Q2 2024 Torrid Holdings Inc Earnings Call
Greetings and welcome to the Torrid Holdings, Inc. Second 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. 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.
And it's now my pleasure to introduce to you Qing Wei Chief accounting.
Officer. Thank you Qing Wei you may begin.
Good afternoon, everyone and thank you for joining towards call today to discuss our financial results for the second quarter of fiscal 2023, which we released this afternoon and can be found on our website at investors don't torrid Dot Com with me today on the call are Lisa Hopper, Chief Executive Officer of Torrid Bachman.
CECO, Chief commercial officer and pull at M. C. 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 the underlying assumptions forward. Looking statements may include but are not limited to statements containing the words expect believe plan anticipate will may should estimate and other words in terms of similar meaning.
All forward looking statements are based on current expectations and assumptions as of today September six 2023.
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 all filings with the SEC.
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.
I will begin by discussing our second quarter performance, providing details on the progress we have made as well as our focus going forward I will then turn the call over to Mark because he go to discuss our merchandising and marketing strategies Paulo.
Paul will then review our financials in more detail and provide our outlook for the remainder of the year.
Our second quarter results reflect the impact of continued choppy customer behavior. They are more selective in their purchases and exhibit inconsistent traffic trend in.
In addition, we have identified missed opportunities in our casual product assortment that we are addressing immediately.
With that we generated sales of 289 million and adjusted EBITDA of 32 million for the quarter in line with our guidance from.
From an inventory perspective, we were pleased with the progress. We've made we've ended the quarter with inventory down 13% compared to a year ago. We saw the largest decline in our intimates merchandize and are in good standing with our current levels.
During the quarter, our customers responded well to newness in our assortment, we saw strength in new fabrications in leg shape and we plan to expand these going forward as mentioned our casual business was softer than we expected and in hindsight, we realized that we did not offer enough variety versatility and innovation.
Our customer funnel metrics have been consistent and stable over the last 12 months.
Our VIP customer retention rate continues to demonstrate strength standing at an impressive 97%.
We have seen an increase in margin rates among key customer groups, such as loyalist Vips and new web buyers.
Lastly, we are seeing a return to acquiring 60% of our customers in the store, which is approaching pre COVID-19 levels overall.
Overall, our strategies will continue to emphasize customer file growth being enhanced marketing investments additional store openings value rationalization and improved product offerings.
As we look ahead, we're focused on positioning the business to generate consistent growth over the long term as always we maintain a data driven approach to ensure high quality design merchandise and inventory.
In addition to delivering great merchandise that film every need in her closet and ensuring a flawless, but our focus is directed towards three pivotal priorities.
These priorities encompass number one broadening our pricing strategy to rationalize the value of our product offering number two enhancing our marketing investments and number three optimizing our cost structure and inventory.
The first priority is to broaden our pricing strategy in place a greater emphasis on value.
We recognize the importance of value and competitive opening price points, especially in this environment.
In a highly competitive marketplace. She is increasingly looking for high quality products that provide the best value for money.
We have not had the ideal balance and value pricing, which we know she is having a negative impact on both customer acquisition and retention.
Our initial retail prices have risen too much in the last few years and we are implementing a comprehensive strategy that balances both value and price, which will be fully integrated into our spring lines with the good better and best assortment and pricing strategy.
Number two turning to marketing our second priority, we consistently strive to innovate our investments and engaged in testing across diverse channels all with the objective of driving both the immediate as well as lifetime productivity.
In the past several years very little of our marketing efforts have been devoted to driving traffic to our stores. We have had a marketing bias towards E. Commerce, well, we are becoming more productive in our digital investments. We're also rebalancing our overall marketing strategies to enhance the customer's omni journey.
This journey is channel agnostic in terms of service, but with a preference for store traffic, which provides a substantially higher lifetime return.
In the second quarter, our traditional digital investments were instrumental in delivering positive results. During the fourth of July sales and the July torrid cash of that move.
Moving forward, we will continue to drive the evolution of our marketing strategy, focusing on customer acquisition frequency retention as well as maximizing lifetime value.
Our third priority is to optimize our cost structure and inventory after a comprehensive review of our operating structure. We have identified key areas to optimize workforce realignment product cost improvement and inventory management.
As part of our workforce realignment, we made the difficult decision at the beginning of the third quarter to eliminate several positions, resulting in a reduction of 5% and our headquarter staff by executing these are central cost saving initiatives. Our organization is effectively poised to reshape our business operations Austin.
We are also conducting an in depth analysis of our product costs I recently completed a highly productive vendor trip to Asia and wish we had the privilege of personally engaging with our top suppliers there.
Based on this vendor alignment, we believe there is significant opportunity to improve our product margins over the next two years.
Our speed model helps us preposition fabrics with third party factory partners and they believe us to accelerate product with punishment cycles.
Prove inventory turnover and drive higher market share gains.
The next step is to enhance our inventory management by expanding our ship from store program and testing clearance stores.
As of August we have successfully rolled out our ship from store initiative to an additional 200 stores, bringing the total of participating stores to approximately 600 locations.
The programs outcomes have been positive generating incremental sales and enabling us to optimize inventory from our stores and.
We're also implementing additional measures to enhance labor productivity across our retail stores as well as our distribution center.
We expect these strategic initiatives to generate substantial savings on an annualized basis over the next two years.
In a rapidly changing retail environment, we are focused on exercising control over the aspects within our control, we believe that by streamlining our organization.
Enhancing our pricing strategy with value and improving our inventory management.
We're making the right investments to position the business for long term growth.
Our unwavering commitment remains achieving optimal results through our products customer excellence and fit while maintaining a keen awareness of the ever changing landscape.
And with that I'll pass the call to Martin with Veeco, our Chief commercial officer.
Thanks Lisa.
I'd like to start today by giving some updates on a few of the initiatives that our teams have been working on and then I will briefly discuss some of the highlights of the second quarter.
I discussed last time, our merchandising and planning teams are focused on driving gross margin expansion through better balancing our assortment to customer demand improving product sell through an improvement in the efficiency with which we price and promote our product by channel and location.
We've made progress in our pre season assortment planning process and with each successive by we've added guardrails that allow for data driven assessment of the risks risks and opportunities in the business.
We are finding meaningful opportunities in categories fits and fabrications that we've not invested in sufficiently despite substantial customer demand.
We've also made improvement in our channel planning and expect to see that tailoring or investments better to demand by channel will drive margin expansion in the coming deliveries.
For the second quarter, we saw some modest improvements in our product margin rates as we've increased our average retail through a better mix of Reg price selling like getting cleaner and our clearance inventory levels.
We expect this margin expansion to continue in the fall season.
We've improved our methodology for pricing by channel by initiating pricing levels, the target product sell throughs and all that.
In August we rolled out of our ship from store capability that remaining 200 U S stores and are seeing incremental sales and accretive EBITDA from these efforts, which also help us move through more regular price inventory.
In marketing, we have begun to see some more successful promotional events are torrid cash redemption in July was a success and we are seeing some modest improvement in this event as we have tweaked the timing cadence and the supporting marketing efforts.
Our future marketing events will continue to evolve as we focus our message on the product that is hot at the time that our customer is looking for it.
Our efforts to drive customer loyalty and engagement continues through store events improvements in our online shopping experience and more synchronized messaging across our shopping channels.
We also launched a new data platform with our digital marketing agency in August and the early learnings show that we have potential to optimize the amount and allocation of our digital spend which will be testing over the coming months, while I'm not pleased with our overall results in the quarter I am pleased with the progress our teams have made.
<unk> and putting fundamental changes into place that will help us avoid some of the missteps that had been a drag on our performance.
I'm also very excited to announce that Kate Horton has rejoined the torrid team as chief merchandising officer.
Kate is a strong leader a talented merchant and brings a great understanding of our customer and a passion for the torrid brand.
Turning to a few second quarter highlights we continued to see success and work where this quarter. However, it was not enough to offset the softness in the casual part of our assortment.
Dressing the opportunity in our casual assortment is a key focus for our design and merchandising teams and we're working to maximize the part of the casual business that has the versatility to be dressed up or dressed down as these hardworking styles are seen as a value to our customers.
In apparel, we had success in our two for $30 tops business as our customer has responded to value will be increasing our offerings in the opening price point portion of our business through the fall and into spring.
I shall GARS lightweight then and edgy casual looks where fashion highlights as where bottoms in boots flare and wide leg.
The wider leg opening and bottoms has been a success for us, but we did not capitalize sufficiently on this trend this past quarter, but we will have an increased penetration through the fall season.
By category non denim bottoms, and leggings were strong as were dresses and jackets.
As was the case in the first quarter, we saw much of the Miss in our apparel business coming from Underinvestment and key fabrics fabrics fits in and prints.
All of which have a consistent history.
As we progressed through the fall we've made further improvements to the way we utilize our historical selling data and we should see improvement with each successive by cycle and the way that we balance the assortment across the attributes that are important to our customers.
And the curve business, we had strong regular price selling and active which continues to be driven by outdoor performance apparel and also in the lounge and swim apparel businesses.
And our curve foundations business, we have opportunities next year to fine tune, our prints optimize our assortment by channel and to change the timing of fall color palette getting set in the stores.
In summary, I am confident that the changes that have been made to our merchandising and planning process the utilization of our selling and customer data and the addition of Kate to the leadership team will result in improved Assortments as we move through the fall and into next spring.
And with that I will now turn the call over to Paul.
Thank you Mark and good afternoon, everyone I will start with a detailed discussion of our second quarter results followed by an update on our outlook.
In the second quarter, our customers continue to face headwinds related to the current environment and in turn we experienced challenges with traffic. However, we have carefully manage our business through disciplined expense and inventory management and generated net sales and EBITDA that were in line with our expectations, we not only met our quarterly guidance.
But also launched initiatives that speak to a long term strategic vision as previously highlighted by Lisa and her review of his priorities.
We view fiscal 2023 as they rebuild ear for torrid as it relates to product.
Volume in our organizational structure, we have taken cost control measures that will prove to be effective get balanced shrink further opportunities in the near future.
Let's start by discussing our topline performance.
During the second quarter net sales declined 18, 2% to 289 million compared to 354 million last year.
Parable sales in the quarter declined 17, 9%.
We experienced slowing customer traffic during the quarter as the broader retail environment struggling most consumers shifting their spending to essential isn't experiences.
As we moved through the quarter, we saw sequential improvements in our torrid cash events specifically.
Specifically the daily average sales during our July toward cash event outperformed that of April by searching for science, Arizona, We attribute primarily to the heightened sense of urgency and we successfully integrated the events.
Our gross profit margin was 35, 5% compared to 37, 2% in the second quarter of last year.
<unk> hundred 70 basis point decline was primarily due to approximately 105 basis points deleverage in store occupancy.
70 basis points, and a one time benefit and private label credit card income last year.
And Deleveraged 45 basis points, and merchandising payroll cost and other reserves.
This was slightly offset by product margin improvement of 50 basis points, driven by a thoughtful pricing decisions on the web and promotional category activity in stores.
SG&A expenses in the quarter were 70 million compared to 79 million for the second quarter and the prior year.
The 9 million decrease in SG&A is primarily due to a $3 7 million decrease in store payroll cost $2 9 million reduction in performance bonuses in <unk>.
One 4 million decrease in property and equipment disposals, and a decline of $1 million in other store operating costs.
As a percentage of sales SG&A was 24, 2% compared to 22, 3% in the prior year, an increase of one 9%.
Marketing expenses in the quarter were 13 million compared to 14 million in the second quarter of last year.
As a percentage of net sales marketing increased 70 basis points to four and a half per cent compared to three 8% in the second quarter of last year.
The reduction in marketing expenses, primarily due to lower spending on upper funnel activities, such as TV advertising and reach no marketing events.
We remain focused on optimizing our marketing spend by channel aiming to enhance returns on investment and fostered growth in customer acquisition and retention.
Turning to our bottom line performance, our net income for the quarter was 7 million or six cents per share versus net income of 23 million or 22 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 was $32 million or 11, 1% of net sales compared to $52 million or 14, 7% of net sales in the second quarter of 2022.
Yeah.
Turning to the balance sheet, our cash and cash equivalents stood at 19 million at the end of the quarter.
Total liquidity, including available credit was 149 million total debt at the end of the quarter was $313 million compared to 335 million in the second quarter of 2022.
Our net debt to adjusted EBITDA was two eight times at quarter end.
Inventory at the end of the quarter and declined approximately 13% to 158 million compared to 181 million at the end of the second quarter of fiscal 2022.
Given our projected sales for the rest of the fiscal year, we're comfortable with our current inventory levels.
In Q2, we opened three toward stores, while simultaneously closing two stores ending the quarter of 639 stores.
We still expect you opened 30 to 40 stores for the remainder of the year.
Turning to our outlook, we recognize consumers are facing external pressures to the current environment and while we're encouraged to see our sales trends have stabilized the business has been anything but predictable this year.
We believe it is appropriate to assume that the back half of the year, we will continue to be volatile.
Our focus remains on driving topline results through our marketing investments and new product releases, while carefully managing our inventory and expenses.
We have implemented a cost reduction initiative that is projected to yield some annual savings this year, while anticipating them more significant acceleration in the reduction in the coming year.
Driven by improved costs as well as the annualized nation of SG&A reductions made in 2023.
Given this backdrop, we are revising our outlook for the year and now expect sales to be between 1.080 belly Inn, and 1.115 billion and adjusted EBITDA to be between 90 million to $100 million, which includes the impact of the 53rd week, we anticipate.
Net sales of the 50 <unk> week to be between 14 million to 18 million.
Capital expenditures to be between $35 million and 40 million for fiscal 2023, reflecting technology investments and between 30 to 40, new store openings, primarily in the fourth quarter.
For the third quarter, we project net sales to range from 242 million to $251 million and adjusted EBITDA to be between $11 million and 15 million.
Despite the near term pressures, we remain confident in the long term potential of torrid, we have a loyal and active customer base, which accounts for over 90% of ourselves who shop with us on average four times a year.
The changes, we're making to the merchandising and marketing side of our business combined with our disciplined approach to expense management should position us to deliver solid top and bottom line growth overtime.
And with that I will now turn it over to the operator for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two if you would like to remove a question from the queue.
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While we pull for questions.
And the first question comes from the line of Mark <unk> with Baird. Please proceed with your question.
Hi, This is Amy tusky on for Mark.
So in regards to your pricing in recent quarters, you've talked about we're finding your promotional strategy being part of your playbook.
And strategic pricing was it gross margin benefit to this quarter, but you also noted plans to implement a deeper value strategy. So could you help us to reconcile those two comments and what impact do you expect pricing to have in the coming quarters.
It is.
Two different.
Aspects of pricing so what we've talked about previously is promotional pricing to optimize margin and product based on ownership and desirability by channel.
Which is underway and we've learned a lot and we're starting I think to see results that we feel confident in terms of being able to expand moving forward. What I'm discussing today is a slightly different aspect of the business, which is I think also incremental tour our promotional strategies that we've discussed.
Before which is over the last several years three years, our pricing our retail tickets have gone up substantially and I had the opportunity to go and.
Work strategically with our core vendors understanding.
The mill and sounds like investments cost of goods, the the CMT and the country of origin opportunities in terms of understanding and strategizing, our pricing strategies and sourcing strategies that would drive.
Benefit in cost of goods as well as allowing us to have a variable pricing.
Strategy at retail, meaning Mark mentioned, our two for 30 program has done very well, we have an inventory that appropriately.
It's out of the store with much a.
Much stronger presence of key items, we'll be introducing core programs in dresses and tops.
And shorts and actually going into spring that have a good better best strategy that have an.
On opening price point variation so our ticket prices have gone up an average of $10 by every category and we are we know that our customer has a bit of sticker shock not we won't be eliminating the fashion from our product, we will be adding more into the opening.
Price point into the goods section so theres a combination of sourcing strategy cost of good strategy through the sourcing initiatives as well as the assortment strategies that allow us to have a more.
Buried pricing structure for the customer and what we've done so far they responded very very well to where you feel like it's incremental business as we move forward and we'll have a we have some programs and right now we'll have more fulsome programs as we enter the spring season.
So, it's two different things promotion and pricing or different initial pricing or different.
Okay. Thank you for that.
So you know you did talk about the product costing opportunity. It. So how should we think about but not affect of the product costing opportunity versus the need for a sharper and sharper price points to what extent are you going to be reinvesting the savings.
There is.
I think the third product costing it gives us an improvement in Cogs, which has it.
Fundamental benefit to our bottom line as we move forward from a pricing perspective, we think it's our opportunity to build average order value and add incremental units to the mix. So there is multiple multifaceted benefit.
One, which is where they may not be buying their basics for months and then.
Accelerated away as we think they should so opening up that part of the assortment and then on the other side Cogs basically as a benefit across all of the inventory.
That makes sense.
Yes. Thank you.
Okay.
And the next question comes from the line of ours.
With Bank of America. Please proceed with your question.
Hi, Thanks for taking my question can you. Please give more detail on the cadence of sales trends throughout the quarter by month I know you touched a bit upon the next hard cash program component, but just the total sales trends and then also what you're seeing quarter to date. Please.
The trends of the quarter or.
Well, it's choppy and the first and third months were softer than the middle so that oh, well, they're still managing what we referred to is that choppy customer behavior I think we have.
More confidence in terms of near term results and in terms of the early third quarter results and what we're seeing is our ability to be more predictive and consistent in terms of delivering on our forecasting and so I think that leads them as an organization been able to absorb.
The behavior of the customer and work it into our forecasting more effectively.
Starting to see trends in terms of.
Yeah.
Merch margin or product margin improvement and that are more and more consistent where we're seeing nice response to early fall of products. So we're happy about that so you know I I.
I wanted to be clear, it's a it's a challenging kind of transformation for us isn't at the organization, but we are very optimistic by what we're seeing with the customer with some level of predictability and we're managing all of these aspects of the business to drive to an inflection inflection point.
And so what we're seeing right now is better results in terms of our product margin and more predictability in terms of our of our performance.
So we're forecasting it so hum that makes us feel more confident as we're moving forward.
That's helpful. And then I wanted to ask about the clearance stores that you're testing next or this quarter and what criteria are you considering for current stores to underperform enough to become a clearance store and also can you elaborate a little bit on the impact to margins you expect from the this testing and also to.
Incorporating more clearance stores into your portfolio.
Portfolio.
Yeah, I mean, the the Thunder like we've chosen so far has been.
And outlets I think where outlet centers, where the customer has more of an expectation of a higher penetration of clearance product and so we looked at several things, but you know one of the key considerations was the stores that would be theater stores that you know presume.
I believe we would get.
Some amount of the the margin balance.
<unk> said that we expect to see.
Look we opened them.
And then a few days I think it's a little premature to talk about the margin that we expect before we even opened one but.
We of course have our models and like all models theyre not going to be exactly right they'll probably be directionally correct I don't think.
Prepare to talk about the margin benefit before we bought them.
But I think the thesis is that as we use theater stores to feature a particular clearance stores. What we have been able to test is putting more fashion skus and those stores that take up the space that was originally committed to higher levels of clearance in the store.
And we have seen positive movement in terms of getting more fashion into those stores that would be theater stores again, well test three they'll open in the next week or so and we'll be able to report on the next quarterly call on how that's working what the margin implications are and how we are we would be if it works how it would be.
Celebrating it making the decisions in terms of the particular stores in theater stores that would be applied.
Thank you.
And the next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.
Good afternoon, and thank you for taking our question I was hoping you could quantify the cost savings that you've identified across the various initiatives you've just discussed today and what proportion of those cost savings are realizable in 2023 versus 2024, how are you thinking about the opportunity to drop those cost savings to the bottom line versus reinvesting.
And so that's nice thank you.
So if we're talking about the SG&A cost savings for this year. It's a couple of million dollars on an annualized basis, it'll be about four and a half million dollars I think the bigger opportunity is and then it should drop to the bottom line. The bigger opportunity is the cost of goods that I was discussing in inventory management.
From ship from store clearance stores in those types of things and how that will end.
Be able to shift our inventory investment and.
Her time so.
It's something that we look at constantly Brooklyn, I think that you know we've gone to a point that we feel really comfortable with in terms of an organizational investment that allows us to deliver on our initiatives and really draw deliver growth in that business. So will continue though.
Look at that.
On a consistent basis, but I feel like right now the biggest opportunity is going to be more in the Cogs and the inventory investments that we think we can improve upon.
Great. Thank you very much I'll pass it on thank you Brook.
And the next question comes from the line of Alex <unk> with Morgan Stanley . Please proceed with your question.
Hi.
I'm on for Alex.
I know you spoke to decelerating traffic trends throughout the corner and that kind of differs from what we've heard from other partners. This earning season I was wondering you know how much are you attributing that the macro environment versus how would you attribute to maybe company specific decision.
Actually we saw variable traffic trends in the quarter. So actually the best traffic trends were in June and.
The other months were softer so.
Okay.
It didn't improve actually went to the back end of the quarter.
And I missed the rest of your question.
Was there more.
I was just wondering like how much you attribute kind of performance to more macro conditions first is more like company specific execution.
Oh, okay.
That's a very hard I think to.
Distinction to make them. We do think there is that as everyone has discussed some level of macro pressure.
That is not something that we can.
Yeah, we can manage.
Effectively internally, meaning.
It's it's outside influence what we do focus on is what we can manage internally and so some of the things that we've talked about but enhancing our casual presentation about pricing and value pricing opening price point.
Cost of goods improvement are the things that we're really focusing on as an organization.
That we have a runway there to really drive some true value in New York in the in the business.
That's helpful. Thank you and one more from me.
We've heard from a number of companies about increased credit card delinquencies can you speak to any trends you're seeing in your own credit card business.
Yeah, Hi, this is Paul I didn't see him. So we actually saw an improvement from a credit card delinquencies this quarter compared to the prior quarter. However, whenever were looking versus the prior year. We have certainly seen an increase I'm just like everybody else in the industry, but at this point.
We are not it's not something that we are extremely concerned you know our business. So hopefully that answers your question.
Thank you.
There are no further questions at this time and I would like to turn the floor back over to Lisa Hartman for any closing comments.
Thanks Bill.
Joining us today, we look forward to sharing our progress as we move through the balance of the year and look forward to talking to you after the third quarter. Thanks for joining us.
And ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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