Greetings. Welcome to Torrid Holdings, Incorporated Fourth Quarter Fiscal 2022 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Paula Dempsey, Senior Vice President of Finance and Investor Relations. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining Torrid's call today to discuss the fourth quarter and fiscal year 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 include, but are not limited to, statements containing the words expect, believe, plan, will, may, should, estimate and some other expressions. All forward-looking statements are based on current expectations and assumptions as of today, March 23, 2023. These statements are subject to 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. 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, Paula. Good afternoon, everyone, and thank you for joining us for a discussion of our fourth quarter and full year results. Before I begin, I'd like to thank the Torrid team for their dedication in providing our customers with exciting new products and a compelling customer experience. We've navigated a year of retail challenges with new leadership in many parts of the organization, elevated inventory levels resulting in a higher promotional environment and decreased customer discretionary spend. Despite all of this, the team has accomplished a great deal in a short time. I believe that the changes we've made have been essential to reignite profitable long-term growth. I'm also very happy to announce the return of Mark Mizicko to Torrid as Chief Commercial Officer. Mark previously served as the Chief Operational Officer of Torrid back in 2016. And prior to that, he served us as Chief Planning Officer of both Hot Topic and Torrid. He brings a wealth of experience and expertise in retailing and we are excited to have him rejoin the team. Mark will be leading all aspects of margin optimization, inventory planning and buying as well as working with Vivian Alhorn, our Chief Marketing Officer on marketing and e-commerce activities. Essentially focusing on all things that drive product sales for the company, we believe that with Liz Munoz focused on design, Vivian's expertise in marketing and e-commerce, my involvement in product selection as well as Mark's leadership of inventory planning, marketing, e-commerce and planning functions we have a strong team focused on delivering the very best product for our customers. Now moving into our fourth quarter performance. We delivered net sales at the upper end of our guidance range. Customers responded favorably to our Black Friday and Cyber Monday events, taking the pressure off to our…

Thank you, Lisa, and good afternoon to all of you. Before I begin, I'd like to recognize the Torrid team for how much they've accomplished while navigating through uncertainties associated with all the changes they dealt with this past year. We implemented operational and strategic changes that have improved the foundational health of our business, and we focused on controlling what we can control. I believe that the changes we made will allow us to increase shareholder value and deliver long-term growth. I would like to begin by highlighting the accounting policy change that you may have seen in today's press release. In the fourth quarter of fiscal 2022, we made a voluntary change in our accounting policy regarding the classification of private label credit card funds. Historically, we recorded PLCC funds as a reduction to SG&A expenses. Under the new policy, we record PLCC in net sales, and all metrics reported using net sales will be impacted. We believe the recognition of the PLCC funds in net sales is preferable because it will enhance the comparability of our financial statements with those of many of our industry peers and provide greater transparency into the performance metrics related to our industry. This reclassification has been retrospectively applied to all periods discussed in today's prepared remarks. I will now provide a detailed discussion of our financial results followed by our outlook. Starting with the fourth quarter results. Net sales came in at $301 million compared to $318 million last year. Comparable sales in the quarter declined 5.4%. We had a strong start to the quarter as customers were eager to shop doing our Black Friday and Cyber Monday events, which took the pressure off our Torrid cash event later in the quarter. Gross profit for the fourth quarter was $96 million…

[Operator Instructions] Our first question is from Lorraine Hutchinson with Bank of America. Please proceed.

Thanks. Good afternoon. I wanted to follow up on the changes you're making to Torrid cash. Have you been able to test these? And what's the customer reaction look like?

So we've just tested our -- we're in the midst of testing our first shift in the first quarter. So normally, we would have the redemption rate towards the end of the quarter. This year, we've had an earlier toward cash redemption time period about, I guess, 10 days ago, it ended, and we'll have another one towards the end of the quarter. A lot of the shipping for that redemption rate will happen and move end of the second quarter. So we'll have a better indication of how we see that moving forward. Lorraine, I would say that we're offsetting kind of the historical strength of the Torrid Cash program, which has softened in the last year with other types of promotional stories for the customer. And we've been testing many of these over the past since I arrived at the company, hampered a bit by the large inventory position that we had last year. But have accumulated a lot of very positive learnings in terms of how to promote and then compel the customer at a much more positive and healthy gross margin return on that. And so one of the reasons we're bringing -- I'm very excited about bringing Mark into the company as he has an extensive amount of experience and not just inventory management and planning but also in margin optimization through these promotional elements. So, more to come on this, but what we've done is really this year, mitigated the risk of the program as we saw it softening over time by switching it to fix smaller time period and also augmenting that with other promotional activity that has been very margin accretive at this point in the testing stage.

Thank you. And then on the gross margin front, can you speak a bit about the product cost inflation that you expect and any transportation savings that you think will flow through this year.

Sure. So we do feel that and have plans that we will have some recovery in gross margin this year. As we are moving towards the back of the year, we're starting to see some improvement in first cost on product, and we're also starting to see some improvement as we have been seeing and we'll continue to see in freight. But that is an inbound freight and outbound freight related to customer delivery is still growing and expanding. So it offsets some level of that. But we are seeing some improvement in costing. We also brought in a new SVP of product development and sourcing last year. And his strategies are in terms of new vendor bases and new country of origins that have the quality that we expect are being able to be integrated into our sourcing strategies and those are also helping our cost of goods as we move forward.

Thank you.

Thank you.

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

Good afternoon, everyone. And nice to see the progress that you're making. Can you give us an update on the Studio line, what you've seen from the Studio line, how it's performing relative to your expectations? And as you went through the fourth quarter, how was the exit rate? And Lisa, how would you define the health of the consumer? And then just lastly, with the SG&A uptick slightly, how do you think of that cadence through the year if you unpack the measures of the margins going forward? Thank you.

Thank you, Dana. We're really pleased with how Studio is performing. The core product there for core fabrication is [funky], but we also have four to five other fabrics that we've been testing and that will become part of the core assortment of that line. We are expanding as we move forward and adding polished denim, or studio denim in that line, some what I would call studio streetwear. So very happy. We see any time that we introduce a new idea is very compelling to our customer. It drives frequency, it drives conversion and a need to need that she absolutely has -- so that's exciting. We have learning in it now, and that's a woman blend, and that's doing well in addition to that. So great launch and more opportunity as we move forward. I'm not quite sure your second question about the fourth quarter. Can you?

The cadence of the quarter, how are you seeing the health of the consumer as the quarter ended? Or any update on how the consumer is?

Sure. So what we've seen is some positive momentum over the fourth quarter back to stores, which was very exciting. And at the beginning of this quarter, we also saw an improvement in store traffic. It has become choppy in the last couple of weeks, but we -- there's a lot of seasonality and lots of different conversations that could be had about that. But some really nice green shoots in terms of the customers' recovery and return to the stores. That, combined with our focus in the stores on customer acquisition and getting that customer to the dressing room. So -- and tracking conversion rates in the stores in conjunction with traffic, we're seeing some nice improvement there. And the focus of getting the customers to addressing room, the conversion rate almost doubles what you get a customer in the dressing room. And so we've done some additional training in the stores and onboarding in the stores that really focuses on that customer journey, and we're seeing some very positive reaction from that, both from customer acquisition as well as conversion. Again, nice positive shoots a little bit choppy on the store return. And actually, we're seeing some -- now we had a little bit of softness online, I think as a lot of people have discussed and we're seeing a bit more of a shift back online. Again, we look at it as an omni customer, and we baked in what we think are the most likely scenarios for this year with, again, one more year of really having a lot of moving pieces on the macro front that could have an impact at any time. And so really managing this as Tim says, controlling the controllables and being nimble and aggressive and a multi-tier environment. So I'm happy with some of the things we're seeing, looking for margin recovery this year, really thinking about that done in 2 steps on the merch margin side. And then I'll let Tim who always love to talk to me about SG&A, tell you about SG&A.

Dana, from an SG&A perspective, I think on a full year basis, we are going to see a slight deleveraging just because of the return of incentive compensation, although we're going to do everything we can to mitigate that over time. I think you'll see that start to improve itself by the back half of the year as we expect that the sales velocity in the back half will be better than the front half. We are still seeing a lot of the same things that other retailers talking about around wage pressure in stores and things like that. But we are focusing on a lot of efficiency activity around how we staff our stores, how we staff and run our distribution centers overall costing programs in terms of understanding how we source non-merch procurement, and my goal is to drive that number down as we talked about controlling the controllables and find a way to drive leverage in that number.

Got it. Thank you.

Thanks Dana.

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

Good afternoon. Thank you for taking my question. I guess, first, with respect to the revenue guidance, it does imply a strengthening trend as we move through the year. Can you talk a little bit more about what's giving you the confidence there? And key drivers you'd call out aside from the timing of the store openings and the 53rd week as you mentioned? And then just also on the revenues, any color on your underlying expectations on customer growth versus spend per customer?

So we do expect that we will have easier comparisons, by the way, in the second half of the year. The new store growth will be an opportunity. And then we're seeing that we're getting more and more receptivity to new product launches, and I think we're excited about sort of what we're going to see that contribute over the course of the year. So it's a combination of all of those things. So the easier comparison being one of the major aspects of it.

Okay, thank you. And then on gross margin for the fourth quarter, results were a little bit better than we were looking for and it seems like you beat perhaps your plans. I know the quarter was really about clearing the inventory to set you up for a better 2023, but curious what drove the upside or the better trend maybe than expected in the fourth quarter? And if there's, any takeaways from some of the test and learning that you're doing on new promotional tactics that you would call out?

I think that it was less - there was less pressure to clear than there had been in third quarter, number one. So - and because receipts mitigated at the end of the year. We really had our early spring receipts as we mentioned in the body of the comments. We also are starting to see some positive movement in gross margin efforts. So some of the promotional and marketing strategies that we have put in place are starting see some leverage in gross margin. And so, I think the rate was slightly better than we anticipated. And that - just by smidge, but we're still making better progress and less of a delta on a year-over-year quarterly gross margin basis. So I think - the nice news on that is some - for us internally some when we didn't have the excess inventory that was overwhelming at the level of business we are actually able to employ some of our strategies to see some margin improvement and that's positive as we move forward.

Great, thank you for all the detail.

Thank you.

Our next question is from Corey Tarlowe with Jefferies. Please proceed.

Hi, good afternoon and thanks for taking my questions. So Lisa, I wanted to ask you on new customer acquisition, you have clearly emphasized that stores serve as a great way to acquire new customers. But I'm just curious over the last quarter, what has worked from a marketing or product perspective obviously outside of stores that has really helped to drive some new customers into the Torrid brand?

So, we look at the total customer file and one of the big successes we had last year was customers who have lapsed bringing them back to the brand. And so that was a growth area for us in the customer on scenario. We've also just - this didn't really apply as much to last year, but some of the nice things that we're seeing early this year, as we've just switched to a new digital marketing agency with a very clear strategic direction to build customer file throughout all categories, reactivation of new customers and then focus on retention and frequency as well. And we're feeling like we're on the right path in terms of doing that. But to your point in reinforcing what we said in the call, what has really worked for this business over many years is the customer experience that she has in the dressing room in the stores as a new customer, her conversion into an omni customer and the incredible lifetime value and dedication that customer has with very high retention rates. And that is fundamentally the underlying philosophy of this business of this organization. Definitely omni, the most effective, most productive opportunity for us to acquire new customers, retain them and build frequency is through the store experience. All of our data on the customer experience in the stores is the highest I've ever seen in the retail environment. And that opportunity to get her in the dressing room and double the regular store conversion rate by getting her in there. And then the long focused marketing strategy is to build frequency are really the strategy that we're moving forward. And move that customer quickly to an omni environment, because they do spend more as an omni customer. So that's simply is the story. And by moving from I think when I walk in the door, there's a - all of the focus in marketing was top of funnel awareness and on consideration, moving that to a much more robust 360 degree focus that starts with the journey that the customer has primarily in store. So we'll start opening more stores this year and we will accelerate that as we move into following years. We have all of the data that we need to indicate, that this is a very sound business strategy for us as we move forward. And we're going to go into this very thoughtfully, strategically with a test and react mentality as we do this, but I'm feeling excited about the opportunity, the runway that we can build by reigniting this method that we've used historically and the brand to drive the growth of the brand. That was a big answer to your question, Corey. So I hope - I answered what you wanted to hear.

Yes, thank you very much, that's very helpful. And then just, Tim, we've talked about controlling the controllables. I know that, that is your focus. And I recognize there's a lot that you probably couldn't control at the onset of COVID, and now there's probably a little bit more in your control now than there has been in quite some time. But as you think about what you can control and you think about prioritizing those actions that you need to take, how do you think about ranking some of those aspects that - you have on your priority list?

Yes. I think we look at sort of the biggest and the best bank for our buck and that's always going to be managing inventory and how we buy, rank and sell through the product. That's always going to be the biggest contribution to profitability and growth of this business. I think overall, we're also going to dig into every aspect within SG&A. We're going to look at how we staff our stores, how we're compensating our store associates, how efficient we can be in the distribution center and how we can drive efficiencies to leverage SG&A - the lowest possible sales volume as possible. So, we're taking a look at pretty much everything, how we buy bags in stores, how we're doing distribution of store supplies. Basically, everything and anything that is driving cost in the organization or causing inflationary cost pressure we're going to take a look at.

Great. That's very helpful. Thank you very much and best of luck.

Sure.

Thanks.

Our next question is from Jonna Kim with TD Cowen. Please proceed.

Thank you for taking my question. Just curious what you're assuming in terms of the promotional environment in your guidance? And also, as you continue to open new stores, have you noticed any difference in the store ramp and performance of your new stores versus historical levels? And how do you think about store productivity as you continue to open stores? Thank you.

Right, so as we considered this year, we realized we were coming off of a very aggressive promotional environment due to the inventory scenario that we had at the company. So, we're taking a measured approach. We don't think we can just pull the rug out from under the customer that we have to be compelling from a promotional story, but we're also focused on mitigating that over time with smaller events and more margin-rich events as we move forward. And then again, of course, inventory management will help control that promotional environment as well. So we're focused on all of those, things. We don't have - we haven't opened a lot of stores in the last four years. So COVID to now, we really haven't been opening a lot of stores. The stores that we are opening and the performance that we're seeing for new stores are very, very healthy. Our ramps, we basically don't have a ramp. Our ramp is very, very fast on stores. And our new - of the limited number of new stores that we've opened, they are hitting or beating their pro forma. So we're happy with that.

Got it, thank you.

Thank you.

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

Thanks. I guess a sign-up on that one on the promo, I mean, I kind of understand that, but there's a lot of margin to put back into the business for just stabilizing gross margin from a promotional standpoint? I mean what's the risk that you kind of after two years, did that customer fully used to a more promotional business like you?

So we're pulling back this year, to be clear. What I said is we're pulling back and being more, I would say, surgical amounted and that because we don't have an inventory issue that we are not, having to be highly promotional. The other thing that's going to make a difference for us as we move forward is really fundamentally how we by product, by channel, how we rank product and using all the analytics that we have at our disposal to make better inventory investment choices based on customer behavior. So the quality of the inventory and the channel assortment of the inventory, the overall investment, combined with much more surgical promotional cadence is a combination of how we see moving forward. So we think we'll have a level of recovery this year, and then we should be back next year in due time to some historical merch margins. So it's - we're not trying to get it all back in one year, but we also are telling a different promotional story than we had been telling and managing inventory more appropriately by channel, which allows us to pull back on the promotional messages as well.

So the offset then as it relates to kind of the language around gross margin guidance for the year would be input inflation, cost inflation?

I'm sorry, I don't want to - could you ask that again?

Yes, so there is - so I thought that the gross margin commentary is more or less a stabilization of gross margin. And so, I guess if you are pulling back even to some extent on promotional activity, why you wouldn't expect to give - why there would it be more flow through the gross margin?

There is flow through the gross margin. We're just mitigating that to make sure that we're not - that we are up against a highly promotional year. We don't think we're going to get it all back in one year, and we're doing - we're thinking about the recovery over a two-year period. The question is now quickly that comes through. And then - and we also, I would say, have factored in - is a variable related to an uncertain economic situation. And so, there is - a balance between what we've invested, margin recovery and some, I guess, some hedge against macro environment an economic issues. Does that make sense?

So gross margin, yes, I think I just misunderstood the language around the commentary for gross margin?

Gross margin - expands this year.

Yes, we do expect expansion in gross margins.

And no - okay. I'll take that offline. And my actual question was more along the lines. So it sounds like sort of inventory is a big piece of the recovery this year. Is that are you increasing the frequency of newness? How are you thinking about kind of like the architecture kind of coming out of this year, last year, yes?

The newness is similar to prior years. The breadth and depth of that newness is, it might be slightly different and shifted. But in general, we're not changing the rhythm of the business. We're changing how we're buying it and how we're promoting it. And that just the base level of inventory will help mitigate and soften the level of promotions. So - and we know that, but I'm just - what drives this customer are new ideas, new product, new fashion, studios, those types of things. And so, we're - we have a calendar for the year of introducing new ideas to this customer, which - so there are two things that we really think about the business, is store expansion, customer acquisition related to that and the drive to omni. And then the launch of new ideas to the customer, not always just fashion, but core ideas as well. Because we can provide everything she needs to buy for her closet. And so, we focused on those - that as well as we move forward.

And then last year, as far as from a mix standpoint - am I correct in remembering that they're sort of skewed more towards basics and less occasion?

Well, we overbought everything last year. Well certainly, we're not left out when inventory was split around. The approach to basics was we just didn't -- we weren't as aggressive because of the longer shelf life of that product. And so, we have a bit more time this year to work through the basics, and we just made sure that we were as plain as possible in any prior season clothes and that we've started the year as fresh as possible and we did. Our fall holiday inventory is down substantially. The increase in inventory, the OP is really related to spring, early receipts - are on-time receipts because of supply chain challenges in the past. So happy - I am happy with what we're - how we were able to get through the excess inventory last year without - taking the liability into this year.

Right, thank you very much.

Okay thanks.

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

Good afternoon and thank you so much for taking our question. My question is on the marketing outlook for the year. Can you talk to any further changes that you see on the horizon to improve the customer engagement? And do you need to reinvest some of the promotional recapture into additional marketing spend to continue to fuel the business' growth?

Sure, hey Brooke, thank you for your question. What I would tell you is that we've engaged two new digital marketing agencies. One is a more traditional approach where we have a strategy. We deploy the funds within that strategy. They optimize it and make the investments. As we move through with the new agency that is much more focused on retail in general than our previous agency was, we will invest as we start to see productivity in that. We are also testing with a different agency things like connected TV, very small, very minimal, but again, giving us the visibility to how we should invest, and we will continue to invest as we move forward. I think on a multiyear basis, as we start accelerating store openings, we will also supplement that customer acquisition with more investment in marketing as we move through and not just marketing for top of the funnel, but marketing to actually also drive customers to the stores, so that they can convert at a higher level there and become omni. So I think I'm very happy with - I'm very pleased with the marketing team that we have in place and their strategic approach to the business, and we're seeing nice progress there. So to year-end, once we see productivity, we will continue to invest in to that productivity. And on a longer-term basis, we are anticipating a higher level of investment, particularly to support the customer acquisition through both stores and digital.

Thank you. And if I could just ask one more for Tim, can you speak to your priorities for cash use, including the debt level and any plans for potential repayment this year? Thank you very much.

No, our plan to - any excess cash we have right now is going to be focused on growing the business and that store growth that we talked about. It seems to be the best source of generation, both of new customers and return on investment. So that's the number one focus as of today. And we'll see as the business evolves through the course of the year, where we are, but we're very comfortable from a liquidity perspective. We're very comfortable with cash flow generation. And we feel like, we've got enough to manage what we need to do to grow this business. And then beyond that, we'll come back with the highest and best use after we've focused on that growth.

Thank you. I will pass it on.

Thank you.

Thanks.

Our next question is from Alex Straton with Morgan Stanley. Please proceed.

Thanks for taking my question today. Two from me first on SG&A, I'm trying to understand how much of the $7 million to $8 million number this quarter was unusual and how you think about that going into 2023? And then second, a bit related to the last question, it looks like cash levels are at the lowest of the year and down quite a bit year-over-year. It seems like that might be normal cadence for you, but I want to understand, is that right and kind of how you feel about cash levels at the moment? Thanks.

Sure. I'll answer your second question first. We're very comfortable with cash levels. It is a seasonal thing as we come out of the holiday and also as we built up the inventory that we came through last year with - we paid that off. So I'm not at all concerned about cash flow or liquidity as I mentioned we have more than an ample amount of liquidity and we'll drive the business to generate incremental cash flow throughout 2023 and we'll focus on that cash flow on investment as a growth vehicle to primarily the store things we talked about. From a SG&A perspective in the fourth quarter, I kind of tried to address in my commentary we had about $2 million related to severance related activities. Those were included in our SG&A backed out for adjusted EBITDA. And then we had close to $1 million associated with some non-cash write-off of some assets that we no longer were utilizing in our technology space. So those are the - looks quantities of the SG&A unusual items. I did breakout for you in my script the basis point impact of that which was 70 basis points of our increase was due to severance and 40 basis points due to the disposal of assets.

Great, thanks.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Thanks so much for joining us today and your interest in the company. We look forward to sharing our progress with you as the year progresses.

Thank you, everyone.

This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.