Greetings, and welcome to Torrid Holdings Third Quarter Fiscal 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. It is now my pleasure to introduce your host Vince Adams, SVP, Finance. Thank you, Vince. You may begin.

Good afternoon, everyone. Thank you for joining Torrid’s call today to discuss third quarter financial results for 2022, 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; and Tim Martin, Chief Operating Officer and 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 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 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, Vince. Good afternoon, everyone, and thanks for joining us for a discussion of our third quarter results. I'd like to start the call by recognizing the Torrid team for their continued dedication towards the business as we face a choppy macroeconomic backdrop. Despite external pressures, we've remained steadfast in our goal to deliver exceptional product, anchored on our world-class fit. I'd also like to officially introduce Tim Martin, who is joining today's call as our Chief Operating Officer and Chief Financial Officer. Tim brings a wealth of experience to Torrid and he will be instrumental in helping us deliver on our strategic priorities. I look forward to you learning more about Tim and Torrid as we move forward. Now moving into our third quarter results. Despite the challenging environment in late Q3, our net sales and adjusted EBITDA were within our expectations. During the quarter, we saw the customer respond favorably to new product introductions, including the launch of our Studio line of wear-to-work styles. However, similar to the trends experienced at other retailers, we saw a slowdown in consumer demand during the month of October that coincided with our Torrid Cash event, which typically makes up a large portion of quarterly sales. As a result of this softness, the comparable Torrid Cash event was down double digits versus last year and prior quarters, which negatively impacted performance. As we worked to right-size our inventory levels in the third quarter, we added incremental discounts and promotions, which pressured margins. We were able to make headway clearing through inventory, ending the quarter with total inventory of 25% from last year. While this was a significant improvement relative to the second quarter, it is still somewhat higher than we would like, primarily due to the softer demand we experienced late in…

Thank you, Lisa, and good afternoon, everyone. I'm incredibly excited to be joining the company as Torrid's Chief Operating Officer and Chief Financial Officer. Torrid is an amazing brand with strong potential, and I look forward to being part of its success. We have a significant opportunity for growth, and I am happy to be working with Lisa and the Torrid team as we strive to consistently deliver on the company's potential. I will begin with a detailed discussion of our financial results followed by an update on our outlook for the rest of the year. Starting with the third quarter results. Net sales came in at the low end of our guidance at $290 million, which was down 5% compared to $306 million last year. Comparable sales in the quarter declined 8% compared to a 14% increase in the third quarter of 2021. As a further comparable, we were up 9% to the 2019. Similar to trends reported at other retailers, we experienced a slowdown during the month of October. This coincided with the timing of our quarterly Torrid Cash event, which negatively impacted our third quarter results. However, we were pleased to see our customer respond favorably to new product offerings during the quarter, including the Studio collection, and demand early in the quarter was more in line with our expectations. Gross profit for the third quarter was $92 million or 31.6% of net sales. This compares to $125 million or 40.9% of net sales in the third quarter of last year. During the quarter, we continued to focus on rightsizing our inventory levels, which resulted in an increase in discounts and promotions over the last year. Approximately, 850 basis points of the decline was due to higher discounts and promotions to clear inventory. The remainder of the…

Thank you. [Operator Instructions] Our first question is from Oliver Chen with Cowen. Please proceed with your question.

Hi, thanks very much, Lisa and Tim. On the inventory situation now, what are the main strategies to clear through it? And also, is there a risk in terms of the depth of promotions you may need to take? What are you seeing in the consumer environment that give you a conviction, you can get through it? As we look ahead to modeling inventory in the new year, would love your take on how you see that in terms of the growth rate relative to sales? And then the second question, Lisa, zooming out, what's your hypothesis for driving greater consistency in terms of what the brand and/or strategies may need to take place for that to happen? And Tim lastly on the debt, what's your target ratio? Would love your refreshment on your priorities in terms of the debt level and the debt to EBITDA ratio you seek to maintain. Thank you very much.

Okay, thanks, Oliver. I'll start with the inventory question. Our aging on our inventory is actually very, very positive, meaning we have very current inventory. There is a lot of moving pieces with inventory, particularly the only bulk of inventory that has a long trajectory in terms of clearing is basics, and that's primarily basics in bras and denim and other bottoms. And we are, of course, not promoting that heavily and not burning down that inventory, but we'll land the plane on that and feel comfortable that we can manage that appropriately. The other increase in inventory is actually receiving our spring product in the correct timetable, because last year, we consider a resort, which is just setting the stores to be a spring line and so we count that in our spring inventory. So, we receded that on time and we're receding spring one, which will set the end of December on time as well. And so, last year, those lines were late. So, I'm not worried about the timeliness of managing the inventory. We are just very committed to making sure that we stay on top of it and that we turn it quickly. I think actually the opportunity for us is we are much cleaner than we've been all year, and the inventory is very current, and that we can moderate promotions as we move forward. So, I don't actually expect in the first quarter to have to accelerate any more than we have, and I think that we have some possibility of being able to moderate that as we deliver a new product and have the customer respond to that. But overall, with inventory, I'm comfortable with the aging. It's actually quite clean. There's moving pieces associated with it. We're just committed to making sure…

So, last one over to me. So, Oliver, to also answer a little bit of the question you had on inventory, we believe our guidance appropriately reflects any of the promotional activity we’ll need to do in the fourth quarter to keep that inventory as clean as Lisa mentioned and position us for success going into the first quarter of 2023, which kind of dovetails into the conversation around debt levels. We can generate as a business pretty healthy returns on operating cash flows when our working capital and inventory are aligned with sales and demand. As such, we're going to generate a lot of free cash flow in the future of this business. We'll look to invest that in the growth opportunities that we see. We have a significant amount of incremental store opportunities both in Canada and the U.S. that we’ll want to invest in and continue to grow this business at the appropriate times, and we also will look at investing in technology where necessary or other things to bring the customer experience to a higher level. As such, though, we are comfortable with our overall debt level at this point in time and I don't see any need to do anything in the short term to do that. But if we have extra cash flow beyond our investment capability to grow the business, we'll look at doing something at that time.

Thank you. Happy holidays. Best regards.

Thank you as well.

Thank you.

Thank you. Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Hi everyone. Can you expand upon the customer base and the improving retention? Where are you now in terms of retention? How does it look? Does it look different online versus in-store? And can you expand on the product conversion into different categories? It sounds like the Studio collection got a strong response too. What are you seeing in the other categories? And lastly, with the impact of inflation, what are you seeing both on a channel basis and regionally with your core customers? How does it differ? Thank you.

Thanks, Dana. I'll just talk generally. As we have an approach to our customer -- I spoke about it before, and we're maintaining a consistent approach here as we have new customer acquisition that we pay attention to retention and frequency and reactivation. We talked on the prepared remarks that our reactivation campaigns continue to yield very positive results. Our retention numbers are actually quite strong. And we do think we can improve that a couple of hundred basis points as we move into next year. And what we're trying to do in addition to retention is to build frequency. What we found and what we know is that every time we have a launch like Studio, like Festi, like a new bra offering that, that engages our core customer at the highest levels and drives them to build frequency. So next year, we have a multiple launch plan that will have launches -- four to five major launches throughout the year of new product categories that really do drive frequency with that core customer. And then on the new customer piece, it's -- as we mentioned in the remarks, it's primarily driven through store acquisition, that's the healthiest piece of that. But we are also -- we also have new customer acquisitions that will be driven through a digital campaign next year as well. So, happy with the retention overall, building frequency among those customers and focused on reactivation in the short term. But next year, we'll continue with a full 360-degree approach to building that customer file and maintaining the quality of that customer. On the product conversion, I think I spoke a little bit to that in terms of new product. Yes, Studio works very well for us. It continues to work well. I'm very happy with…

Thank you.

Thanks, Dana

Thank you. Our next question is from Lorraine Hutchinson with Bank of America. Please proceed with your question.

Hi. This is Alice Xiao on for Lorraine Hutchinson. Thanks for taking our question. I had a quick follow-up on Oliver's question. Can you give us a more detailed breakdown of your inventory composition, and just percentages of inventory in each category, whether it's basics, evergreens versus fashion versus things you need to clear? And then secondly, on the upgrade -- updated development process you mentioned just now, how much are you leaving open to chase in 1Q versus what you normally would leave open to chase? Thank you.

Yes. I'll take the first portion. We don't break out the total detail level of inventory. As Lisa mentioned, what we've seen we’re the deepest in right now are things that are mostly basics and evergreen categories that we have the time to work through. We are very clean on seasonal and liability product. So, we're confident that we're going to continue to maintain that and that's what we're very much focused on. I'll turn it to you. Do you want the rest of the question?

On the development process, we are leaving -- I'm not going to go into percentages, but we're leaving more open on a liquid basis in order to test and react. We also are testing products in the third quarter with the idea of reordering that product into subsequent quarters. So, it's -- there's a quick turn aspect of the liquidity. And then there's also a test and then holding liquidity later as we get the results of those tests to buy into those specific categories. So, it's a multipronged approach. I'm comfortable with the amount that we have opened at this point. And our sourcing team is working diligently and finding opportunities for us to be more efficient and react more quickly to some of these wins.

Thank you. And then lastly, does the updated guidance for sales really assume performance kind of in line with the exit rate? Or are you contemplating any more sort of incremental macroeconomic pressure?

I would say that our guidance contemplates a couple of different things. One is the trend that we've seen going through the third quarter, the uncertainty of the overall macroeconomic environment, and our desire to maintain cleanliness in our inventory position and set us up for 2023 that we're pretty optimistic about where our product development as we roll into spring will position us for.

Thank you.

Thank you. Our next question is from Mark Altschwager with Baird. Please proceed with your question.

Hi. This is Amy Teske on for Mark. Thank you for taking our questions. Can you give us any commentary on your Black Friday performance and how that informs your view on the holiday season? And then, with respect to the updated guidance, what are the underlying assumptions that you've baked in for January as you cycle last year's supply chain disruptions?

I'll take the first part of the question related to Black Friday. What we did see is, as Lisa mentioned, we are seeing the customer respond to some of the newness. Unfortunately, given our inventory position, we were still very promotional throughout the holiday. We did see actually a pretty surprising and slightly better-than-we-expected response in store. But I think as Lisa mentioned, the way the new product is resonating in the stores has been well received by the customer. But again, we had to be highly promotional to continue to clear through product. Our January expectations are that the trends that we've been dealing with over the last quarter would retain itself through the holiday, less around the supply chain disruption that really didn't impact us all that much as a comparable benefit. So, we've kind of just assumed basically the current trend of the business will carry forward in our guidance.

Okay. Thank you. And then if I could ask one more. When you're approaching 2023 internally, what scenarios are you baking into your operational planning?

Sorry, can you repeat that question? I just want to make sure I followed you.

Yes. So not asking about 2023 guidance, but when you're approaching the year internally, what macro scenarios are you baking into your operational planning?

We maintain as much flexibility as we can right now with the -- given the uncertainties in the overall macroeconomic environment. We're going to continue to focus on maintaining our inventory investments in line with the demand trends. And as Lisa mentioned, by keeping a little bit more open in our open-to-buy process, it allows us flexibility to throttle up or throttle back as needed to react to the demand.

Okay. Thank you.

Sure.

Thank you. Our next question is from Alex Stratton with Morgan Stanley. Please proceed with your question.

Hi. This is [indiscernible] on for Alex Stratton. Thank you for taking my question. I was wondering how you view the health of the consumer. Are you seeing maybe any different impacts in terms of income level? And are you seeing any signs of trade down? Thank you.

For the first two quarters of '22, we only saw an impact to our lower income customer and that was pretty consistent. And for the first time in the third quarter, we saw an impact throughout all income levels. I don't have the data for fourth quarter, but we'll talk about that as we move -- at our next call. But for the first time, as I mentioned, in third quarter, we did see it impact all income levels.

And then to answer your question about if the customer is trading down, we have not seen them actively trading down when the product is right and they're responding to the newness. We've seen some strong response there regardless of price. However, we have been so highly promotional that our average unit retail is lower than it has been historically. So, she hasn't actually had the trade down.

Thank you.

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

Thanks, everyone, for joining us on this call. We look forward to returning on the fourth quarter and full year call. And I want to wish everyone a happy holiday season. So, thanks so much.

All the best to you and yours.

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