want to make sure that we're protecting the opportunity to continue to grow the topline and engage our customer but at the same time, we have a room to expand our performance on the EBITDA margin line.
Got it and then secondly can you just elaborate on the loyalty program transformation I mean, how much investment that might require and then are the in store events, you're planning this summer gonna be incremental to last year and also does that require additional investment. Thank you.
Yeah. So so we're we're in the early stages and testing some things for loyalty and what we're really interested in is stickiness and traffic at both the store level and online. So we'll be testing some things as far as getting additional.
Customer visits.
Part of part of the opportunity in loyalty is also for us to reassess and.
Decouple some of our promotional events that in the past have been loyalty participation required. So for example toward cash has been.
In the past a very very important part of our business and there's been some softness in the toward cash promotions and so we're doing some reinventing their that is promotional and then also on the loyalty front, making it not a requirement so.
Touching on the store and the Activations. These are incremental to what we've done last year and but expenses that are fully baked into the EBITDA margins that you see in the marketing for the back half so.
I would just add that philosophically, we believe and continue to see some promising movement in terms of customer engagement with frequency in store activation of new customers as well as reactivation in general and we feel and have feel strongly and are starting.
To prove out that it that creating these store activation events are I'm incredibly productive for us engage the customer and bringing new customers and it's part of a more of a broader marketing strategy moving forward. That's more as a more 360 degree approach versus just a purely digital approach of.
Everything is symbiotic and works together, but where historically has the company ever loss.
Several years has been very focused on primarily top of funnel digital but and mark can speak more to that that strategy has changed to be more of a 360 <unk> strategy that incorporates the stores more fully.
Yeah.
Uh huh.
Yeah.
And then touch on what Lisa just talked about you know Oh a majority.
The early part of first quarter of our digital marketing spend was being aimed at new customers and we've we've reinvested more into the middle funnel and we're seeing some positive traction in terms.
Of traffic in terms of our digital driven sales.
And you know counter to what we had thought would be the risk, we're actually not losing or gaining and the amount of new customers. Even as you know we're not specifically seeking them all in our audience matrix. So all of that looks oh, promising and we're continuing to experiment.
I think there's a lot more room to optimize particularly as as I mentioned, a little earlier as we get a little bit more data insights from the new data.
That's super helpful.
Buck.
Thank you.
Thank you. Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed with your question Hi, Good afternoon, everyone can you parse out a little bit more of the traffic trends between online and stores and what you saw if theres any difference regionally also and then just unpacking the gross.
And a little bit the inflationary impact of product cost how are you planning for that through the balance of the year.
With the pricing strategies that are being refined.
For the third and fourth quarters, what should we be looking at in comparison to last year and does it differ online versus store. Thank you.
Traffic was down in both channels kind of in lock step.
From the middle of March until the middle of May and we're starting to see.
Traffic normalize kind of baseline levels and both channels. So it was consistent regionally and by channel and the shift in the customer traffic trends.
So when they do their gross margin yeah as far as gross margin Dana. So we are expecting the second half not to be as pressured with inflationary challenges I'm. The reason Chile as we are in the process of depleting all the inventory that was acquired with even higher freights.
Last year, and so we're anticipating really recognizing that benefit.
Later on and and half of the year. So that's really what we're gonna see that inflationary pressure kind of starting to go away.
Got it.
And then just the pricing strategies for the back half or will it be the same level of promotions or does it adjust how you anything different on the product side that you are bringing in to drive demand and one of the thing Lisa did you see is it more basics of them, that's more fashion, where there's been more of a change in sales trend.
Yep.
So I'll touch first on the pricing. So you know I think we've made a.
Big improvement and in pricing on the website and more targeted by item. You know there are some brand new products that are being well received out the gate that in the past typically we would have discounted immediately and we're holding off on discounts and finding that she is still responding.
So the product that she wants so we'll we'll continue to try to optimize our end game continue to gain more margin expansion online a lot of that margin expansion online.
<unk> will come through better sell throughs, not necessarily through the pricing, but as we as we start to see better sell throughs, particularly as we get later in the back half than will be adapting our pricing strategy. Accordingly, So we don't anticipate having to discount as much online in.
Store channel were in probably the earlier innings in terms of getting more targeted in our promotions. So for example in swim we were able to do some targeted a swim discounts by store group based on how well they were turning through the good so.
Well, we'll have a lot more room to do that in seasonal goods as well as just in things that are doing really well and turning through versus things that are a little softer and need a little bit more discounts. So are our goal in both channels is to get better at allocating discount to what needs.
The discount versus just a more general overall discount.
I'm the basics versus fashion, while we saw pretty universally in the first quarter as she was still shopping as she was still buying very specific to need. So we I think in the prepared remarks, we said something about pulling back on promotions and we essentially could not find the elasticity and.
Promotions and some of the decisions that we were making that would have traditionally had a level of elasticity that we would be happy with so and the responses that we responded to her behaviors and pulled back on some promotions and to Mark's point.
Really surgically manage pricing online and worked more on a category basis by store group and stores I think as we have brought in new basics. She has responded really well to them. They brought in some new ribs and tops and some dress categories.
And some jackets that she really responded to so she's responding more like more likely to respond right now to fashion and I'm, a little bit softer on basics, but as the weather has changed in the last couple of weeks. We've also seen basics accelerate a little bit so during the first quarter. She was.
Merrily, driven by specific need and more oriented toward fashion.
Yeah.
Thank you.
That's right.
Thank you. Our next question is from Brooke Roach with Goldman Sachs. Please proceed with your question.
Excuse me.
Our next question is from Corey Tarlow with Jefferies. Please proceed with your question.
Yeah, Hi, good afternoon, and thanks for taking my question I guess, Lisa you talked about seeing good moment momentum in conversion and AUR could you talk a little bit about what you think is driving that it's nice to see that even in.
Spite of kind of traffic being a little bit worse than what you might have thought to to see the momentum in conversion.
And AUR, so it'd be helpful. If we get a little bit more color there.
Sure I wouldn't I would say broadly with conversion that there is more positive chatter. If you you know I know you guys have a lot of different ways to gauge kind of customer sentiment broadly and then in terms of that the customer sentiment toward the product was positive.
When she came into buy she has a specific need she was finding what she wanted and she was converting and so I think you know that combined with some of the pricing strategies that mark talked about really aided the AUR and will continue I think to accelerate as we move forward and become more adapted to this more adept at those Choi.
So and also our AUR should improve as we go through the year, primarily because we were clearing through so many goods last year and it's hard for us to discern it was kind of as a challenge that we had in the first quarter with the Choppiness of traffic was exacerbated by the fact that we had been discounting so heavily going in.
To this because of our inventory situation.
Good news is the inventory's in great shape. Good news is we really like the composition of the inventory and the good news is when she she the customer sentiment is quite positive.
So and the hardest quarter of the year is behind us.
That being said you know as I mentioned in my earlier remarks to Mark that.
And his question that we have just we're taking a conservative approach for the balance of the year, we have a lot of very.
I think very exciting initiatives underway that are proving out.
And that where we are expecting and are seeing you know merch margin expansion and we're continuing to see that and are addressing the aspects of gross margin that will help drive that as well so that ive I would say you know to find it a good story in the.
Amidst of that which I appreciate you asking the question.
As we will see them I think our expansion from this point, both in customer behavior, and and pricing and margins.
It was just after the Choppiness of first quarter, we felt like it was prudent to be.
Conservative moving through the balance of the year and we wanted to do that as well so that our inventories were also managed incredibly responsibly. So.
I'm encouraged by several of the Kpis that we're seeing a broad improvement in and then recovery that we're seeing right now.
That's great.
And then just to follow up on an earlier comment that you made Lisa you talked about optimizing spending could you maybe give a little bit more color about.
Where you expect some of those optimizations to occur and what you think the opportunity to be going forward.
Sure I mean, I think a big chunk of store payroll that I have are much more.
Detailed approach to store payroll and how we staff our stores and manage the payroll the customer traffic trends and I think we have a lot of opportunity there and Paula mentioned that we are you know we we haven't it across every aspect of the business business that they can chunks, there and then.
I think.
They we do have freight that's going to benefit on the gross margin side. We have were building I see you guys remember last time last year at this time, we were putting in a new ERP and putting in a new distribution center and we're having trouble shipping things out of the D. C that is working smoothly very smoothly and we're getting more and more productivity out.
Our distributions that we're saving there and cost per unit is going down on incoming and outgoing distribution and fulfillment charges. So.
The opportunity is as broad and were finding it in pretty much every line of the.
And so.
We're very very aligned on that focused on making the right decisions. There I think that as you said as.
We've said several times, we will see leverage in SG&A and the balance of this year.
Great. Thank you so much for all the help and best of luck.
Yeah.
Thank you all.
Our next question is from Brooke Roach with Goldman Sachs. Please proceed with your question.
Good afternoon, and apologies for the technical difficulties earlier at least I was hoping that you could dive a little deeper into the assortment mix between some of these sophisticated neutral styles and be Edgier looks that's where it has been known for in the past can you elaborate on the magnitude of the changes of the Assortments that you've identified on the timeline of driving that.
And then subsequently on inventory can you provide a little bit more color on how we should expect the inventory cadence to move as we go through the year on a year on year growth basis. Thank you.
Sure I'll start that but I'm going to turn it over to Mark I would say that overtime, many kind of core processes in terms of assortment and attribution channel planning has been.
Muddled I would say it is the right word and so that there were broader swings in investments than you would normally expect.
It's really a process oriented solution and Mark is on top of the aspect of exactly how we're buying by department by channel.
And so I'm going to turn it over to him to give more color on that and also kind of the inventory trends for the year.
Yeah.
Beginning on to what Lisa said Brooks.
In terms of magnitude of of shifts between core product and edginess, that's really not what we see driving.
Big changes, that's an important part of putting in front of her you know the looks that she's responding to from a fashion perspective, but even more of our opportunity comes from just building on what the customer response to so for example, you know.
There were some core fabrications and Pops last year that we we probably walked away from in a much bigger way than it should have they they were selling through they were performing at a high margin. They were well received by the customer and we just kind of move.
On to something new and whereas B and in hindsight and in what we're building.
On the go forward is how do we.
How does how do we continue to build on successes rather than walking away from our success in hope of finding a bigger success.
I hope that makes sense. So so that is a bigger part of what you're doing in the process on that.
Changes to that process.
From the very beginning.
In the beginning of when we were first talking about concepts to one more line planning all the way through our hindsight ing and are in our on our buys so there's a lot of focus on how to make or part of our assortment work harder, which we know will benefit us in terms of choice.
Productivity as well as a <unk>.
Improving our initial mark up so.
Oh that work I would say in terms of the magnitude is much bigger than the swings from or into <unk>.
Regarding inventory.
I guess, we said it before we're happy with where the inventory as well.
What will be down even a little bit more inventory in this quarter than we were at the at the end of our first quarter and we like where our receipts are for the back half of the year and we like where our inventory levels will be for the back half of the year, we anticipate better sell throughs.
At Reg price, which you know is behind a lot of the margin rate upside that we're anticipating so I'm very pleased with with where we're positioned for the rest of the period for those.
Thank you I'll pass it on.
Thank you. Our next question is from John Kim with TD Cowen. Please proceed with your question.
Thank you for taking my question just a quick one for me could you provide any detail you have on consumer behavior by in Cogs different you sound very young.
And also your you mentioned you're pulling back on marketing.
As you think about driving demand for in this environment. What are your key priorities in the marketing funds, while ensuring and drive higher retirement on last night. Thank you so much.
So so I I got I got the part on pulling back on marketing. So I think you know in marketing dollars, there's been a slight adjustment for the back half of the year as a percent worse, we're pretty steady to where we've been I don't anticipate I don't anticipate.
Hey, any traffic or conversion headwinds from any marketing adjustments, we've made as I as I talked a little bit about earlier I think the bigger story in marketing is how we're investing and how we're getting those incremental visits and how where are we what.
We're working on is getting an ROI that is a little bit more immediate so so to say that differently rather than them getting a new customer rois that could pay back over over a year or more we're looking for some rois that payback over over the next.
Quarter, two so so trying to get flow through to EBITDA, a little sooner than where we were positioned at the first part of the year and if you could repeat the first part of your question Oh I have it I'll answer it so.
You asked about performance by.
Income group and it wasn't yet.
Yeah is that right. So it was down across all income groups in the first quarter.
We don't and we haven't seen that and we don't anticipate that being the case as we move forward, but for the first quarter.
It was more consistent than it has been across income.
Australia.
Got it thank you so much.
Thank you. Our next question is from Alex <unk> with Morgan Stanley . Please proceed with your question.
Great. Thanks, a lot for taking the question two for me just on the tour and cash are and I know you were considering some changes to the structure of that so I'm. Just wondering have any of those have been implemented or how are you thinking about that differently and upcoming corner and then for Mark I know you're your newer returning here, so maybe which initiative.
Do you think you can act on are you most excited about and in the near term that you can kind of immediately action and then maybe on the longer term ones. What are the barriers there and in terms of the changes that you've outlined on the call. So far thanks a lot.
Sure. Thank you.
So I guess, you know for toward cash and FERC in first quarter. You know we tried some things hadn't tried before in terms of what we distributed and who we distributed toward cash too and we also had a second toward cash.
[noise] event, I'd say that we weren't really pleased with adding a second toward cash for the quarter. It didn't work out the way we had hoped for this quarter. What we're planning to do is we moved we moved the event from where it was going to be in June into July where the product is going to be a little.
Bit more transition also there's more reason for her to buy we've also shortened the number of days, where we're trying to provide more of a sense of urgency.
Romney event and.
Trying some different things to rehab rehabilitate it so to speak as far as I'm trying to create a little bit more scarcity of cash. So those are a few of the highlights that we're making.
In terms of some of the short term things are initiatives that I'm excited about I mean, you talked a little bit about changes in well and our approach to marketing.
We talked a little bit about pricing and promotion.
We haven't really touched on ship from store B kind of re imagine the way that we use ship from store as a way to drive additional sales origin and EBITDA and starting towards the end of March we turned this capability back on.
It is somewhat mitigated that or for you now.
A number of months and what we're seeing is it's driving incremental sales its driving incremental margin. There appears to be a really nice flow through in the way that we're managing it the way that we manage it in the Paas and what we're including to be eligible.
For store and what we're not including and so what.
We're seeing an additional you know.
The mid single digits of inventory that's available on the online channel and and she's buying it. So so that's exciting and we anticipate as we move through the year that that's going to allow us to clear a lot more units at Reg price and less units at clearance and so there is a margin rate upsides.
We have contemplated as far as what we're going to get shipped store.
You know what sell through being increased in conjunction for ship from store is very powerful and that's something that we're going to see and as we get into the middle of the back half and then I guess from a longer term.
Will we hope to get some impact this year, but more of the impact will be next year and that is around our cost strategies and.
And getting to a place where.
Bye bye being a little bit more strategic about our assortment and standing for core in a bigger way that we're gonna be able to negotiate some better cost. So I anticipate that that is going to be a much bigger 2024 of benefit in 2023, and then a lot.
The balancing of the assortment that we're doing them.
We're having we're going to definitely see some impact in the back half, but we're only going to see a few deliveries of impact, whereas we will have a whole year of delivery impact next year, So I expect that benefit.
Getting bigger as we pivot.
Thanks, a lot good luck.
Thank you.
Thank you there are no further questions at this time I would like to turn the floor back over to CEO , Lisa Harper for closing comments.
Thanks, operator, and thanks, everyone for joining us and appreciate your questions and your focus on the brand we look forward to being back with you I guess at the end of the summer with the Q2 results. Thanks again.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.
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