Torrid Holdings Inc. (NYSE:CURV) Q3 2023 Earnings Call Transcript
Torrid Holdings Inc. (NYSE:CURV) Q3 2023 Earnings Call Transcript December 7, 2023
Operator: Greetings, and welcome to the Torrid Holdings, Inc. Third Quarter Fiscal 2023 Earnings Conference Call [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chinwe Abaelu. Thank you. You may begin.
Chinwe Abaelu: Good afternoon, everyone. And thank you for joining Torrid’s call today to discuss our financial goals for the third quarter of fiscal 2023, which we released this afternoon and can be found on our Web site at investors.torrid.com. With me today on the call are Lisa Harper, Chief Executive Officer of Torrid; Mark Mizicko, Chief Commercial Officer; and Paula Dempsey, our new Chief Financial Officer. Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements may include, but are not limited to, statements containing the words expect, believe, plan, anticipate, will, may, should, estimates and other words in terms of similar meaning.
All forward-looking statements are based on current expectations and assumptions as of today, December 7, 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 our filings with the SEC. This call will contain non-GAAP financial measures, such as adjusted EBITDA. 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 Web site. With that, I will turn the call over to Lisa.
Lisa Harper: Thanks, Chinwe. Good afternoon. And thank you for joining us to discuss our third quarter results. Before I dive into our financial performance, I would like to take a moment to thank our more than 7,000 employees across the US and Canada who are dedicated to the brand and to our customers. I'd also like to thank our more than 4 million active customer base for continuing to love the brand, while providing the most value added feedback. This quarter, the Torrid foundation with the support of our loyal customers and employees contributed over $0.75 million to the breast cancer awareness campaign. Thanks to you all. I am also thrilled to announce the appointment of Paula Dempsey, Chief Financial Officer. This well deserved promotion reflects the outstanding leadership and invaluable contributions Paula has made in the last 10 months since joining our team, and I believe she will continue to be instrumental in delivering our strategic growth plan.
Thank you, and congratulations, Paula. I'm happy to report that our assortment journey over the past year has begun to deliver positive results. We took a hard look at our assortment and understood the need to pivot towards the more casual and relevant styles, ensuring a diverse range across our product lines. It's encouraging to see this shift resonate. From a store perspective, we have launched an initiative with our sitting room Fridays where our store teams personally try on our products. This hands-on approach has not only enhanced our team's understanding and enthusiasm for our products, but also infused a new dynamic into our store atmosphere. As a result, we're witnessing a positive response from a broad range of customers who are attracted to our brand's renewed energy and balanced casual approach.
I will start by reviewing our performance in the third quarter, detailing our achievements and future strategies. Following that, Mark Mizicko will take over to elaborate on our merchandising and marketing strategies. Paula will then review our financial aspects and offer insights into our projections for the rest of the year. I'm pleased to report a strong third quarter where we saw sequential traffic improvement, both in stores and on the web. For the quarter, we generated net sales of $275 million and adjusted EBITDA of $19 million. These results were higher than anticipated due to the strong demand experienced during the quarter. We also ended the quarter with total inventory of $171 million, down 14% compared to the same period last year.
We can attribute these results to a number of initiatives that started earlier in the year and that are now providing favorable results. During the quarter, we focused on executing our key initiatives; number one, broadening our assortment and pricing strategy; number two, strengthening our marketing message; and number three, optimizing our cost structure and the inventory. Starting with broadening our assortment and pricing strategy, which refers to the importance of a balance across casual and dressier options and a range of price points across the product portfolio, supported by expansion in key items and core programs. Initial results of this more balanced strategic approach to assortment and pricing are promising with an appeal across a broad range of customers.
We will continue to scale this initiative in the spring of next year. Our second priority has been focused on strengthening our marketing efforts. I will highlight some of these strategies, while Mark will go into a deeper discussion later on the call. Based on our recent strategic review, we proactively reallocated and increased our marketing investment, enhancing our reporting infrastructure to align more closely with our core objective of optimizing EBITDA. This recelebration of resources and focus has already begun to bear positive results. During our testing period in October, we observed an uplift in both incremental revenue and EBITDA. This improved performance in digital marketing efficiency is not just driving top line growth, but also contributing to a healthy flow through to EBITDA.
During this period of testing, we also witnessed a steady increase in our traffic trends, both on our Web site and in stores, signaling a strong resonance of our brand with customers. Our strategic efforts to optimize our in-store assortment, coupled with our refined marketing approach, are reshaping the tone and content of our messaging across all channels. This synergy between in-store experience and digital engagement is creating a cohesive brand narrative, further solidifying our market position and enhancing the overall customer journey. This outcome underscores the effectiveness of our agile and data driven approach to resource allocation, affirming our commitment to driving sustainable and profitable growth. Finally, our strategic emphasis on cost and inventory management yielded strong outcomes.
Our business to our vendors in Asia this summer played a key role, resulting in a notable 120 basis point increase in our product margin, after accounting for cost benefits and discounts. Furthermore, I am pleased to report that the pilot program consisting of three clearance stores, which was launched on September 10th, has proven to be a success. These developments will undoubtedly serve as the catalyst for the expansion of our overarching strategic initiatives. These stores, along with their feeder stores, have experienced a significant margin improvement relative to the rest of the fleet. By utilizing clearance stores, we are moving through markdowns more profitably and facilitating greater regular price assortment exposure in the feeder stores.
Across the portfolio, we identified opportunities to rebalance investments in departments and channel breadth, focusing on the ratio of web-exclusive choices, including color extensions versus one-off choices to maximize regular price sell-through and reduced markdown exposure. These efforts, combined with improving demand, have led to a year-over-year inventory decrease of 14%. We anticipate further improvement in our inventory levels over the next year. Regarding SG&A, our results aligned with our estimates. We are committed to disciplined expense management without adversely affecting our future growth strategy. Our focus remains on investing in our core strategies to ensure a positive return. As we reflect on this quarter, it's clear that our targeted strategies in merchandising, both in depth and breadth, along with our smart marketing investments and rigorous attention to cost management are beginning to show real results.
Yet, we remain prudent in the current market. We're currently steering several initiatives that I believe will solidify our position moving into fourth quarter and next year. Moreover, I'm confident that our focused approach will lead to expansion in our EBITDA margin in the next year. And with that, I will now pass the call over to our Chief Commercial Officer, Mark Mizicko.
Mark Mizicko: Thanks, Lisa. I'd like to start today by briefly discussing some of the highlights for the third quarter and then providing some updates on a few of the initiatives that our teams have been working on. Our merchandising and planning teams remain focused on generating product margin expansion through better product sell through and continued improvements in pricing and promotion. In the third quarter, we began to see some broad improvement in these trends. We generated improvement in our top line trend, better year-over-year full price product turns and product margin expansion. While we are encouraged by our progress so far, we know that we have much more work to do. There are opportunities for us to enhance our channel and assortment planning and to improve our product ranking and buy accuracy.
Our expectation is that we will continue to see improvement in these trends over the coming quarters as the changes we're making continue to arrive in stores in the fourth quarter and throughout 2024. In the third quarter, we saw improvements across most of our major categories. Our teams have been focused on driving the casual assortment and especially those pieces that have the versatility to be dressed up or dress down, and we have started to see positive trends both in our stores and on our Web site. In apparel, we were pleased with the performance in our tops business, driven by flats, graphics and sweaters. In our bottoms business, we saw the customer react positively to a variety of leg shapes, including wide legs, boots, flares and joggers.
We also had a great response to our Trio denim launch and have seen our leggings business show steady improvement over the course of the year. In the CURV intimates business, we saw strong performance in push-up bras, bralettes and in the panty businesses. Lounge was also strong driven by cosy separates and wear now silverettes and filed on our super soft fabrication. In addition, we continue to see nice results in the outdoor segment of our active business. Turning to marketing. We continue to make progress on several fronts. In promotional events, we've learned a great deal about the timing and cadence of our events, how we communicate them to the customer and how we synchronize our selling channels. As a result of these refinements to our strategies, our Torrid Cash redemption in October was, by most measures, the most successful of the entire year.
Our expectation is that we should continue to see improved customer response to our event calendar as we utilize the data from each event to shape our future promotional calendar. We recently launched a new data platform with our digital marketing agency. In October, we began testing the amount and allocation of our digital marketing spend. The preliminary results were positive and we are continuing these efforts in the current quarter with the goal of maximizing the profitability of our marketing spend with a focus on how these efforts are increasing the size and performance of our customer file. In addition to these initiatives, we've continued to elevate the creative contents that our marketing team produces and have made great progress in improving the user experience of our Web sites and apps.
To summarize, our team continues to make positive changes to our merchandising, planning and marketing processes. We believe that many of the small successes that we're beginning to see in the business have opportunities to lead to greater margin expansion going forward and improve customer file growth. While there is still much to improve upon, we remain focused on building and maximizing our brand. And with that, I will now turn the call over to Paula.
Paula Dempsey: Thank you, Mark, and good afternoon, everyone. First, I would like to say I'm thrilled to have been appointed the Chief Financial Officer at Torrid. Having joined nearly a year ago, I have seen many positive developments with the company and feel honored to be part of such a great brand alongside industry veterans. My commitment to supporting Lisa's vision and driving sustainable growth through measured strategies has not changed. I have confidence in our leadership team, and I'm delighted to be here. I will now start with a detailed discussion of our third quarter performance, followed by an update on our outlook for the fourth quarter and full year. Our third quarter results exceeded our expectations in both the top and bottom lines.
We focused on driving traffic to our stores and online, which led to sequential improvement in our comparable core sales trends, while we have continued to carefully manage expenses and inventory. Now let's start by discussing our top line performance. During the third quarter, net sales were $275 million compared to $300 million last year with comparable sales in the quarter down 8%. We were encouraged to see that our latest collection available in stores and online was met with improved customer traffic trends. In addition, our Torrid's Cash events exceeded our expectations driving a sense urgency as customers have begun to adapt to the changes we have made to the promotion. This event continues to be our most effective promotion. Gross profit margin declined 80 basis points to 33.2% compared to the third quarter of 34% last year.
Selective promotional activity relative to a year ago and improved product costs drove 120 basis point improvement in product margin. This was offset by store occupancy, which deleveraged 80 basis points on lower net sales, a 75 basis point decline in private label credit card revenue and freight income and deleverage of 45 basis points in merchandising payroll costs and distribution expense. SG&A expenses in the quarter were $72 million or 26.1% of net sales compared to $69 million or 23.2% of net sales last year. The primary increases in SG&A were driven by a onetime $1.6 million expense reversal in the prior year related to the performance incentives and $1 million in noncash severance payout from the reduction in force in August of this year.
We maintained a strong focus on managing controllable expenses while capitalizing on efficiencies within our distribution centers, improved technology capabilities and maximizing returns from product cost reduction as a result of increased supplier productivity. Marketing expenses in the quarter were $12.7 million compared to $12.6 million in the third quarter of last year. As a percentage of net sales, marketing increased 40 basis points to 4.6% compared to 4.2% in the third quarter of last year as we continue to effectively invest in digital marketing across all channels, leveraging traffic both in stores and on the web. Turning to our bottom line performance. Our net loss for the quarter was $2.7 million or a loss of $0.03 per share versus net income of $7.3 million or $0.07 per share for the same period last year.
In addition to GAAP measures, we believe that our adjusted EBITDA is an important measure that we use to evaluate and manage our business. Adjusted EBITDA was $19 million or 7% of net sales compared to $32 million or 10.7% of net sales in the quarter of 2022. Turning to the balance sheet. Our cash and cash equivalents stood at $16 million at the end of the quarter. Total liquidity at the end of the third quarter, including available borrowing capacity under our revolving credit agreement was $153.1 million. Total debt at the end of the quarter was $314 million compared to $327 million in the third quarter of 2022. Our net debt to adjusted EBITDA was 2.8 times at quarter end. Inventory at the end of the quarter decreased 14% to $171 million compared to $200 million at the end of the third quarter of fiscal '22.
We are comfortable with our current inventory levels. In Q3, we opened five storage stores and closed one store, ending the quarter with 643 stores. We recognize the value and impact our stores have on our customers and business results. Over the last 12 months, we have seen a greater shift to customers acquired through stores approaching 2019 levels. The stores hold an important value in our customer journey as it plays a pivotal role in converting single channel customers to omni customers within the first year. The spending habits of these omni customers are key as they spend an average of more than 3.5 times than their single channel counterparts. With that in mind, we remain focused on an integrated omnichannel strategy seamlessly bridging our brick-and-mortar stores with our web business, creating a pleasant experience for our customers.
We are making progress improving store profitability through diligent inventory management, streamlined supply chain and strategic labor management processes. In addition, we continue to review the process of evaluating our store fleet as well as taking a detailed approach to determine future locations. This includes repositioning some of our stores to new shopping centers. These targeted improvements are in line with our customer expectations and traffic trends, reinforcing the importance we place on our customers' views and experiences. We are seeing that this comprehensive approach to both operational efficiency and customer centric strategy which translates to increased traffic and customer acquisitions. We remain focused on delivering exceptional value to our customers while driving sustainable growth for our shareholders.
Moving to our outlook. While we're encouraged by the trends in our business and believe that we're well positioned for the holiday season with our new marketing strategies and latest new collections, we remain mindful of the pressure consumers are under today. The current macro environment creates a heightened level of uncertainty, which causes us to be prudent in our guidance. We will remain focused on carefully managing expenses and expect our headcount reduction initiatives will yield favorable results. Looking ahead, we expect to see a more significant impact from our initiatives in fiscal 2024 driven primarily by improved product cost and pricing architecture. For fiscal 2023, given our stronger than expected third quarter results, we are raising our outlook for the year.
We now expect sales to be between $1.125 billion and $1.140 billion and adjusted EBITDA to be between $99 million to $103 million, which includes the impact of the 53rd week. We anticipate net sales of the 53rd week to be between $14 million to $18 million, capital expenditures to be between $25 million and $30 million for fiscal 2023, reflecting technology investments and between 34 to 36 new store openings for the year. For the fourth quarter, we project net sales to range from $267 million to $283 million and adjusted EBITDA to be between $9 million and $13 million. With that, I will now turn it over to the operator for questions.
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