Torrid Holdings Inc. (NYSE:CURV) Q1 2024 Earnings Call Transcript June 12, 2024
Torrid Holdings Inc. beats earnings expectations. Reported EPS is $0.12, expectations were $0.07.
Operator: Greetings and welcome to the Torrid Holdings Inc. First Quarter Fiscal 2024 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chinwe Abaelu, Chief Accounting Officer. Thank you. You may begin.
Chinwe Abaelu: Good afternoon, everyone, and thank you for joining Torrid’s call today to discuss our financial results for the first quarter of fiscal 2024, which we released this afternoon and can be found on our website at investors.torrid.com. With me today on the call are Lisa Harper, Torrid’s Chief Executive Officer; Ashlee Wheeler, Torrid’s new Chief Planning Officer; and Paula Dempsey, Torrid’s 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, estimate, and other words and terms of similar meaning.
All forward-looking statements are based on current expectations and assumptions as of today, June 12th, 2024. 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 website. With that, I will turn the call over to Lisa.
Lisa Harper: Thank you, Chinwe. Good afternoon and thank you for joining us to discuss our first quarter results. Today, I’ll start with some important announcements about our executive leadership team, followed by an overview of our first quarter performance and our strategies for 2024. I am thrilled to announce that Hyon Park has been promoted to Chief Operating Officer. Hyon joined Torrid in 2022 as the Chief Technology Officer. He has been instrumental in stabilizing our systems and executing an IT strategy that supports the growth of our business. We also announced that Ashlee Wheeler has been promoted to Chief Planning Officer. Ashlee has been with Torrid since 2011, serving in a number of merchandising and planning roles, most recently as Senior Vice President of Planning.
She played a key role in driving improvements in our inventory management and optimizing our pricing strategy over the past year and will now lead the entire Planning and Allocation Group. And finally, we announced that Mark Mizicko, our Chief Commercial Officer is retiring. Mark has a long history with Torrid and I’m very grateful to him for coming out of retirement after working as a consultant to join us as a Member of the Torrid leadership team. We appreciate all that Mark has done for Torrid and are grateful that he is staying on as a consultant and wish him the very best second retirement. Turning to our results, we are pleased with our start to fiscal 2024. In the first quarter, we delivered higher-than-expected adjusted EBITDA, driven by strong gross margin expansion and disciplined expense management.
For the quarter, we generated $280 million in sales and $38 million in adjusted EBITDA. We remain focused on tightly controlling our inventory and ended the quarter with healthy inventory levels, which were down 17% compared to a year ago. Our first quarter results reflect continued progress on our key initiatives. In stores, we saw traffic trends improve as we moved through the quarter and we had a very successful Torrid cash event. Customers responded to our balanced merchandise assortment both in terms of breadth of styles as well as price points. During the quarter, we experienced strong regular price comp sales in mid-tops, graphics and denim. While our overall comp declined for the quarter, it was primarily due to a decline in clearance sales relative to last year’s strategic decision to significantly reduce inventory levels and promotions.
We drove positive comp sales at regular price toward the end of the quarter and into the second quarter, demonstrating the strength of our new collection. We expect that clearance sales comps will be less of a drag on our top line as we move through the year. We remain focused on executing our strategic priorities, improving our merchandising assortment, strengthening our marketing message, and optimizing profitability and working capital through cost and inventory management. We were pleased with the response to our spring collections, which reflect a better balance of casual and dressy styles. The reintroduction of our challis fabrication was well received and supported a more casual look and feel to our stores. We saw a positive response to woven tops dresses and non-denim bottoms.
In addition to balancing our assortments, we improved the pricing architecture of our collections. We offered more opening price points across categories. As part of our efforts to evolve and enhance our assortment, we recently visited our factories in Asia. We worked with our key factories to source new fabrications for Torrid to position us to get back into the chase and react model that we are known for. More to come on this in the future. Turning to marketing, our new digital platform is beginning to deliver results in the form of improved customer acquisition and engagement. During the quarter, we launched our Casting Call Model Search contest and the response thus far has been incredible. Ashlee will provide more details in a few minutes.
Moving to working capital, we’ve successfully implemented a number of initiatives to reduce our inventory levels both in terms of cost and units. Our inventory was down 17% due to cost at the end of the quarter compared to a year ago and we expect to end the year with inventory down double-digits. This has led and will continue to lead to a significant improvement in our working capital efficiency as we move through the year. Another key strategic priority for us is to have carefully evaluate our current store fleet. We are working on a comprehensive analysis of our store base to optimize our store footprint. We are reevaluating our stores based on center characteristics, market conditions and profitability. While only a handful of stores perform below our standards, we are looking at all stores to make sure we are in the right location for our customers.
We have found that stores in lifestyle centers perform better on average than our enclosed mall-based stores. We are in the early stages of this process and look forward to updating you on our findings later in the year. In closing, we’ve made tremendous progress over the past year and we are beginning to realize the benefits of this work in our financial results. This marks another consecutive quarter of delivering on our expectations and we believe that we are well-positioned to continue to execute and deliver consistent growth and improve financial results for our shareholders. Before I turn the call over to Ashlee, I would like to thank our amazing team of associates who are at the heart of everything we do. I will now welcome Ashlee to the call who will review our merchandising strategies and marketing plans.
Paula will then review our financials and our outlook for fiscal 2024.
Ashlee Wheeler: Thanks, Lisa. I appreciate the confidence you have in me and I am excited to take on additional responsibilities and lead the planning organization. I will begin today by discussing our merchandising and margin optimization initiatives and then provide an update on our marketing strategies. We are pleased with the sequential improvement in our regular price business during the quarter and our expanding product margins which are attributable to lower product costs as well as reduced discounting and promotion. Our tops and denim businesses in particular saw positive regular price sales and margin comps which were supported by a shift in opening price points and diversity in leg shape. We continued to build on the success of expanding in-store assortments by adding in our best-performing e-commerce exclusives, which have yielded higher overall sell-throughs and higher margins.
This initiative is allowing us to maximize the sales and margin potential of our inventory investments while also promoting a greater cross-channel shopping experience for our customers. Our clearance store initiative continues to be accretive in allowing us to sell store markdowns more effectively and profitably, while also supporting the expansion of greater regular price assortments in our feeder stores contributing to our gross margin expansion this quarter. We will have 15 clearance stores by the end of the second quarter and approximately 150 feeder stores, which we believe is the optimal balance for our total fleet. In further support of our commitment to growth and margin maximization, we are in the process of implementing a merchandise assortment financial planning and allocation system.
We successfully launched the first module of this fleet which allows for much more robust and multidimensional hindsighting of our assortment productivity to help inform our investment decisions and improve our overall buy accuracy. Additionally, this will be the first step in helping form the basis for the future of regional and store-specific assortment. We believe this will further build upon and optimize the success of our current in-store assortment expansion. We will see the launch of the remaining modules throughout the balance of this year and early 2025. Turning to marketing. In April, we launched our Torrid Casting Call, a nationwide model search to find the Face of Torrid for 2025. The last time we ran this popular campaign was in 2019 and our customers loved it.
We’ve seen a remarkable response to our first four events so far. Customer sentiment has been fantastic and the energy incredibly high. These events are driving significant traffic and we have observed a six-point positive swing in new customer acquisition comps and a nine-point positive swing in reactivated customer comps since the campaign launch. We will host our final full-scale casting call event and 100 in-store casting parties this summer before the ultimate winner is chosen in September. We continue to see improving trends in our customer files with accelerating growth and reactivation of lapsed customers and sequential improvement in customer acquisition comparisons year-over-year. In partnership with our digital marketing agency, we were able to leverage valuable insights from our data platform to take quick, decisive action in allocating our media spend throughout the quarter.
We also conducted a digital media upspend test during the first quarter to help us understand the most optimal level of investment for maximizing both near-term ROI and long-term enterprise value. We will apply our learnings from this test as we approach future marketing investments. Lastly, we are evaluating ways to enhance our loyalty program and private-label credit card value propositions. We believe there are opportunities in each that will drive long-term accretive growth. We look forward to seeing the results of these initiatives and sharing more with you next quarter. With that, I will now pass the call to Paula.
Paula Dempsey: Thank you, Ashlee, and congratulations on the new role as Chief Planning Officer. Good afternoon, everyone, and thank you for joining us today. I will now begin with a detailed discussion of our first quarter performance followed by our outlook for fiscal 2024. We’re pleased with our first quarter results. Our sales were in line with our expectations as customers responded to our product offering, enabling us to reduce promotions, which combined with improved products led to 360 basis points of gross margin expansion. Adjusted EBITDA was $38 million exceeding our guidance. We ended the quarter with healthy inventory levels, down 17% to a year ago. For the first quarter, net sales came in at $280 million compared to $294 million last year.
Comparable store sales declined 9%, primarily due to lower levels of clearance sales relative to a year ago. We expect a negative comp impact of clearance to abate as we move through the year while continuing to see improvement in regular price comp sales. Gross profit increased to $115 million from $111 million last year, reflecting a gross margin increase of 360 basis points to 41.3%, driven by lower product costs and fewer markdowns. SG&A expenses in the quarter were $76.5 million or 27.3% of net sales compared to $71.2 million or 24.3% of net sales last year. The increase is primarily driven by performance bonuses and technology investments, partially offset by improved labor productivity both in-store and e-commerce fulfillment. As a reminder, we did not incur performance bonus expense last year.
Marketing expenses in the quarter were $12.8 million compared to $13.4 million in the first quarter of last year. As a percentage of net sales, marketing increased 10 basis points to 4.6% compared to 4.5% in the first quarter of last year. Our net income for the quarter was $12.2 million or $0.12 per share versus a net income of $11.8 million or $0.11 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 $38 million and adjusted EBITDA margin increased 70 basis points to 13.7% of net sales. Moving to the balance sheet, our cash and cash equivalent were $21 million at the end of the quarter, and no borrowings on our revolving credit agreement.
Our total liquidity, including available borrowing capacity under our revolving agreement was $137 million. Total debt at the end of the quarter was $301 million compared to $329 million in the first quarter of 2023. Our inventory levels continue to improve ending the quarter with inventory down 17% to $145 million compared to $175 million a year ago. Looking ahead to the rest of 2024, we expect a quarterly cadence of sales growth to improve with sequential expansion in regular price comp and less negative clearance comp. We remain focused on executing our strategy to improve gross margins and increase adjusted EBITDA through effective pricing, cost initiatives, and enhanced productivity across our stores and online channels. We project net sales for the fiscal year to range between $1.135 billion and $1.155 billion.
Our adjusted EBITDA guidance has been tightened to $109 million to $116 million, reflecting margin benefits from our recent Q1 results that will carry through the year. We expect gross margins to remain robust, driven by improvements in product costs, better opening price points, and fewer promotions due to sustained reductions in inventory levels. SG&A expenses are expected to remain consistent with Q1 levels owing to incentive compensation and technology investments. Marketing investments are projected to align with last year’s as a percentage of sales. Capital expenditure is expected to be between $20 million to $25 million, which include investments in new systems and technology, as well as the opening of 15 to 20 new stores. Let me provide some comments on our expectations for the second quarter of fiscal 2024.
For the second quarter, we project net sales to be in the range of $280 million to $285 million and adjusted EBITDA to be between $30 million and $34 million. Due to the launch of our casting call initiative, we anticipate marketing expenses as a percentage of sales to increase 30 to 50 basis points versus the same period last year. To conclude, our solid Q1 results for 2024 highlight the ongoing improvements across our business. This year our priorities have not changed and include expanding margins, making strategic investments in technology and our workforce and delivering strong working capital results. Now I will turn the call over to the operator to begin the question-and-answer portion of our call.
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