Torrid Holdings Inc. Q2 FY2025 Earnings Call

Greetings, and welcome to Torrid Holdings Second Quarter Fiscal 2025 Earnings Conference Call. Please note that this conference is being recorded. It is now my pleasure to pass it over to Chinwe Abaelu. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining Torrid's call today to discuss our financial results for the second quarter of fiscal 2025, which we released this afternoon and can be found on our website at investors.torrid.com. With me on the call today are Lisa Harper, Chief Executive Officer of Torrid; Paula Dempsey, Chief Financial Officer; Ashlee Wheeler, our Chief Strategy and Planning Officer, is also present and will be participating in the Q&A session. 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, September 4, 2025. 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. With that, I'll turn it over to Lisa.

Thanks, Chinwe. Hello, everyone, and thank you for joining us. Today, I will review our second quarter performance and provide an update on our strategic initiatives, including the enhancement of our product assortment, driving customer growth, and executing our store optimization plan. We are currently executing our strategic plan. Our 5 new sub-brands are resonating with customers and will represent 25% to 30% of our assortment next year. We're on track for meaningful cost savings in fiscal 2026 as we execute our store optimization plan by closing up to 180 stores this year, reallocating our resources to respond to our customers' shopping preferences. We believe this strategic shift, combined with continued inventory productivity, will deliver a substantive increase in free cash in 2026 as well as delivering approximately 150 to 250 basis points of adjusted EBITDA margin expansion. That margin expansion is net of planned incremental marketing investments. We plan to utilize the growing free cash flow to reduce debt and repurchase shares, which we believe positions us to deliver stronger performance and create long-term shareholder value. Let's go over our second quarter results. We delivered net sales of $263 million and EBITDA of $21.5 million, in line with our expectations. Our comps sales were down 6.9% for the quarter due in part to headwinds related to restructuring our footwear business and the movement of our model search activation from Q2 to Q3. We experienced strong demand during our semiannual sale event in June, but softer holiday peaks over Memorial Day and Fourth of July, which led us to be more promotional than we had anticipated to drive conversion. We continue to see customer sensitivity and value orientation given the current environment. During the quarter, we saw strength in bottoms, both denim and non-denim, dresses, and swim, which were offset by tops due to the softness in graphic tees and an overpenetration of crop tops. Having said that, we are seeing green shoots in our tops category as we address short-term product misses. We expect graphics to continue to underperform for the balance of the year with improvements in late Q4 and into 2026. Now turning back to our strategic initiatives. We remain incredibly pleased with the performance of our sub-brands and expect their penetration to more than double in the third quarter, and next year, we will reach 25% to 30% of our total assortment. This growth will support adjusted EBITDA margin expansion in 2026 through its higher margin profile due to limited promotions and higher full-price sell-through. These lifestyle concepts enable us to offer unique collections, which provide more newness and excitement while also catering to a broader customer base. The most recent LoveSick launch exemplifies this strategy, targeting younger demographics with strong engagement rates. Sub-brands generate a halo effect, driving attachment rates to core categories like denim, pants, and intimate apparel while supporting customer reactivation through targeted community and influencer marketing. We're scaling this strategy through increased delivery frequency, enhanced newness, and additional sub-brand launches. On the marketing front, we are bringing back our popular model search event with a new look and feel. This year's event will be primarily digital and will kick off on September 9. Historically, our model search has been a very strong customer activation event for us, and we are optimistic that the new format will enable us to reach an even broader audience. We also began to scale our digital marketing efforts toward awareness and new customer acquisition with a diversified approach of paid media, organic social and a more robust influencer marketing campaign. During the quarter, we launched a Torrid Summer, an influencer-based campaign. These event-based activations were held across the country in key metropolitan areas, creating millions of impressions. Each brand-building moment drove customer engagement and social relevance. We will continue to scale these types of activations into 2026, prioritizing customer file growth through strategic digital marketing efforts, continued influencer marketing campaigns, and organic social media initiatives. We are investing behind these initiatives to increase brand awareness and consideration through top-of-funnel marketing and have made a strategic decision to increase our digital marketing spend for the balance of this year above the original budget by approximately $5 million, yielding a total investment of approximately 6% in 2025 versus the 5% previously budgeted. Based on the results of this increase, we will make the determination of the total increased investment for 2026. Next, our channel optimization strategy represents a decisive response to evolving customer preferences. With digital sales approaching 70% of total demand, we are executing a comprehensive realignment that capitalizes on this fundamental shift while strengthening customer relationships across all touch points. To that end, we have been closely tracking customer retention throughout the course of our store closures, and the results remain in line with our objectives. Our target is to retain at least 60% of customers, consistent with historical performance following closures. Encouragingly, retention trends from the 2025 closures are outperforming fiscal 2024 with a greater share of customers migrating to our online platform. This reinforces that our most loyal customers are increasingly channel-agnostic and continue to engage with us regardless of format. These outcomes are supported by the more robust retention strategy we introduced this year, which incorporates a multifaceted approach with proactive customer outreach before, during, and after a store closure. Building on this foundation, during the first half of the year, we executed the closure of 59 underproductive stores in line with our plans. We remain on track to close approximately 120 additional stores in the back half of the year, bringing total closures to about 180. These decisions are deliberate and strategic, strengthening the overall fleet and redirecting demand to higher return channels. Importantly, when paired with our enhanced retention playbook, this optimization demonstrates that we can both rationalize our physical footprint and preserve, if not strengthen, long-term customer relationships. As I mentioned, beginning in 2026, we will redeploy a portion of the fixed cost savings from the closure of unproductive stores into acquisition-focused marketing efforts to grow the customer file size. A portion will go toward increased digital marketing efforts and a portion toward more robust organic social influencer marketing. And to reiterate, we expect to realize 150 to 250 basis points of adjusted EBITDA margin expansion in 2026 and a substantive increase in free cash, which will be deployed to retire debt and buy back stock. We currently have an active $100 million authorization for share repurchase, of which we have approximately $45 million remaining. We also intend to deploy free cash flow to further reduce our debt, fortifying our balance sheet for long-term financial flexibility. At the same time, we remain committed to investing selectively in initiatives that drive profitable growth and improve customer retention, ensuring that our capital decisions not only provide immediate returns but also strengthen the foundation for future growth. In closing, I want to thank all of our talented team members for their unwavering dedication and support. We remain confident in our strategic direction, and the progress we're making positions us to drive improved business performance and meaningful shareholder value creation over time. With that, I'll turn it over to Paula.

Thank you, Lisa. Good afternoon, everyone, and thank you for joining us today. I'll begin with a review of our second-quarter financial performance and then provide our outlook and guidance for fiscal 2025. Our second quarter results were in line with our expectations for both net sales and adjusted EBITDA. While sales trends fluctuated throughout the quarter, we remain focused on disciplined expense management and execution of our store optimization strategy. Net sales for the second quarter were $262.8 million compared to $284.6 million in the prior year. Comparable sales declined 6.9%. Gross profit was $93.5 million compared to $110.3 million last year. Gross margin was 35.6% compared to 38.7% a year ago. SG&A was favorable by $6.3 million, resulting in $70.5 million in Q2 compared to $76.8 million in the prior year. As a percentage of net sales, SG&A leveraged 20 basis points to 26.8% versus last year. The year-over-year favorability in SG&A continues to be primarily driven by our store optimization efforts as well as prioritization of company-wide projects. We strategically increased our marketing investments by 30 basis points in Q2 compared to last year to support the rollout of new sub-brands. We also invested in creative brand-building campaigns to attract new and younger customers. Net income was $1.6 million or $0.02 per share compared to a net income of $8.3 million or $0.08 per share in the prior year quarter. Adjusted EBITDA was $21.5 million, representing an 8.2% adjusted EBITDA margin versus $34.6 million and 12.2% adjusted EBITDA margin last year. We ended the quarter with cash and cash equivalents of $21.5 million compared to $53.9 million in the prior year. As of August 2, we had $7.9 million drawn on our revolving credit facility. During the quarter, we repurchased approximately 6 million shares of our common stock at $3.50 per share, utilizing $20 million of the company's cash. The share repurchase was executed simultaneously with the secondary offering in June. Total liquidity, including available borrowing capacity, remained strong at $111.7 million. Additionally, we continue to strengthen our balance sheet by reducing total debt from the prior year by $8.2 million to $288.4 million. And at the end of the quarter, we proactively extended our ABL agreement from 2026 to 2030. Inventory totaled $130.2 million, which is approximately 1% higher than the prior year, primarily due to in-transit timing. We're managing inventory with discipline and anticipate some temporary fluctuations throughout the year. However, we expect year-end comparable inventory to be down in the mid- to high single-digit range, with total inventory declining more significantly due to store closures. Turning to our store optimization strategy. We closed 57 stores during the second quarter and are very pleased to see retention from these closures performing at our target rate, which is consistent with historical levels and highlighting both the strength of our brand and the loyalty of our customers. We remain on track to close up to 180 stores in fiscal 2025, with the majority of the remaining 120 closures expected towards the end of the year to align with these expirations, minimizing incremental exit costs. The stores identified for closure are underperformers, averaging roughly $350,000 in annual sales and located in less attractive markets. We expect the sales impact to be minimal as we plan to offset closures through target marketing investments and stronger customer retention strategies. We believe our optimization efforts will generate 150 to 250 basis points of adjusted EBITDA margin expansion, net of additional marketing investments beginning in fiscal 2026 and positioning us for sustained profitability. At the same time, our capital allocation priorities in 2026 will remain disciplined, strategic, and balanced, focused on enhancing shareholder value while maintaining financial flexibility. We intend to deploy cash flow towards share repurchases under our existing $100 million share repurchase program, underscoring our confidence in the inherent value of the company and our ability to deliver attractive long-term returns while also reducing debt to further strengthen the balance sheet and support long-term growth. Turning to our guidance for fiscal 2025. We're updating our revenue outlook to reflect the current macro environment, which we believe is driving variability in sales trends in our business. We now expect full-year net sales in the range of $1.015 billion to $1.030 billion. For the third quarter, we expect net sales of between $235 million and $245 million. Given the changes in tariff rates since our last call, we anticipate up to $10 million in incremental headwinds to margins. We continue to proactively manage country of origin sourcing to minimize impact on our business as well as negotiating lower costs from our vendors, creating operational efficiencies, and selectively taking price increases where we see a value gap in the market. Our total tariff impact for fiscal 2025 is expected to be approximately $15 million, and we have mitigated 80% of that cost. We now expect adjusted EBITDA in the range of $80 million to $90 million for the full year, which incorporates the higher tariffs announced in July and incremental marketing investments. As Lisa mentioned, we're investing an incremental $5 million in marketing in the second half of the year, taking marketing as a percentage of net sales to approximately 6%. For the third quarter, we expect adjusted EBITDA to be between $16 million and $21 million. We still anticipate capital expenditures to be in the range of $10 million to $15 million, focused on digital experience, store refreshes, and fulfillment capabilities to support our omnichannel growth strategy. In closing, we're making transformational changes to our business as we capitalize on lease expirations to optimize the size and locations of our store fleet. These actions will enable us to operate more efficiently, deliver consistent long-term growth and profitability, and fuel continued investment in our fast-growing digital channel, a critical engine of our customer engagement and future growth. We are confident that the steps we're taking today position us to create meaningful value for our customers, our associates, and our shareholders. Now we will open the call to our questions.

And our first question comes from Corey Tarlowe with Jefferies.

Lisa, how would you characterize the health of your customer and the appetite for newness that you've infused into the business? And then is there a way to put context around the lift that you're seeing from some of the sub-brands in stores and what that's expected to look like over the remainder of the year?

Sure. Thanks, Corey. I would say that the health of our existing customers is very strong. We see continued improvement in terms of especially our top-tier customers of their engagement and the transactions associated with that. We made an assessment, I would say, 18 months ago or so, maybe a little bit longer that we needed to reinvigorate the quality and innovation and relevancy of our product. And we've worked very hard over that time period and are very pleased with the customer reaction to the launch of those sub-brands and the halo that it gives some of our core businesses like denim and non-denim bottoms and intimates. So we're really pleased with that. We launched our very first sub-brand right after Christmas last year, on December 27, 2024. We didn't have a robust delivery of sub-brands in the first half of the year after those initial launches, primarily because we wanted to see if they were going to work before we really chased into them. Based on the success of the launches in the first part of the year, we have chased into the back part of the year. All of the sub-brands, except for LoveSick, will deliver on a monthly basis from here on. As that happens, we expect sub-brands to contribute about 10% of our total business this year, and by next year, we anticipate that percentage to rise to about 25% to 30%. We are successfully bringing new customers to the brand and, in some cases, younger customers through these launches. LoveSick is still early in terms of assessing its specific impact on new demographics or age, but we are pleased with how all of these are launching. I'd say our goals have been focused on frequency of our existing customers and attracting new customers, and we're achieving those. The decision to increase our marketing spend for the back half of this year aligns with the more aggressive store closure schedule we've discussed previously. We believe it is strategically important for us to not wait until next year to invest in awareness and consideration at the top of the funnel. We feel confident with the performance of the sub-brands and the improvements in the core business assortment. We're excited about driving both the frequency of existing customers and reactivation of customers who haven't shopped with us for a while while also bringing in new customers and a broader range of clientele. Overall, while we're optimistic about our sub-brands, we do see some choppiness with our consumer base. Our core consumer has a household income of around $95,000 to $100,000, and we've learned from our sales associates that there is concern regarding discretionary spending on clothing. Nevertheless, we believe the excitement generated by our sub-brands will help offset some of the macro pressures. Did I answer everything, Corey?

I just wanted to follow up on the outlook for the year. Is there a way you could put into context the EBITDA outlook change? And I know you're investing more in marketing, but how are you thinking about the other aspects around promotions and investments in the business as we look throughout the remainder of the year and maybe what stays in the business or what comes out even as you think about what next year could look like?

Yes. There are a few aspects that have impacted us, the largest being tariffs. We think the total hit for tariffs this year is cumulatively about $50 million. We've offset 80% of that, or about $40 million. Essentially, the impact on EBITDA for the balance of the year presumes that we don't have more expenses to cut or more margins to drive associated with that last $10 million of tariff impact. We have made significant headway on the sourcing side, and we will continue to do so to offset that moving forward. But primarily, the impact stems from the tariff hit above and beyond what we had factored into our previous communications. Let's have Ashlee talk about some of the promotional efforts.

Yes, Corey. From a promotional standpoint, as Lisa noted, we've continued to see some choppiness with the customer. We responded with additional promotional activity that wasn't originally planned to help drive conversion efforts. We expect this trend to continue throughout the rest of the year in today's environment. Beyond the $10 million associated with tariffs that Lisa mentioned, there is the incremental marketing investment. At this point, our primary focus is on upper funnel awareness and consideration to drive the required customer behaviors and set us up for growth in 2026 to support sub-brand acceleration.

And our next question comes from the line of Brooke Roach with Goldman Sachs.

This is Savannah Sommer on for Brooke Roach. There was a lot of ground covered on the call, and it's really great to see the continued momentum with the sub-brands. You've mentioned planning the sub-brands to be 25% to 30% of the assortment next year. I was curious what you expect that mix to go to over time. How do you think about the margin opportunity and the associated timeline there as the brands continue to scale?

Are you asking how scaling will look post-2026?

Yes, that's correct.

Okay. We've discussed before, and we're still very happy with the margin profile that we’re seeing in sub-brands. These are delivering hundreds of basis points higher in product margins than the bulk of our business. We consistently perform well as we roll out more deliveries. I think there are several ways we consider expansion past 2026—such as testing some ideas next year, including converting existing stores to focus more on sub-brands. We've refixtured about 135 stores so far this year, and we plan to complete the refixturing by the beginning of next year. This will allow for more flexibility in our stores. So far, we’ve launched sub-brands in three stores and are currently rolling out a fourth to more than 200 stores. We are learning a lot this year regarding how expanded assortments enhance the customer experience. We will test more ideas next year—such as pop-ups and potentially standalone stores for some of these brands. Our two largest brands currently are Belle Isle, which has a more preppy, East Coast vibe, and Festi, which is more bohemian and free-spirited. These brands may serve as candidates for pop-ups or expanded assortments in standalone stores. As part of our incubation process for these new concepts, we aim to provide an internal marketplace to avoid being outdated in terms of traditional plus-size mindset or offerings. Our customers now prioritize fashion more than simply fit. We believe we are well-positioned to offer diverse lifestyle choices through our assortments. Our teams have done a tremendous job bringing such a wealth of new product to our customers and updating our core Torrid line. I think there are opportunities for further expansion moving forward into 2027, especially for pop-ups and stand-alone concepts, as well as converting some stores to have a higher percentage of sub-brands in the overall assortment mix.

And our next question comes from the line of Janine Stichter with BTIG.

You've got Ethan Saghi on for Janine. So to start, could you provide any color on how the business performed exiting Q2 through August?

Yes. Based on the results of Q2, we saw a slightly softer performance throughout the peak holiday period. We didn't experience the usual acceleration we would normally see over Memorial Day or Fourth of July. However, outside of that, the business performed in line with our expectations. June's semiannual sale event was particularly strong, which pleased us greatly. As we previously noted, consumers remain somewhat value-oriented in this environment, and we have responded with promotional activity to drive conversion. This trend has continued consistently throughout August so far.

Got it. That's super helpful. And then just a follow-up for me. So have you seen any customer pushback following your price increases? And then could you elaborate on how you're thinking about additional price increases for the back half of the year?

Our price increases related to tariffs are minimal and very product-specific. They aren't across-the-board increases, which is why we haven't seen specific pushback related to the tariff-related price adjustments. However, I must mention that our customers have consistently indicated that pricing is their #1 complaint. It's not uncommon within the retail space. We communicated a focus on opening price point products about 1.5 years ago and introduced that strategy. Nevertheless, we have somewhat lost our way due to managing fluctuating production costs and pricing challenges related to tariffs. I believe our team has taken commendable steps to manage those issues. We still recognize that we have an opportunity related to the opening price point products. In the upcoming year, we anticipate that approximately 25% of our assortment—25% of our total sales in the apparel segment—will consist of opening price point items. This is a significant objective, as it requires collaboration across merchandising, design, and product development to maintain quality while providing better value for the customer. Thus, when considering the range of our business for next year, we expect around 25% to 30% in sub-brands, about 25% in opening price point products, with the balance composed of the core business. This strategic direction is poised to be as valuable as the product innovations we've recently introduced, and I'm excited to bring this to our customers as we approach the first quarter of next year.

And with that, there are no further questions at this time. I would like to pass it back to Lisa Harper for closing remarks.

Great. Thank you, everyone, for joining us today. We look forward to keeping you updated on our advancement of our strategic initiatives. Thanks, and I look forward to talking to you next quarter.

Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect and have a wonderful day.