Greetings, and welcome to the Torrid Holdings, Inc. Third Quarter Fiscal 2023 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chinwe Abaelu. Thank you. You may begin.

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 website 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 website. With that, I will turn the call over to Lisa.

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 as 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 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 inventory. Starting with broadening our assortment and pricing strategy, which refers to the importance of 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 reallocation 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 website 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 experiences 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.

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 dressed down, and we have started to see positive trends both in our stores and on our website. 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 the panty businesses. Lounge was also strong, driven by cozy 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 content that our marketing team produces and have made great progress in improving the user experience of our websites 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.

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 Cash events exceeded our expectations, driving a sense of 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 a 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 one-time $1.6 million expense reversal in the prior year related to the performance incentives and $1 million in non-cash 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 reductions 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 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 they play 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 more 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 chains, 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 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 and $103 million, which includes the impact of the 53rd week. We anticipate net sales of the 53rd week to be between $14 million and $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.

Our first question comes from the line of Brook Roche with Goldman Sachs.

I was hoping you could elaborate on the cadence of consumer trends that you've seen as you've moved through the third quarter and into holiday in terms of traffic, ticket and conversion. And as you make these changes to your marketing and merchandise strategy, how are you thinking about the opportunity to return to positive sales growth going forward?

We are seeing sequential improvement in both channels through the third quarter in terms of traffic. Our average unit retail is up. Our average transaction size is down slightly. We think that can be attributed to lower inventory levels, so lower clearance inventory associated with that as well. We're seeing more consistency in our ability to forecast and rationalize the trend of the consumer. I would still say that they continue to be picky and we think that the move toward casual and a kind of a younger feeling overall product assortment has been very well received by this customer. I would expect that, on a year-over-year basis, we should start seeing comps improve positively as soon as next year, and that would be accompanied by some margin expansion related to the things that we've talked about in terms of cost of goods and the margin initiatives that we have in place. I think I might have missed the last part of your question.

I think you covered it. We talked about our big ticket conversion and the opportunity to return to sales growth. I guess just a follow-up for Paula. Can you elaborate a bit more on what you're seeing in credit card income, and how you're forecasting that going forward? What impact could you see if there's a change in industry late fee structures or other changes to consumer credit?

So what we did see is from a penetration standpoint, our private label credit card was slightly down from last year but not overly concerning. We are definitely seeing consumers being a little bit slower on spending on their private label credit cards because of current interest rates. I think as we move forward, we don't necessarily know what the decision will be and whether the fees will be changing or not. So at this point, we are just like everybody else in the industry just watching the news and especially starting to prepare plans just in case there is a change. But at this point, we just have to do the best that we can and listen to see if there are any updates.

Our next question comes from the line of Alex Straton with Morgan Stanley.

This is Katie Delahunt on behalf of Alex Straton. I just was wondering, I know you had spoke to a number of initiatives that you thought were contributing to kind of this better-than-expected print, the wider price points, the improved assortment, marketing, the adjustments to the cash event. Is there any one in particular you would point to as the main driver, or is it really just kind of a compounding of all of these together?

I think the most important thing we've done, the two most important things we've done are assortment oriented or moving toward a more casual, younger assortment and inventory management, because those are kind of the basis for every other strategy that we employ. I do think being in line with inventory allows us to focus on margin expansion; having the right product allows us to build margin. I think the marketing initiative is something that has a long tail to it that I think will improve customer acquisition, retention, and frequency over time. And I think that what we're doing in terms of those are the main ones. I think the clearance store strategy where the fees are clearance combination generates more margin than the rest of the fleet, that's really compelling. So what we're trying to do is make sure that we are very carefully focused on assortment and inventory levels and then layering in these margin initiatives and margin improvement initiatives on top of that. And then the marketing move and increased investment in digital marketing and careful review and data analytics that determine how we're investing moving forward. The short-term return on that, as well as the mid and long-term return of those investments is a fundamental shift for us that's going to continue to pay off as we go into next year. Is that helpful?

Yes, very helpful. And maybe one more from me. We were just wondering, what is your fourth quarter guide, assuming in terms of demand? And if you could speak to any quarter-to-date trends particularly around Black Friday, that would be really helpful?

We were happy with the performance during November, particularly around Black Friday and Cyber. We were less promotional on a year-over-year basis. So it was really not much of a top-line story as it was a margin expansion story and we're very happy with those results. I think, again, as we rebalance assortments and inventories, we're being able to really focus on gross margin dollars, and that was the tone of how we approached Black Friday and Cyber events.

Our next question comes from the line of Corey Tarlowe with Jefferies.

Lisa, I was wondering if you could just talk a little bit from a trend perspective, what worked for you in the quarter and into holiday? And how are you flexing into some of those trends as we head throughout the next couple of key weeks here of the fourth quarter?

So some of the things that are working well for us are anything in the cozy area. So sweatshirts, any cozy fabrications, and graphics are working for us, denim and a lot of different leg shapes. So denim is down overall. But as we've gone into flare and wide leg and boot and a variety of leg shapes, that is really catching the attention of the customer and delivering. I think that we've done a good job with our holiday kind of sparkle assortment, and that's been very well received and moving through. So what's interesting about it is that we have kind of the high-end event-driven product that's working, and then we have the cozy casual pieces that are working as well. And so that is, I think, a precursor of how we're thinking about our assortment and our customer’s end use as we move forward. The other pieces that are working in intense, bralette, panties, push-up plunge silhouette are all working really well. Silverettes worked really well. Anything Christmas-specific has worked really well. So as we move forward, obviously, the Christmas pieces are less relevant. But I think the balance between casual, cozy, and higher event-driven end use is a better way for us to manage our business as we progress.

And Paula, just on the gross margin, as you think about the factors that have impacted the gross margin so far this year and in the third quarter, as you think holistically about some of the puts and takes of the margin headwinds and tailwinds, what are some that you expect to stay for a little while and what are some that perhaps are going to come away and as perhaps sales get better and we start to see a much higher margin in the future?

So as you noted, for Q3, our gross margin was slightly down. But as we mentioned, our product margin was up. So it was down really due to deleverage, more to do so with volumes of net sales. As we move forward into Q4, from an expectation standpoint, we think it's going to be aligned with where we were last year. And so as sales continue to improve, we're definitely going to see that improvement in gross margin into the next year. Hopefully, that answers.

Our next question comes from the line of Mark Altschwager with Baird.

This is Amy Teske on for Mark. You noted some positive results from the testing of the clearance stores. Were there any traffic trends here that were different from the balance of the chain, and is this attracting a different type of customer? And then bigger picture, could you just help us size the opportunity here, how many stores could become clearing stores?

For the clearance centers and their feeder stores, the standout aspect of our performance is the margin expansion observed in the feeder stores, primarily driven by a couple of factors. First, there was a move from clearance selling to regular pricing due to significantly less clearance merchandise available. Additionally, we allocated more space for our regular price items. As a result, we experienced a substantial increase in margin dollars in the feeder stores. We are still working on optimizing the model regarding the number of feeder stores for each clearance center to further enhance margin dollars in the clearance centers themselves. Regarding traffic and customer trends, there were no significant differences. We haven't examined the demographics closely to identify any variations; the traffic patterns were quite similar, with the differences stemming more from what customers chose to purchase.

Our next question comes from Dylan Carden with William Blair.

I'm just trying to fill out what if any conservatism you're kind of baking into guidance, given the performance you just put up kind of looking at pre-pandemic sales levels, it would suggest something of a deceleration. I just want to sort of make sure I understand kind of how you're thinking about the world here.

I would just say that we are watching the customer from week to week. There's a lot of business to be done right now. We don't peak the same way that other retailers peak in the fourth quarter. We have a big event with Torrid Cash in January that again is something that's always backloaded in our performance. As I mentioned earlier, we were happy with margin performance, particularly, which was our strategy over Black Friday and Cyber, and we're very happy with our inventory levels. So we don't have a lot of product to clear. We don't have a lot of areas of inventory that are backlogging us at all. So it is a cleaner scenario. But we are watching the consumer week by week and becoming more and more comfortable with that performance. So I can't tell you what scale of conservatism that we're in here; we're trying to be as pragmatic and prudent as possible as we move forward, executing some of our strategies and refining them.

On pricing and sort of lower clearance levels, cleaner inventories. Any way to scale maybe in potentially sort of product margin terms sort of a structural level that you're targeting as far as sort of what that opportunity to the magnitude, I would think it would be pretty big, just kind of given some of the history here.

We believe there is a significant opportunity for margin expansion in our product over the next year. While I can't guarantee we'll return to our historically high levels, we are confident that with the current challenges regarding costs, as well as our improved assortment, inventory management, and other strategies that were not fully optimized in the brand's previous performance, we see a real opportunity for substantial margin growth in our product margins.

Would the high watermark not be feasible given input inflation, or why wouldn't you expect to be able to get back to that, to your point, you sort of implement…

If you consider the overall situation, we have shifted significantly from 2019 through the pandemic to a much higher online presence compared to the 50-50 split we had before. Currently, our online penetration is greater than that. I don’t believe we will be able to return to the historical merchandise margins we achieved in the past due to the fundamental economics of the web channel. However, there is still considerable overall improvement.

And then finally, just on the marketing testing that you're doing, and apologies if I missed this. When are you kind of looking to do a fuller rollout? And as part of the thought here that maybe you would wait for, I don't know, better macro or a more meaningful quarter before you kind of start leaning into that more seriously?

The results we observed did not suggest a need to pull back. Therefore, the additional level of investment we started in October has continued through November and into this quarter. It is still quite early, and every metric we analyze indicates that our current level is appropriate; we are not yet ready to determine if it should be increased. However, we are tracking all the metrics and examining the data weekly, which leads to ongoing discussions about how to reallocate resources, where to increase investments, and what the overall investment level should be. We will continue to monitor this and look forward to discussing our future direction.

We believe it is crucial to invest in this important area. As we mentioned today, our customer acquisition numbers in stores have returned to 2019 levels as a percentage, but we feel there is room for improvement in customer acquisition and retention through digital channels to enhance our efforts. The team has excelled at utilizing data on a daily and weekly basis to make informed decisions regarding these investments.

And when you say it's sort of EBITDA accretive, what are the primary drivers of that? Is that just throughput leveraging?

The main factors are that the returns on our spending levels are resulting in sufficient revenue per customer session, traffic, or store sales, and the conversion rates we are achieving are contributing positively to EBITDA. Essentially, we are generating more than enough sales and profit margins to cover the additional variable costs associated with the investment, allowing for EBITDA to increase afterward.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to CEO, Lisa Harper, for closing comments.

Thank you all for joining us today. We appreciate your attention to our brand and business. I hope all of you have a wonderful holiday season, and we look forward to connecting with you in the new year with the fourth quarter and full year results. Thank you so much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.