Greetings, and welcome to the Torrid Holdings, Inc. Third Quarter Fiscal 2023 Earnings Conference Call [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chinwe Abaelu. Thank you. You may begin.

Good afternoon, everyone. And thank you for joining Torrid’s call today to discuss our financial goals for the third quarter of fiscal 2023, which we released this afternoon and can be found on our Web site 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 new 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, estimates and other words in terms of similar meaning. All forward-looking statements are based on current expectations and assumptions as of today, December 7, 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 Web site. With that, I will turn the call over to Lisa.

Thanks, Chinwe. Good afternoon. And thank you for joining us to discuss our third quarter results. Before I dive into our financial performance, I would like to take a moment to thank our more than 7,000 employees across the US and Canada who are dedicated to the brand and to our customers. I'd also like to thank our more than 4 million active customer base for continuing to love the brand, while providing the most value added feedback. This quarter, the Torrid foundation with the support of our loyal customers and employees contributed over $0.75 million to the breast cancer awareness campaign. Thanks to you all. I am also thrilled to announce the appointment of Paula Dempsey, Chief Financial Officer. This well deserved promotion reflects the outstanding leadership and invaluable contributions Paula has made in the last 10 months since joining our team, and I believe she will continue to be instrumental in delivering our strategic growth plan. Thank you, and congratulations, Paula. I'm happy to report that our assortment journey over the past year has begun to deliver positive results. We took a hard look at our assortment and understood the need to pivot towards the more casual and relevant styles, ensuring a diverse range across our product lines. It's encouraging to see this shift resonate. From a store perspective, we have launched an initiative with our sitting room Fridays where our store teams personally try on our products. This hands-on approach has not only enhanced our team's understanding and enthusiasm for our products, but also infused a new dynamic into our store atmosphere. As a result, we're witnessing a positive response from a broad range of customers who are attracted to our brand's renewed energy and balanced casual approach. I will start by reviewing our performance in the…

Thanks, Lisa. I'd like to start today by briefly discussing some of the highlights for the third quarter and then providing some updates on a few of the initiatives that our teams have been working on. Our merchandising and planning teams remain focused on generating product margin expansion through better product sell through and continued improvements in pricing and promotion. In the third quarter, we began to see some broad improvement in these trends. We generated improvement in our top line trend, better year-over-year full price product turns and product margin expansion. While we are encouraged by our progress so far, we know that we have much more work to do. There are opportunities for us to enhance our channel and assortment planning and to improve our product ranking and buy accuracy. Our expectation is that we will continue to see improvement in these trends over the coming quarters as the changes we're making continue to arrive in stores in the fourth quarter and throughout 2024. In the third quarter, we saw improvements across most of our major categories. Our teams have been focused on driving the casual assortment and especially those pieces that have the versatility to be dressed up or dress down, and we have started to see positive trends both in our stores and on our Web site. In apparel, we were pleased with the performance in our tops business, driven by flats, graphics and sweaters. In our bottoms business, we saw the customer react positively to a variety of leg shapes, including wide legs, boots, flares and joggers. We also had a great response to our Trio denim launch and have seen our leggings business show steady improvement over the course of the year. In the CURV intimates business, we saw strong performance in push-up bras,…

Thank you, Mark, and good afternoon, everyone. First, I would like to say I'm thrilled to have been appointed the Chief Financial Officer at Torrid. Having joined nearly a year ago, I have seen many positive developments with the company and feel honored to be part of such a great brand alongside industry veterans. My commitment to supporting Lisa's vision and driving sustainable growth through measured strategies has not changed. I have confidence in our leadership team, and I'm delighted to be here. I will now start with a detailed discussion of our third quarter performance, followed by an update on our outlook for the fourth quarter and full year. Our third quarter results exceeded our expectations in both the top and bottom lines. We focused on driving traffic to our stores and online, which led to sequential improvement in our comparable core sales trends, while we have continued to carefully manage expenses and inventory. Now let's start by discussing our top line performance. During the third quarter, net sales were $275 million compared to $300 million last year with comparable sales in the quarter down 8%. We were encouraged to see that our latest collection available in stores and online was met with improved customer traffic trends. In addition, our Torrid's Cash events exceeded our expectations driving a sense urgency as customers have begun to adapt to the changes we have made to the promotion. This event continues to be our most effective promotion. Gross profit margin declined 80 basis points to 33.2% compared to the third quarter of 34% last year. Selective promotional activity relative to a year ago and improved product costs drove 120 basis point improvement in product margin. This was offset by store occupancy, which deleveraged 80 basis points on lower net sales, a 75…

[Operator Instructions]. Our first question comes from the line of Brook Roche with Goldman Sachs.

I was hoping you could elaborate on the cadence of consumer trends that you've seen as you've moved through the third quarter and into holiday in terms of traffic, ticket and conversion. And as you make these changes to your marketing and merchandise strategy, how are you thinking about the opportunity to return to positive sales growth going forward?

We are seeing sequential improvement in both channels through the third quarter in terms of traffic. Our average unit retail is up. Our average transaction size is down slightly. We think that can be attributed to lower inventory levels, so lower clearance inventory associated with that as well. We're seeing more consistency in our ability to forecast and rationalize the trend of the consumer. I would still say that they continue to be picky and we think that the move toward casual and kind of a younger feeling on the overall product assortment has been very well received by this customer. I would expect that on a year-over-year basis, we should start seeing comps [Technical Difficulty] positive side as soon as next year, and that would be accompanied with some margin expansion related to the things that we've talked about in terms of cost of goods and the margin initiatives that we have in place. I think I might have missed the last part of your question.

I think you covered it. We talked about our big ticket conversion and the opportunity to return to sales growth. I guess just a follow-up for Paula. Can you elaborate a bit more on what you're seeing in credit card income, and how you're forecasting that going forward? What impact could you see if there's a change in industry late fee structures or other changes to consumer credit?

So what we did see is from a penetration standpoint, our private label credit card was slightly down from last year but not overly concerning. We are definitely seeing consumers being a little bit slower on spending on their private label credit cards because of current interest rates. I think as we move forward, we don't necessarily know what the decision will be and whether the fees will be changing or not. So at this point, we are just like everybody else in the industry just watching the news and especially starting to prepare plans just in case there is a change. But at this point, we just have to just do the best that we can and listen to see if there's any updates.

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

This is Katie Delahunt on for Alex Straton. I just was wondering I know you had spoke to a number of initiatives that you thought were contributing to kind of this better than expected print, the wider price points, the improved assortment, marketing, the adjustments to the cash event. Is there any one in particular you would point to as the main driver, or is it really just kind of a compounding of all of these together?

I think the most important thing we've done, the two most important things we've done are assortment oriented or moving toward a more casual, younger assortment and inventory management, because those are kind of the basis for every other strategy that we employ. I do think being in line with inventory allows us to focus on margin expansion, having the right product allows us to build margin. I think the marketing initiative is something that has a long tail to it that I think will improve customer acquisition, retention and frequency over time. And I think that what we're doing in terms of -- those are the main ones. I think the clearance store strategy where the fees are clearance combination generates more margin than the rest of the fleet, that's really compelling. So what we're trying to do is make sure that we are very carefully focused on assortment and inventory levels, and then layering in these margin initiatives and margin improvement initiatives on top of that. And then the marketing move and increased investment in digital marketing and careful review and data analytics that determine how we're investing moving forward. And the short term return on that as well as the mid and long term return of those investment is a fundamental shift for us that's going to continue to pay off as we go into next year. Is that helpful?

Yes, very helpful. And maybe one more from me. We were just wondering, what is your fourth quarter guide, assuming in terms of demand? And if you could speak to any quarter-to-date trends particularly around Black Friday, that would be really helpful?

We were happy with the performance during November, particularly around Black Friday and Cyber. We were less promotional on a year-over-year basis. So it was really not much of a top line story as it was a margin expansion story and we're very happy with how that -- those results. I think, again, as we rebalance assortments and inventories, we're being able to really focus on gross margin dollars and that was the tone of how we approach Black Friday and Cyber events.

Our next question comes from the line of Corey Tarlowe with Jefferies.

Lisa, I was wondering if you could just talk a little bit from a trend perspective, what worked for you in the quarter and into holiday? And how are you flexing into some of those trends as we head throughout the next couple of key weeks here of the fourth quarter?

So some of the things that are working well for us are anything in the cozy area. So sweat shirts, any cozy fabrications, graphics are working for us, denim and a lot of different leg shapes. So denim is down overall. But as we've gone into flare and wide leg and boot and a variety of leg shapes, that is really catching the attention of the customer and delivering. I think that we've done a good job with our holiday kind of sparkle assortment, and that's been very, very well received and moving through. So what's interesting about it is that we have kind of the high end event driven product that's working and then we have the cozy casual pieces that are working as well. And so that is, I think, a precursor of how we're thinking about our assortment and our customers’ end use as we move forward. The other pieces that are working in intimate, bralette, panties, push up plunge, silhouette are all working really well. Silverettes worked really well. Anything Christmas specific has worked really well. So as we move forward, obviously, the Christmas pieces are less relevant. But I think the balance between casual, cozy and higher event driven end use is a better way for us to manage our business as we progress.

And Paula, just on the gross margin, as you think about the factors that have impacted the gross margin so far this year and in the third quarter, as you think holistically about some of the puts and takes of the margin headwinds and tailwinds. What are some that you expect to stay for a little while and what are some that perhaps are going to come away and as perhaps sales get better and we start to see a much higher margin in the future?

So as you noted, for Q3, our gross margin was slightly down. But as we mentioned, our product margin was up. So it was down really due to deleverage, more to do so with volumes of net sales. As we move forward into Q4, from an expectation standpoint, we think it's going to be aligned with where we were last year more in sale. And so as sales continue to improve, we're definitely going to see that improvement in gross margin into the next year. Hopefully, that answers.

Our next question comes from the line of Mark Altschwager with Baird.

This is Amy Teske on for Mark. You noted some positive results from the testing of the clearance stores. Were there any traffic trends here that were different from the balance of the chain, and is this attracting a different type of customer? And then bigger picture, could you just help us size the opportunity here, how many stores could become clearing stores?

So for the clearance centers and the clearance feeder stores, I think the highlight of the performance is the margin expansion that we saw in the feeder stores in particular, which was driven by a few things. One, there was a shift out of clearance selling into REG because there was much less clearance on the floor, of course. And the second part is that we took some of the space and we put some more of our reg price assortment in it. So there was a pretty nice expansion of margin dollars in the feeder stores. We're still doing some work on trying to optimize the particular model of how many feeder stores there are per clearance center, how to continue to drive even more margin dollars in the clearance centers themselves. As for the traffic and the customer trends, it was not meaningfully different. I don't have -- we didn't really dissect it yet to see if there are differences in demographics going in, the traffic trends were very similar. It was just more of a makeup of what they were picking up that was driving it.

[Operator Instructions]. Our next question comes from the line of Dylan Carden with William Blair.

I'm just trying to fill out what if any conservatism you're kind of baking into guidance, given the performance you just put up kind of looking at pre-pandemic sales levels, it would suggest something of a deceleration. I just want to sort of make sure I understand kind of how you're thinking about the world here.

I would just say that we are watching the customer from week to week. There's a lot of business to be done right now. We don't peak the same way that other retailers peak in the fourth quarter. We have a big event with - toward cash in January that again is something that's always back loaded in our performance. As I mentioned earlier, we were happy with margin performance, particularly, which was our strategy over Black Friday and Cyber and we're very happy with our inventory levels. So we don't have a lot of product to clear. We don't have a lot of areas of inventory that are backlogging us at all. So it is a cleaner scenario. But we are watching the consumer week by week and becoming more and more comfortable with that performance. So I can't tell you what scale of conservatism that we're in here, we're trying to be as pragmatic and prudent as possible as we move forward, and with executing some of our strategies and refining them.

On pricing and sort of lower clearance levels, cleaner inventories. Any way to scale maybe in potentially sort of product margin terms sort of a structural level that you're targeting as far as sort of what that opportunity to the magnitude, I would think it would be pretty big, just kind of given some of the history here.

We think there's over the next year or so substantive [expansion] in margin in the product. I can't say we're going to go back to our high level from a historical basis, but we certainly feel that with all of the stress -- with the costing, the improved assortment and inventory management and all the other strategies that we've talked about, which are -- we have strategies in place that we did not have optimized in the kind of the prior experience of the brand that we think that there is, I would say, substantive margin expansion opportunity in the business from [Multiple Speakers] product margin.

Would the high watermark not be feasible given input inflation, or why wouldn't you expect to be able to get back to that, to your point, you sort of implement…

If you look at total mix, because we're so heavily -- we shifted from '19 through the pandemic, so much higher penetration online where we were more like 50-50 and '19, but we're higher than that, now that there's the fundamental economics of the web channel really won't allow us to get back, I don't think at this point to the top line historical merch margins that we've been able to hit in the past, but still a substantial improvement overall.

And then finally, just on the marketing testing that you're doing, and apologies if I missed this. When are you kind of looking to do a fuller rollout? And as part of the thought here that maybe you would wait for, I don't know, better macro or a more meaningful quarter before you kind of start leaning into that more seriously.

Well, we -- the results we saw didn't give us any indication that we have reason to pull back. So the extra level of investment that we started in on October, we've continued through November and into this quarter. And it's still very early. Every metric that we look at makes us feel like the level that we have is right, we're not ready to make a call on whether that gets increased to another level yet. But we monitor all the metrics and analyze the data on a weekly basis. And so we're constantly having conversations about how to reallocate, where to increase and what the overall level should be. So we'll certainly continue to monitor that and hopefully have future conversations about the direction that we're taking.

We think it's very important to -- it's a very important area to invest in. And as we are -- we mentioned in the -- I think, in the comments today that our customer acquisition numbers as a percentage are up in stores to 2019 levels, but we think that we can do a better job in terms of customer acquisition and retention through the digital channel to augment that more effectively. And I think the team has done a great job in using the data on a daily, weekly basis to make really smart calls in those investments.

And when you say it's sort of EBITDA accretive, what are the primary drivers of that, is that just throughput leveraging.

Well, the primary drivers are where -- the returns on the levels of what we're spending are such that the price per customer session or traffic or store bills that are -- and the conversion rates that we're getting are flowing through to EBITDA. In other words, we're getting more than enough sales, margin dollars, considering all the additional variable costs that there are to cover the investment and have EBITDA flow through after all of that.

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

Thank you all for joining us today. We appreciate your attention on our brand and business. I hope all of you guys have a wonderful holiday season, and we look forward to connecting with you guys in the new year with the fourth quarter and full year results. Thank you so much.

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