Greetings, and welcome to the Torrid Holdings Inc. Second Quarter Fiscal 2023 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] As a reminder, this conference call is being recorded. And it is now my pleasure to introduce to you Chinwe Abaelu, Chief Accounting Officer. Thank you, Chinwe. You may begin.

Good afternoon, everyone, and thank you for joining Torrid's call today to discuss our financial results for the second quarter of fiscal 2023, which we released this afternoon, and can be found on our website at investors.torrid.com. With me today on the call are Lisa Harper, Chief Executive Officer of Torrid; Mark Mizicko, Chief Commercial Officer; and Paula Dempsey, our Interim Chief Financial Officer. Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements may include, but are not limited to, statements containing the words expect, believe, plan, anticipate, will, may, should, estimate and other words in terms of similar meaning. All forward-looking statements are based on current expectations and assumptions as of today, September 6, 2023. These statements are subject to risks and uncertainties that could cause actual results to differ materially. For further discussion of risks related to our business, see our filings with the SEC. This call will contain non-GAAP financial measures, such as adjusted EBITDA. Reconciliations to these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC and available on our website. With that, I will turn the call over to Lisa.

Thanks, Chinwe. Good afternoon, and thank you joining us to discuss our second quarter results. Before I begin, I would like to acknowledge and thank the Torrid team for their hard work and dedication as we navigate many important initiatives. I will begin by discussing our second quarter performance, providing details on the progress we have made, as well as our focus going forward. I will then turn the call over to Mark Mizicko to discuss our merchandising and marketing strategies. Paula will then review our financials in more detail and provide our outlook for the remainder of the year. Our second quarter results reflect the impact of continued choppy customer behavior. They are more selective in their purchases and exhibit inconsistent traffic trends. In addition, we have identified missed opportunities in our casual product assortment that we are addressing immediately. With that, we generated sales of $289 million and adjusted EBITDA of $32 million for the quarter, in line with our guidance. From an inventory perspective, we are pleased with the progress we've made. We've ended the quarter with inventory down 13% compared to a year ago. We saw the largest decline in our intimates merchandise and are in good standing with our current levels. During the quarter, our customers responded well to newness in our assortment. We saw strength in new fabrications and leg shapes, and we plan to expand these going forward. As mentioned, our casual business was softer than we expected, and in hindsight, we realized that we did not offer enough variety, versatility, and innovation. Our customer file metrics have been consistent and stable over the last 12 months. Our VIP customer retention rate continues to demonstrate strength, standing at an impressive 97%. We are seeing an increase in margin rates among key customer groups,…

Thanks, Lisa. I'd like to start today by giving some updates on a few of the initiatives that our teams have been working on, and then I'll briefly discuss some of the highlights of the second quarter. As I discussed last time, our merchandising and planning teams are focused on driving gross margin expansion through better balancing our assortment to customer demand, improving product sell through, an improvement in the efficiency with which we price and promote our product by channel and location. We have made progress in our pre-season assortment planning process. And with each successive buy, we have added guardrails that allow for data-driven assessment of the risks and opportunities in the business. We are finding meaningful opportunities in categories, fits and fabrications that we have not invested in sufficiently, despite substantial customer demand. We have also made improvement in our channel planning, and expect to see that tailoring our investments better to demand by channel will drive margin expansion in the coming deliveries. For the second quarter, we saw some modest improvements in our product margin rates, as we have increased our average retail through a better mix of right price selling by getting cleaner in our clearance inventory levels. We expect this margin expansion to continue in the fall season. We have improved our methodology for pricing by channel by initiating pricing levels that target product sell throughs by an outlet. In August, we have rolled out our ship-from-store capability to the remaining 200 U.S. stores and are seeing incremental sales and accretive EBITDA from these efforts, which also help us to move through more regular price inventory. In marketing, we have begun to see some more successful promotional events. Our Torrid Cash Redemption in July was a success, and we are seeing some modest improvement…

Thank you, Mark, and good afternoon everyone. I will start with a detailed discussion of our second quarter results, followed by an update on our outlook. In the second quarter, our customers continue to face headwinds related to the current environment; and in turn, we experience challenges with traffic. However, we have carefully managed our business through disciplined expense and inventory management and generated net sales and EBITDA that were in line with our expectations. We not only met our quarterly guidance, but also launched initiatives that speak to a long-term strategic vision, as previously highlighted by Lisa in her review of priorities. We view fiscal 2023 as a rebuild year for Torrid as it relates to product, value and our organizational structure. We have taken cost control measures that will prove to be effective, yet balanced, ensuring further opportunities in the near future. Let's start by discussing our top-line performance. During the second quarter, net sales declined 18.2% to $289 million, compared to $354 million last year, and comparable sales in the quarter declined 17.9%. We experienced slowing customer traffic during the quarter as a broader retail environment, struggled with consumers shifting their spending to essentials and experiences. As we moved through the quarter, we saw sequential improvements in our Torrid Cash event. Specifically, the daily average sales during our July Torrid Cash event outperformed that of April by 13%, a result we attribute primarily to the heightened sense of urgency we successfully integrate in the event. Our gross profit margin was 35.5%, compared to 37.2% in the second quarter of last year. The 170 basis points decline was primarily due to approximately 105 basis points deleverage in store occupancy, 70 basis points in a one-time benefit in private label credit card income last year and deleverage 45 basis…

Thank you. [Operator Instructions] And the first question comes from the line of Mark Altschwager with Baird. Please proceed with your question.

Hi. This is Amy Teske on for Mark. So in regards to your pricing, in recent quarters, you have talked about refining your promotional strategy being part of your playbook. And strategic pricing was a gross margin benefit to this quarter. But you also noted plans to implement a deeper value strategy. So could you help us to reconcile those two comments, and what impact do you expect pricing to have in the coming quarters?

It is two different aspects of pricing. So what we have talked about previously is, promotional pricing to optimize margin and product, based on ownership and desirability by channel, which is underway, and we have learned a lot. And we are starting, I think, to see results that we feel confident in terms of being able to expand moving forward. What I'm discussing today is a slightly different aspect of the business, which is, I think, also incremental to our promotional strategies that we have discussed before, which is over the last several years, three years, our pricing, our retail tickets have gone up substantially. And I had an opportunity to go and work strategically with our core vendors, understanding from the mills and fabric investments, cost of goods, the CMT, and the country of origin opportunities in terms of understanding and strategizing, pricing strategies and sourcing strategies that would drive benefit in cost of goods as well as allowing us to have a variable pricing strategy at retail. Meaning, Mark mentioned our 2 for $30 program. It's done very well. We have an inventory led appropriately. We just set up the store with much stronger presence of key items. We will be introducing core programs and dresses in tops and shorts. And as we go into spring, that have a good, better, best strategy that have an opening price point variation. So our ticket prices have gone up an average of $10 by every category. And we are -- we know that our customer has a bit of sticker shock. Not -- we won't be eliminating the fashion from our product. We will be adding more into the opening price point into the goods section. So there's a combination of sourcing strategy, cost of goods strategy through the sourcing initiative, as well as assortment strategies that allow us to have a more varied pricing structure for the customer. And what we've done so far, they've responded very, very well to. We feel like it's incremental business as we move forward. And we have some programs and right now we'll have more fulsome programs as we enter the spring season. So it's two different things. Promotions and pricing are different. Initial pricing is different.

So, you did talk about the product costing opportunity. So how should we think about the net effect of the product costing opportunity versus the need for sharper price points? To what extent are you going to be reinvesting the savings?

There's -- I think the product costing gives us improvement in COGS, which has a fundamental benefit to our bottom-line as we move forward. From a pricing perspective, we think it's opportunity to build average order value and add incremental units to the mix. So there it's a multifold, multifaceted benefit, one which is where they may not be buying their basics from us and then it accelerated away as we think they should. So opening up that part of the assortment. And then on the other side COGS basically is a benefit across all of the inventory.

And the next question comes from the line of Alice Xiao with Bank of America.

Can you please give more detail on the cadence of sales trends throughout the quarter by month? I know you touched a bit upon the Torrid Cash program component, but just the total sales trends. And then what also what you're seeing quarter to date, please?

The trends of the quarter were choppy and the first and third months were softer than the middle. So, that we are still managing what we'd refer to as that choppy customer behavior. I think we have more confidence in terms of near-term results and in terms of the early third quarter results. And what we're seeing is our ability to be more predictive and consistent in terms of delivering on our forecasting. And so I think that we've, as an organization, been able to absorb the behavior of the customer and work it into our forecasting more effectively. We're starting to see trends in terms of merch margin or product margin improvement that are more and more consistent. We're seeing nice response to early fall products. So we're happy about that. So, I want to be clear, it's a challenging kind of transformation for us at the organization, but we are very optimistic by what we're seeing with the customer with some level of predictability. And we're managing all of these aspects of the business to drive to an inflection point. And so what we're seeing right now is better results in terms of product margin and more predictability in terms of our performance as we're forecasting it. So, that makes us feel more confident as we're moving forward.

And then I wanted to ask about the clearance stores that you're testing next or this quarter. What criteria are you considering for current stores to underperform enough to become a clearance store? And also, can you elaborate a little bit on the impact to margins you expect from this testing and also just incorporating more clearance stores into your portfolio? Thanks.

Yes, I mean the centers that we've chosen so far have been in outlets, I think where -- outlet centers where the customer has more of an expectation of a higher penetration of clearance product. And so, we looked at several things, but one of the key considerations was the stores that would be feeder stores that presumably would get some amount of the margin benefit that we expect to see. And look, we opened them in a few days. I think it's a little premature to talk about the margin that we expect before we've even opened one, but we of course have our models and like all models, they're not going to be exactly right. They'll probably be directionally correct, but I don't think we're prepared to talk about the margin benefit before we built it.

And I think the thesis is that as we use feeder stores to feed a particular clearance store, what we have been able to test is putting more fashion SKUs in those stores that take up the space that was originally committed to higher levels of clearance in stores. And we have seen positive movement in terms of getting more fashion into those stores. That would be feeder stores. Again, we'll test three sale-open in the next week or so, and we'll be able to report on the next quarterly call on how that's working, what the margin implications are and how we're we would be -- if it works, how we would be accelerating it and making the decisions in terms of the particular stores and feeder stores that would be applied.

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

I was hoping you could quantify the cost savings that you've identified across the various initiatives you've discussed today. And what proportion of those cost savings are realizable in 2023 versus 2024? How are you thinking about the opportunity to drop those cost savings to the bottom line versus reinvestment in the business? Thank you.

So if we're talking about the SG&A cost savings for this year, it's a couple of million dollars on an annualized basis, it'll be about $4.5 million. I think the bigger opportunity is -- and those should drop to the bottom line. The bigger opportunity is the cost of goods that I was discussing and inventory management from ship-from-store to clearance sources, those types of things and how that will be able to shift our inventory investments and -- over time. So, it's something that we look at constantly, Brooke. And I think that we've gone to a point that we feel really comfortable with in terms of an organizational investment that allows us to deliver on our initiatives and really deliver growth in this business. So, we'll continue to look at that on a consistent basis. But I feel like right now our biggest opportunity is going to be more in the COGS and the inventory investments that we think we can improve upon.

Great. Thank you very much. I'll pass it on.

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

Hi. This is [Helen Qiao] on for Alex. I know you spoke to accelerating traffic trends throughout the quarter. And that kind of differs from what we have heard from other reporters this earning season. And I was wondering, how much are you attributing that to the macro environment versus how much are you attributing to maybe company-specific execution?

Actually, we saw variable traffic trends in the quarter. So actually, the best traffic trends were in June and the other months were softer. So it did improve as we went through the back end of the quarter. I missed the rest of your question. Was there more?

I was just wondering, like, how much you attribute kind of performance to more macro conditions versus more like company-specific execution.

Okay. And that's a very hard, I think, distinction to make. We do think there is, as everyone has discussed some level of macro pressure, that is not something that we can manage, I mean, effectively internally, meaning it's a outside influence. What we do focus on is what we can manage internally. And so some of the things that we have talked about enhancing our casual, presentation about pricing, value pricing, opening price point, cost of goods improvement are the things we are really focusing on as an organization, and think that we have a runway there to really drive some true value in the business.

That's helpful. And one more from me. We have heard from a number of companies about increased credit card delinquencies. Can you speak to any trends you are seeing in your own credit card business?

Yes. Hi. This is Paula Dempsey. So we actually saw an improvement from a credit card delinquency on this quarter compared to the prior quarter. However, when we are looking versus the prior year, we have certainly seen an increase, just like everybody else in the industry. But at this point, we are not -- it's not something that we are extremely concerned in our business. So hopefully that answers your question.

There are no further questions at this time. And I would like to turn the floor back over to Lisa Harper for any closing comments.

Thanks for joining us today. We look forward to sharing our progress, as we move through the balance of the year and look forward to talking to you after third quarter. Thanks for joining us.

And ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.