Earnings Call Transcript - CURV Q3 2021

Operator, Operator

Greetings. Welcome to Torrid Third Quarter Fiscal twenty twenty one Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host Jessica Schmidt. You may begin.

Jessica Schmidt, Host

Good afternoon, everyone. Thank you for joining Torrid’s call to discuss its third quarter results, which we released this afternoon and can be found on our website at investors.torrid.com. With me on the call is Liz Muñoz, Chief Executive Officer of Torrid, and George Wehlitz, Chief Financial Officer. Before we begin, I would like to remind you of the company's Safe Harbor language, which I'm sure you're all familiar with. Management may make forward-looking statements including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a 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 and adjusted EBITDA margin. Reconciliations of these non-GAAP measures to the most comparable GAAP measure are included in the earnings release furnished with the SEC and available on our website. Now, I would like to turn the call over to Liz Muñoz.

Liz Muñoz, CEO

Good afternoon everyone. Thank you for joining us for a discussion of our third quarter performance. Before I begin, I would like to take a moment to address George’s retirement, which I am sure you saw in today’s press release. George has been a tremendous partner over the last decade, during which time we have built an incredible relationship. He was an integral part of our success, particularly as we transitioned to a public company, and I want to thank him for his valuable contributions to Torrid, as well as congratulate him on his pending and well-deserved retirement. George will remain in his role until the end of the first quarter of twenty twenty two, at which point he will transition to serve in an advisory role. I know George will always be available to us, and we look forward to a seamless transition over the next several months. We are in the process of launching a comprehensive search for both internal and external candidates, and we will update you on the progress we make as appropriate. I also want to thank our employees and customers whose passion and loyalty contributed to our strong performance. We are especially grateful for our employees' efforts as they navigate this difficult operating environment. On today’s call, I will discuss our strong third quarter performance and detail our growth strategies. I will then turn the call over to George to discuss our financial performance in more detail and provide an update on our outlook. We are excited to be reporting another quarter of strong performance. We delivered double-digit top line and EBITDA growth, while navigating the global supply challenges, further demonstrating the strength of our business model and the progress we are making against our long-term strategies. Our mission at Torrid is to help curvy women everywhere know the confidence and excitement that comes from getting dressed every day in apparel and intimate wear that makes them love the way they look and feel. We continue to deliver on our mission again this quarter, providing them with an unparalleled fit and experience that we consistently refine and enhance. Briefly highlighting our third quarter results, net sales grew thirteen percent compared to the third quarter of last year and nineteen percent compared to twenty nineteen. Our sales growth was driven by a comparable sales increase of fourteen percent, which includes e-commerce and stores, marking our thirty-seventh positive comp in the last thirty-nine quarters. Our adjusted EBITDA of fifty-five million increased from last year's thirty-one and our adjusted EBITDA margin expanded nearly seven hundred basis points to eighteen percent. Our results reflect continued execution against our key strategic initiatives, and we are energized by the long runway that's still in front of us. At Torrid, we have a powerful and nimble operating model, and we remain committed to continuously building on our successes to evolve the business and keep our customers highly engaged with our brand. With a constant flow of valuable feedback, we continuously test and innovate across all aspects of the organization. We use our learning to evolve our offering and experience, enabling us to deliver on our commitment to this underserved community. Turning to each of our growth strategies, which include expanding Curve, deepening our customer relationships, increasing our brand awareness, and attracting new customers, as well as leveraging our infrastructure. First, growing our Curve business. Curve is an important initiative for us and our customers as we are solving fit challenges and intimates, providing our customer with something she never thought was possible: a bra that is both sexy and comfortable. During the quarter, we further supported Curve with additional marketing campaigns that effectively targeted specific customer segments to encourage first Curve purchases. We tested product-specific rewards to activate bras, which is part of our strategy to assure customers into specific categories that drive longer-term loyalty. These marketing campaigns successfully drove sales in the bra category, contributing to both revenue growth and higher margin in the quarter. In Q3, we ran a test in select stores where we doubled the size of our Curve assortment and we were pleased with the results. Our Curve offerings generated incremental revenue, basket size, and conversion in these stores. We also see evidence that Curve is attracting new customers, with bras remaining the number two entry item for new Torrid customers. Looking ahead, we will expand the reach of our Torrid Curve intimate business, building on the traction we've gained in attracting new customers, increasing loyalty, and driving higher overall basket size. In the fourth quarter, we will launch in-store bra fitting events to further engage our customers, and we will build on our targeted marketing campaigns to drive Curve purchases. We remain on track to launch a dedicated Curve experience on our website next year and plan to expand the combined Curve and Torrid assortment to over twenty-five percent of our stores by the end of twenty twenty-two. We could not be more excited about the significant opportunity ahead for Curve. Turning to our second growth strategy, deepening our relationships with existing customers. Our flow of new product creates excitement and engagement with our customers. During the quarter, we saw strength in our casual offerings, including denim, active lounge, and sleepwear. Trends in dressier and workwear items were compelling as our customer continues to return to a more normal behavior across social activities than work. We also launched our third Lovesick collection, which was met with a favorable response. Performance in our licensed product offering was also strong with sales growing almost twice as fast as the overall brand. In licensing, we used learnings from past successes and leveraged our customers' affinity for holiday celebrations. For example, we launched a limited Halloween collection where we saw exceptional response from our existing customers and drew new customers to Torrid. As we go forward, we will continue to create excitement through product innovation. We are expanding our unparalleled fit capabilities to categories that address additional needs our customer is asking of Torrid, including footwear, sleep, brand collaborations, and special occasions. For example, we enhanced the fit of our wide calf boots, which are available in multiple shaft sizes by continuing to leverage our extensive fit capabilities. The customer response has been strong, and we will continue to build on this success to serve our customer in additional ways that meet her needs. We also continue to make enhancements to our e-commerce platform to create excitement and deepen our engagement with our customers. During the third quarter, we added a daily drop navigation option to highlight our most recent fresh arrivals, which has quickly become one of the highest generators of unique visits on our website, second only to the new arrivals option. We also began accepting applications for our Torrid credit card directly on our website, resulting in a significant increase in applications. We will continue to improve the features, functionality, and creativity of our website to expand our overall storytelling. We will build on these learnings and test new initiatives as we evolve our website to continue to enhance the online experience. We also leverage our loyalty program to deepen our relationships and expand our wallet share. During the quarter, we leveraged our loyalty program to create engagement on social media and strategically drive customer purchases to targeted categories. For example, we offered bonus points to loyalty customers who shared product reviews on social media platforms, resulting in a significant increase in our Facebook and Pinterest engagement. While this program engages our customer and generates content, it also provides us with valuable feedback that we can deploy to continually enhance our offering. We will accelerate this reward program, which was highly successful at incentivizing customer reviews during the quarter. Taking a look at our third growth strategy, we continue to invest in marketing and digital initiatives, creative community events, key collaborations, and website enhancements during the quarter. We also selectively opened new stores, which serve as a low-cost source of new customer acquisition and an important competitive advantage as this customer more actively seeks in-person fitting interactions. In September, we also launched a marketing campaign with the tagline, 'Sexy Has No Size.' This campaign highlighted our denim and bras and featured a diverse group of models of different sizes. As part of the company, we conducted paid partnerships with digital female-focused publications to launch integrated marketing support. We generated over twenty-one million impressions in Q3 through these partnerships, which we expect to drive increased awareness and subsequent new customer acquisition over time. We are in the early stages of building our influencer ambassador program to drive brand awareness authentically with people our customers can relate to. We are pleased with the results of our pilot as it demonstrated its ability to build brand awareness. The content generated during the quarter drove over two million impressions. We continue to evaluate and expand this program based on early reception and early learnings. Our digital marketing strategy is an important component of our overall marketing initiative, and we will continue to test new store traffic-driving programs. On Instagram, we increased our video content reels and adjusted our messaging in response to changes on Instagram to drive engagement. We will continue to invest in both existing and emerging social media platforms. We are creating engaging social media videos that we will leverage across different platforms to drive increased brand awareness and followers. We also continued to leverage our community events to effectively activate customers, and we will use them in new and creative ways. We plan to offer a VIP holiday event during the fourth quarter exclusively for our top loyalty members. Building off the success of our May twenty twenty-one model search called TeamTorrid, we held a similar event for all of our employees in August. This model search generated inspiring stories and engaging content across our communities. The selected winners will be featured in our spring twenty twenty-two marketing campaign. The winners from TeamTorrid are on our website, and we are thrilled with the results, which demonstrate our commitment to inclusivity and diversity as we represent the real world. We are also proud to have held our eighth annual breast cancer awareness campaign, a cause important to us and to our community. This year, we collaborated with the National Breast Cancer Foundation and designed specific products to support this cause. The collaborations generated excitement and engagement, and we successfully raised over five hundred thousand dollars. In addition to our digital marketing and brand awareness initiatives, our omni-channel strategy remains core to our customer acquisition and brand engagement. Even post-COVID, stores continue to be the number one way in which a customer first discovers Torrid. During the third quarter, we opened eleven new stores, bringing our store base to six hundred and nineteen locations. As a reminder, over ninety percent of our store base is profitable. New store performance exceeded our expectations and generated over a third of sales from new customers, ahead of pre-COVID levels. The majority of our openings were in outlet or optimal locations, and we remain committed to engaging our customer where she wants to shop. Our stores offer an immersive shopping experience and passionate associates designed to make her feel great. This experience is particularly important for a customer who has struggled with fit her entire life, making our store base a significant competitive advantage. Going forward, we are further leaning into the power of our store base with our localized marketing initiatives. And finally, our fourth growth strategy is enhancing our infrastructure. We continue to improve our omni-channel capabilities, including the expansion of ship from store on additional products. We also saw continued growth in our buy online and pickup in-store capabilities. We love this feature as it encourages customers to shop for additional products while in-store to pick up their online order. Our omni-channel capabilities enhance our direct-to-consumer unified commerce model, providing a seamless experience to our customers. As we head into the fourth quarter and fiscal twenty twenty-two, we will continue to leverage our organization and infrastructure investments, as well as build upon our existing capabilities to drive profitable growth. We will expand and refine our omni-channel offerings as we continue to adapt to the changing consumer environment, which we believe is an ongoing process. Over the next few months, we will launch our next-generation Torrid app to enhance the experience and improve search functionality. Overall, we are pleased with our accomplishments this quarter and thus far for the year, particularly given the challenging operating environment. We, along with the rest of the industry, are facing global supply chain headwinds. We have strong long-term vendor relationships and a diversified manufacturing base, and we are working closely with our partners to mitigate the current challenges. Our priority is getting our products into the U.S. and specifically into our customer’s hands in addition to managing the costs associated with these deliveries. As always, we are focused on delivering for our customer and meeting her needs despite the current operating environment. While we expect supply chain headwinds to continue at least into the first half of twenty twenty-two, we are successfully navigating the current environment, and our underlying operating model remains strong. In conclusion, we are proud of our third quarter performance, especially in light of the challenging environment. The results we have delivered so far in twenty twenty-one reflect our multi-lever growth strategy and demonstrate the power of our brand. We have a significant opportunity ahead of us to expand brand awareness and accelerate customer acquisition within our large and underserved market with just a small percentage of the eighty-five billion dollar plus-size women's market. We remain in the early innings of our growth. We will continue to execute behind our proven growth strategies to deliver profitable growth and create long-term shareholder value. I will now turn the call over to George to discuss our third-quarter financial performance in greater detail. He will also provide you with our financial outlook for the fourth quarter and the full year.

George Wehlitz, CFO

Thank you, Liz, and good afternoon everyone. Thank you for joining us. I will begin with a detailed discussion of our financial results, followed by an update on our outlook. In my remarks, I will make select comparisons to the third quarter of twenty nineteen to normalize for the anomalies created by COVID-19 in the prior year to provide a better understanding of our growth. For the third quarter, net sales grew thirteen percent to three hundred and six million, compared to two hundred and seventy million last year and increased nineteen percent from twenty nineteen. Our growth was primarily driven by the continued strength in our e-commerce business and the ongoing recovery in store productivity. We are particularly pleased with our sales performance, given the inventory constraints caused by the supply chain challenges we faced during the quarter. Comparable sales growth of fourteen percent in the third quarter was driven by both an increase in transactions and higher average order value. We continue to attract new customers to the brand and drive increased spend per customer as a result of our focus on expanding our current business, driving customer engagement, as well as leveraging our omni-channel presence. Gross profit in the third quarter was one hundred twenty-five million or forty point nine percent of net sales. This compares to ninety-six million or thirty-five point four percent of net sales in the third quarter of last year, and ninety-eight million or thirty-eight point three percent of net sales in twenty nineteen. This five hundred fifty basis point expansion in our gross profit margin from the prior year was primarily driven by reduced promotional activity and pricing initiatives, partially offset by an increase in store occupancy expense and higher freight costs related to the supply chain disruptions. We expect the impact of these higher freight costs to persist in the fourth quarter, which I will speak to shortly. Selling, general and administrative expenses in the quarter were sixty-six million, compared to sixty-seven million for the third quarter in the prior year. As a percentage of sales, SG&A decreased approximately three hundred basis points to twenty-one point seven percent, compared to twenty-four point seven percent in the third quarter of last year. This improvement was primarily due to leverage in our store expenses and lower share-based compensation, partially offset by an increase in store operating costs and additional costs associated with being a public company. Marketing expenses in the quarter were fifteen million, compared to fourteen million for the third quarter of the previous year. As a percentage of sales, marketing declined approximately thirty basis points to four point nine percent compared to five point two percent in the third quarter of last year. The lower than planned marketing costs were due to the strategic decision to moderate marketing investments during the quarter as a result of reduced product availability associated with shipping delays. Turning to profitability, in addition to GAAP measures, we believe that adjusted EBITDA and adjusted net income are important measures that we use to evaluate and manage our business. The adjustments are particularly relevant this quarter and for the remainder of the year due to the one-time non-cash impact on GAAP earnings from the charge associated with re-evaluating our legacy incentive units as part of our IPO last quarter. Adjusted EBITDA was fifty-five million dollars, or eighteen percent of net sales, compared to thirty-one million dollars, or eleven point four percent of net sales in the third quarter of twenty twenty. This compares to thirty-three million dollars, or twelve point seven percent of net sales in the third quarter of twenty nineteen. For the quarter, our tax rate was two hundred fifty-seven percent, compared to fifty-eight percent in twenty twenty, due to an increase in the amount of non-deductible items associated with share-based compensation. This increase was largely driven by one hundred eleven million dollar non-cash charge associated with revaluing our legacy incentive units as part of our IPO. Net loss for the quarter was fifty-nine million dollars or zero point fifty-four dollars per share, compared to net income of four million dollars or zero point zero four dollars per share for the same period last year. Adjusted net income was twenty-eight million dollars or zero point twenty-five dollars per diluted share, an increase of fifty-three percent from adjusted net income of eighteen million dollars or zero point seventeen dollars per diluted share in the third quarter of twenty twenty. Turning to the balance sheet, cash and cash equivalents at the end of the quarter totaled sixty-two million. Our cash flow from operations is strong, totaling one hundred twenty-five million for the nine-month period ended October thirty, twenty twenty-one as we continue to deliver profitable growth and efficiently manage our working capital needs. Total debt at the end of the quarter was three hundred forty-one million, reflecting the new term loan recorded in the prior quarter. As a result of our strong adjusted EBITDA growth and cash generation this quarter, our net debt to adjusted EBITDA was one point zero seven at quarter-end, which is an improvement from one point two two at the end of the second quarter. Inventory at the end of the quarter was one hundred fifty-nine million, compared to one hundred twenty-four million last year and one hundred forty million in the third quarter of twenty nineteen. Excluding in-transit levels, our inventory was slightly down from prior year. Although our available inventory is modestly below optimal levels, we took measures to air freight and feel very comfortable with the inventory levels to meet the consumer demand that is reflected in our fourth quarter forecast. We opened eleven stores in the third quarter, bringing us to a total of six hundred nineteen stores. Turning to our outlook. Although we are very encouraged by the performance thus far in twenty twenty-one, we recognize the industry-wide global supply chain challenges will persist in Q4 and into twenty twenty-two. We are closely monitoring the situation and continuing to take proactive measures to mitigate the impact, including selectively air freighting goods, placing orders earlier, as well as offsetting some of the associated cost pressures by consolidating fabric orders and selectively increasing prices. While we are taking proactive measures to manage our supply chain, many of these initiatives will not begin to benefit until early next year. For the full year, we are narrowing our guidance to a net sales range between one point two nine billion and one point three billion, compared to our prior guidance range of one point two nine billion to one point three one billion. We are also narrowing our outlook for adjusted EBITDA to the higher end of our prior guidance. The range is now two hundred fifty-two million to two hundred fifty-seven million compared to our previous guidance range of two hundred forty-eight million to two hundred fifty-eight million. Our outlook assumes gross profit margin pressure in the fourth quarter resulting from higher transportation, raw material, and labor costs, consistent with our industry peers, as well as elevated promotions related to two potential future inventory delays. Capital expenditures are expected to be approximately twenty-three million for fiscal twenty twenty-one, reflecting roughly twelve new store openings in the fourth quarter or approximately a total of twenty-three new stores in twenty twenty-one. We also plan to close approximately five stores in the fourth quarter. We announced a share repurchase program authorized by our Board of Directors, under which we may repurchase up to one hundred million dollars of our outstanding common stock. Our first priority remains to invest in our business, and we may opportunistically make purchases from time to time depending upon a variety of factors, including share price, corporate and regulatory requirements, and other market and business conditions. We remain confident in our long-term growth outlook and believe this is another tool to enhance our total shareholder return. We will update you on our share repurchases as appropriate. As we look beyond twenty twenty-one, we are excited about the long-term opportunity and we remain focused on executing our strategic growth initiatives. As Liz mentioned, I will continue my role as CFO through the end of the first quarter twenty twenty-two to ensure a smooth transition and will continue to serve as an advisor to the company thereafter. Liz and I have built an incredible relationship during our decade of working together, and this has been a tremendous experience and journey for me. I have every confidence that Torrid has an amazing future and will continue to support the business and its future growth opportunities. With that, I will now open it up for questions and turn it over to the operator.

Operator, Operator

Our first question is from Lorraine Hutchinson with Bank of America. Please go ahead with your question.

Lorraine Hutchinson, Analyst

Thanks. Good afternoon. I just wanted to dig into the source of cost pressures a bit more. Can you quantify the incremental pressure in Q3? And then how are you thinking about that within your guidance range for gross margin in Q4? And looking into the first half, would you expect to be able to offset all of those in the first half? Or do you think you’ll still have some gross margin pressure then?

George Wehlitz, CFO

Yes, Lorraine. So, looking at Q3 to Q4, if we're looking at comparing to twenty twenty, we'll still see some pressures related to store occupancy as we had to bring down abatement last year. We'll see some moderation in the amounts we have related to wage pressures more in Q4, again related to how we purchased and the timeframe in which we purchased them, seeing more of those costs coming into Q4 and we'll see that continue into twenty twenty-two. But from a mitigation standpoint, we are doing that on many fronts related to looking at selected price increases, what we can do with our vendors regarding how we manage production issues and how to consolidate the fabrics. So, a number of initiatives as we said, we have really good relationships with many of our vendors who are partnering with us on controlling those costs.

Lorraine Hutchinson, Analyst

Thanks. And then, can you talk about the performance of e-commerce and stores versus your initial expectations for the third quarter?

George Wehlitz, CFO

Both remain very strong. As we opened stores and the stores have come back online, we have continued to see increased productivity from the stores. Customers are really engaging at the store level; coming back to the store even with all of the COVID-19 challenges, they're craving that interaction. So, we do see them coming back into the stores for that piece, and we still see them engaging online. So, we're very pleased with both channels at this point and how they're performing.

Lorraine Hutchinson, Analyst

Thank you.

Operator, Operator

Our next question is from Kimberly Greenberger with Morgan Stanley. Please proceed with your question. Kimberly, your line is now open.

Kimberly Greenberger, Analyst

Thank you so much. Sorry about that. I wasn't sure that I was entirely clear on the supply chain impacts to revenue in both the third quarter and the fourth quarter. I know you talked about the global issues and the delays, but could you specifically talk about whether you encountered out of stocks? If there were any delays that impacted revenue growth in certain categories? Just any ability to help us understand if it was supply-driven relative to the revenue in the third quarter came in at the low end of your third quarter expectation rather than the high end, was the variance simply out of stocks in certain categories or was there less consumer demand?

George Wehlitz, CFO

Yes. We saw – basically not from consumer demand, we didn't see any pullback from that end of it. It was mostly related to delays in inventory coming in, and we haven't really quantified the exact dollar amount. We do believe that had we had the optimal amount of inventory that we wanted and when we wanted that our sales would have been significantly higher than what we reported at this point. So, it was mostly attributed to the delays, not to consumer pullback.

Kimberly Greenberger, Analyst

Okay. So, it wasn’t necessarily the absence of inventory, just that the inventory came in much later than you expected. And so you didn't get a full opportunity, I guess, to sell it during the quarter. Is that how I should understand it, George?

George Wehlitz, CFO

Correct.

Kimberly Greenberger, Analyst

Okay. Got it. And then is there any sort of quantification you can help us with on the fourth quarter? How much of an impact, if you have an estimation on the supply chain delays, what sort of impact on top line that could have in the fourth quarter? And then just a follow-up to Lorraine’s question on the recovery in stores, how was revenue here in the third quarter in-store compared to Q3 of twenty nineteen? Thanks so much.

George Wehlitz, CFO

Well, I’ll take the last part first. We are seeing, like I said, we still see an increase in productivity in the stores. We are still below twenty-nineteen levels from pre-COVID, but we are seeing an increase in store traffic and performance at this point. Again, exceeding what we expected at this point regarding the stores. So, we're very pleased with the traffic that's coming through and her experience in the stores at this point.

Kimberly Greenberger, Analyst

Thank you.

Operator, Operator

Our next question is from Oliver Chen with Cowen. Please proceed with your question.

Oliver Chen, Analyst

Hi, thank you. We were curious about the classifications or parts of the assortment that were most impacted by the supply chain issues that you mentioned. You also mentioned promotions having guidance that incorporates the potential from promotions. What do you see happening in terms of different levers or frameworks you're thinking about in those different scenarios, and which you may need to execute that? And the third question, air freight. I know you strategically moved it, but how did you decide what was prudent as you balance the incremental costs in the air freight relative to the sales opportunity and what you chose to do there? Thank you.

George Wehlitz, CFO

I'll take the air freight one first. We looked across the board related to the cost of air freight, especially in light of the increases we were seeing in air freight in addition to ocean freight. Taking a look at what products made the most sense relative to how much the value of what that product is versus the cost of the air freight coming in, as well as if we had orders, we potentially just looked at air freighting a portion of the orders that we've had some of the products here to sell and then backfill with the ocean freight coming into it. But a lot of the product was related to current products, and then we did selectively do some denim as well, but we can’t do all categories the same. We looked at each category and product line separately to make sure we're maximizing the impact of what that freight cost would be for air and ensuring that we had available goods as appropriate in the stores.

Liz Muñoz, CEO

As far as delays to the product, it was relatively widespread. The categories that we focused the most attention on regarding delays were intimates, specifically bras; denim, there were delays involved. I think one of the categories that was probably hit a little harder on delays was shoes and accessories. But we sort of thought across the board. What we intend to do for Q4 as product comes in is obviously focus on products that may be seasonal, whether it's cozy or things like that that we want to ensure are being managed well. But yes, overall, it has been sort of across all categories. I think what is an upside for Torrid is because we make every single thing in her closet, we are, I think, less impacted by delays because what we offer her is so widespread.

Oliver Chen, Analyst

Okay. And on the promotions you discussed for Q4. So, yeah, we'll selectively look at the promotions related to truly seasonal goods, but I think we're very happy with how we’re getting our inventory and positioning ourselves as we go into Q1, and being very strategic about how we're doing promotions to try to mitigate as much of that product as possible that might have a shorter shelf life regarding seasonal goods. Okay. Our last question, there've been a lot of privacy changes in digital marketing and third-party data in IDSA. What are you seeing with customer acquisition costs and any trends we should know about with returns on ad spend? And perhaps in light of the near-term issues you're seeing with supply chain as well? Thank you.

George Wehlitz, CFO

So, we have seen an increase and expected an increase, especially going into Q4 related to customer acquisition costs, and have not seen anything significantly from what we actually have planned for at this point, but we did plan for an increase in Q4 and are looking at that as we move forward.

Liz Muñoz, CEO

And that historically happens as more of the traditional retailers that really rely on Q4 to be a much bigger part of their business do spend a lot of money in Q4 in marketing. So they sort of drive the overall spend. The good news for us is that we don't rely on Q4 like a lot of the others do. So, it's not as a bigger deal for us on the increase, but Q4 always just costs more to market in general.

Oliver Chen, Analyst

Thank you very much and George, best regards on the next steps. Great working with you.

George Wehlitz, CFO

Thanks, Oliver.

Liz Muñoz, CEO

Thanks, Oliver.

Operator, Operator

Our next question is from Dylan Carden with William Blair. Please proceed with your question.

Dylan Carden, Analyst

Yes. Thanks. I just wanted to do a little deeper under the promotion commentary. Is the guidance here that promotions tick up in the fourth quarter? And I guess, given the quarter is not as big from a holiday standpoint, why that might be if that is the case? But even just from a strategic standpoint, it looks like promotions are running in line with where they had been historically in an environment where a lot of people have been able to pull back more meaningfully on that just, kind of given your strong engagement with the customer, why that might be and just generally what the strategy is with promotions in the back half. Thanks.

George Wehlitz, CFO

Sure. I'll start off with part of that. In Q4 specifically, promotional activity is higher. Again, we don't necessarily play the same seasonal issues that other retailers have, but we do have to play in the arena of Black Friday and Cyber Monday events. That promotional activity is typically deeper and that does reduce the increases of promotional rate for that quarter compared to other quarters. But it's not a new anomaly for us as we're having to play with the bigger broader macro issues there. And then from a promotion standpoint, in general, we do use it as we've said more of a customer engagement tool, trying to keep her engaged along the way in that journey of what we're doing. So, Liz you want to add to that?

Liz Muñoz, CEO

Yes. I think it's just important to get that point across. George made it that we use promotions in a different way. We don't necessarily use promotions to drive product that's not working. We use them as an engagement tool because our customer is highly engaged. She remembers what we did the year before and has certain expectations about what we're going to do. We just follow along with that because it is an important part of how we keep her connected with the brand.

Dylan Carden, Analyst

Okay. Thanks a lot.

Liz Muñoz, CEO

Welcome.

Operator, Operator

Our next question is from Brooke Roach with Goldman Sachs. Please proceed with your question.

Brooke Roach, Analyst

Good afternoon and thank you so much for taking our question. Liz, George, I wonder if we could discuss a little bit the sequential cadence of sales that you saw throughout the quarter relative to twenty nineteen levels and maybe any early reads that you have on holiday? How strong was that consumer engagement throughout October and into November?

George Wehlitz, CFO

Brooke, regarding our customer engagement, it was strong throughout the quarter in general. We're very happy with how she engaged in the frequency and amount of her spending in Q3 overall. And going into Q4, related to promotional activity, we are pleased with what we did before Black Friday through Cyber Monday, and that's built into our updated guidance for Q4. Again, we have not seen a pullback in her spend, and she's still engaged with Torrid and continues to spend.

Brooke Roach, Analyst

Thank you. And then as we think about some of the input cost increases that are coming down the pipeline across the entire industry into next year, can you discuss a little bit how you're thinking about how the first half might play out as you think about the continued supply chain challenges, the increased input costs, and the pricing initiatives that you have for the brand? Thank you.

Liz Muñoz, CEO

One of the things that's important to note is that Torrid has a long legacy of addressing price increases. So, we do have a good format and system that we like. We always approach pricing from a customer value perspective, and we tend to look at price increases from a garment to garment perspective. We do think there are opportunities there, and there are areas where we can build increased price. I will tell you that since I've been here eleven years, we have increased pricing on categories year-over-year. For example, when I first started here eleven years ago, the opening price point on blue jeans was thirty-eight to forty-eight dollars; today it’s seventy-eight to eighty-eight. And I can tell you that's sort of across the board.

George Wehlitz, CFO

As we go into twenty twenty-two, we'll still see some of these inflationary pressures continuing into twenty twenty-two. As Liz talked about, we are utilizing some of these offsets as we go into twenty-two and will see some of these take effect in early to late twenty twenty-two, as well as related to the actual, looking at our guidance, we’re actually providing guidance for twenty twenty-two during our Q4 earnings call.

Mark Altschwager, Analyst

Thank you.

George Wehlitz, CFO

Thank you.

Operator, Operator

Our final question is from Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Dana Telsey, Analyst

Good afternoon, everyone. Can you give a little more color on the real estate area lately? Are you still on track? I believe it was twenty-five stores; how are you thinking about next year and real estate cost and the opportunity for expense leverage? Thank you.

George Wehlitz, CFO

Sure, Dana. From a real estate perspective, we are currently on track with twenty-three, twenty-five just with construction delays; there could be some stores that fall into the early part of twenty twenty-two. But we are on track with what we had thought we would do as far as the number of store locations. Looking at twenty twenty-two, we're probably looking at a similar number of around approximately twenty-five stores. We're very happy with the new stores that have started out related to how they opened. Their grand opening performance and customer reaction have been very positive, even actually better than our pre-COVID openings, both from a sales perspective and from a new customer acquisition perspective. So, we're very happy with how our new stores are performing, and we're pleased with our existing fleet as well, with over ninety percent of our existing fleet being EBITDA positive at this point.

Dana Telsey, Analyst

Okay. And then one follow-up. In particular regarding the inflation dynamics, cotton, how important is that for you? And then was there anything you want to expand on with any of the newer categories, footwear, special occasion, or scrubs that would be of interest beyond the internet? Thank you.

Liz Muñoz, CEO

Yes. So, cotton is not as big of a fiber for us as it might be for other companies. I think it's only in the three percent range of our products being cotton-heavy. So, we haven't seen a specific impact regarding cotton. We're seeing price challenges sort of across the board, cotton not necessarily being the biggest or most meaningful. Denim, where we have cotton, I'm sure there's lots of opportunities for driving higher prices just because our customer sees so much value specifically in cotton and in tees where it's mostly located. As for new categories, we have seen a really, really good business and response from the customer regarding our shoes. We've spent years building our shoes, putting reinforcements in for stability and cushion for this larger customer, and frankly wide widths are very, very difficult to come by. So, we're excited about what we've accomplished there and believe there's more opportunity. We also think there's more opportunity with collaborations that drive excitement and engagement with the brand, and we currently have a couple on our website today that we believe have performed very well. And I would say regarding scrubs, we did a test. We know that we are not experts in the world of scrubs. So, we put a test out there to learn more about what the customer wants and doesn't want. We know that we can deliver on fit, and we want to ensure that the fabric we create is genuinely meaningful for her, so you will see scrubs continuing to come forward, and we’ve received excitement from our customers regarding that offering. And with special occasions, we will look into ensuring that we have, even if just a few wedding dresses for her as weddings ramp up in the back half of the year, as well as other items that she can wear to parties and occasions.

Oliver Chen, Analyst

Thank you.

Liz Muñoz, CEO

Thank you.

Operator, Operator

We have reached the end of the question-and-answer session, and I will now turn the call over to Elizabeth Muñoz for closing remarks.

Liz Muñoz, CEO

I just want to thank everyone on the call for your interest in this brand. We continue to be very excited about the future of Torrid, what we're doing for the customer, how we are changing her life, how excited she is about, not only our brands, but our stores and what we do for her. So, we look forward to more discussions with all of you. And again, thank you so much for joining our call. We’ll see you soon.

Operator, Operator

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.