Greetings and welcome to the Torrid Holdings Inc. Fourth 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 is being recorded. It is now my pleasure to introduce your host Chinwe Abaelu, Chief Accounting Officer. Thank you, you may begin.

Good afternoon everyone and thank you for joining Torrid's call today to discuss our financial results for the fourth quarter and full year 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, Torrid's Chief Executive Officer of Torrid; Mark Mizicko, Torrid's Chief Commercial Officer; and Paula Dempsey, Torrid's 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, March 28, 2024. 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.

Good afternoon and thank you for joining us to discuss our fourth quarter results today. I will begin with a review of our fourth quarter performance, highlight our accomplishments during the year, and then discuss our strategies for 2024. Then I'll turn the call over to Mark Mizicko who will review our merchandising strategies and marketing plans. Paula will then review the financials and provide our outlook for fiscal 2024. We are pleased to report that our fourth quarter sales and EBITDA came in ahead of our guidance. While we are not immune to the current macro environment, we are focused on the levers we can control. Our disciplined inventory management enabled us to reduce promotions and drive higher full-price sales. For the quarter, we generated $294 million in net sales and $16 million in adjusted EBITDA. During the quarter, we observe strong customer engagement and a positive response to events like Black Friday and Torrid Cash, both of which exceeded our expectations. We saw positive regular price comp momentum in graphic tees, knit tops, and bottoms, categories that we will continue to build on in 2024. Looking back on fiscal 2023, we made significant changes to improve the fundamentals of our business. We have touched just about every aspect from merchandising to marketing to sourcing. We are pleased to see sequential improvement in our regular price business as customers responded favorably to our holiday and early spring merchandise collections. Key highlights from 2023 are our improved assortment and optimized channel investments to maximize regular price sell-through resulting in margin expansion; reducing our inventory levels ending the year down 21% compared to a year ago; consolidating our sourcing base, positioning us to meaningfully reduce product costs in 2024; launching a new digital marketing platform, leading to an increase in reactivated…

Thanks, Lisa. I'd like to start today by sharing the progress we have made on a few of our key initiatives in merchandising, product margin expansion, inventory productivity and buy accuracy as well as marketing. And then I will briefly discuss some of the highlights of the fourth quarter. Our merchandising and planning teams remain focused on maximizing product margin expansion, through better enterprise sell-through optimize assortment investments by channel and continued improvements in pricing and promotion. We continued to build upon the results of the third quarter with improvement in regular price sell-through and lower -- lower overall discounts, resulting in year-over-year product margin expansion of 140 basis points in the fourth quarter. We believe that our ending inventory position down 21%, as Lisa noted, positions us well to continue building on this momentum throughout 2024. We shared with you in our last call, the early success we saw in the testing of clearance store conversions. We continue to be pleased with their performance and believe they will play a key role, in our continued priority of maximizing inventory productivity. These clearance stores are allowing us to consolidate store markdowns and sell them more profitably as well as freeing up space in our standard format stores, to showcase a wider breadth of our otherwise e-Commerce exclusive assortment. This advantage allows these clearance feeder stores to see incremental margin productivity, from a combination of less markdown competition and additional regular price assortment. We believe this strategy will contribute to improvement in store traffic over time as well with the wider breadth of assortment choice. Given the continuing success of these initial tests, we plan to convert additional stores to this format in 2024. Additionally the optimization of assortment depth and breadth by channel began to pay off in the fourth…

Thank you, Mark. Good afternoon everyone and thank you for joining us today. Fiscal 2023 was a year of robust execution for our company. Despite encountering a softer demand environment than we had initially anticipated. Our focus and resilience have been paramount especially as we navigated through the challenges of the first half of the year in 2023. The second half, however, marked a critical turning point in our journey. We took strategic actions to establish a strong foundation for the future. Our performance improved in the latter months of 2023. While we execute on our core initiatives that we believe will drive our long-term success. I will now begin with a detailed discussion of our fourth quarter and full year followed by our outlook for fiscal 2024. Our fourth quarter results came in ahead of our expectations on both the top and bottom line. We generated meaningful year-over-year gross profit expansion driven by improved product margins as we began to see the impact of our product cost initiatives. We remain disciplined with inventory management ending the year with healthy inventory levels. For the fourth quarter net sales came in at $294 million compared to $301 million last year. This includes sales for the 53rd week, which were processed approximately $22 million comparable sales decline 9%. Gross profit increased to $101 million from $96 million last year, reflecting a gross margin increase of 250 basis points to 34.5%, driven by lower product costs and fewer markdowns. Store occupancy expenses were flat compared to a year ago. SG&A expenses in the quarter were $80.6 million or 27.5% of net sales compared to $77.8 million or 25.8% of net sales last year. The increase is related to a onetime 1.6 million expense reversal in the prior year related to performance incentives. Marketing…

Thank you. We will now be conducting our question-and-answer session [Operator Instructions] Our first question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Good afternoon, and thank you for taking our question. I was hoping you could speak a little bit further about the impact that you're seeing with regard to traffic, ticket and conversion outcomes from some of the new product and marketing initiatives that you have underway at the company? And then specifically, can you help us bridge the path back to positive comp growth at Torrid? And when do you expect to see that inflection for your business? Thank you.

Hi, Brooke. Thanks for your question. We anticipate some pressure on traffic in the first half of the year recovering in the back half. What we're seeing is improvement in stores slightly faster than we had anticipated. We think that this is because of opening price point key item programs that we put into place are working as well as more casual product assortments. And so we are encouraged by the transaction values that we're seeing out of the store channel and the improvement there. We think that in the back half of this year is the inflection point as we have anticipated a normalized traffic trend more toward a flat traffic numbers in the back half and anticipate their continuing kind of improvements that we're seeing from the inventory managements, the regular price sales improvements, as well as the much more efficient investment in inventory, that's that gross margin. So we're not just looking at comp, we're looking at margin comp as a critical KPI for this year, which we're seeing expansion, we'll see expansion most of the year accelerating in the back half as well.

Great. Thanks so much. And then maybe one for Paula. As you contemplate the margin outlook that you provided today, as well as some of the potential headwinds as you think about credit card income and mitigation factors there, how are you thinking about the path back to pre-COVID adjusted EBITDA margin levels? And what are the most important drivers that you expect to realize as you journey back to that level?

Yeah. That's a great question. So I think as we think about this, the late fee ruling, we're still obviously working with our partners at this point. As I brought it up, this is an impact of $11 million to $15 million possibly, but at this point, again, we're working with them to minimize that impact more to come from that standpoint. But I think as we think about EBITDA margin expansion throughout the year, we're going to see it really in one major form, really, which is going to be our gross profit expansion, which we're going to see more dramatically from Q1 to Q3 and easing it in Q4. We're going to start lapping that. As we think about to be more close to fiscal 2019, I would say that our cadence in general, whether it's sales from a top line perspective or even SG&A, will be much more aligned with fiscal 2019.

Thank you so much. I'll pass it on.

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

Great. Thanks a lot. Super helpful overview of the initiatives you've done this year and the focus areas as we look ahead. Maybe for Paula, where do you think we should initially see signs of these efforts showing up in the P&L first? And then perhaps both for Paula and Lisa, what KPIs are you focused on as a management team? I know, Lisa, you mentioned one, but maybe just a quick summary of what from your end you guys are super focused on. Thanks a lot.

Yes. I would say, Alex, that you're going to start seeing in the P&L, you're going to start seeing a gross profit expansion. That's going to be the first place you're going to see. So this year, we're very, very focused, and obviously it's results from everything that we, all of the strategies that started last year. But where you're going to see the results is really going to be through expansion of gross margin, which we did see that already in Q4 of fiscal 2023, and we're going to continue to see that throughout the year. I would say from an SG&A standpoint, you're going to continue to see our SG&A almost at the same levels as Q4 of fiscal 2023 from a dollar standpoint, and there's, as I mentioned, two reasons for that, right? One is we're back with the incentive compensation in 2024, which we did not have in 2023, as well as we are continuing with some heavy investments in technology with new product life cycle, product allocation systems, and not only that, we are, in the second half of the year, going to start looking into our ERP upgrade. But I think in general, you're going to see on the P&L, really, it's going to be in gross profits. One other thing, though, from SG&A, what we're experiencing right now and what we started seeing in late Q4, even early, I mean, even late Q3, actually, we're seeing improvements in store labor expenses, and we expect to leverage that this year, which is a great sign.

And then other KPIs, I mentioned product margin comp expansion is probably the biggest mover this year. The other thing I would reinforce is the kind of rationalization between channels. As we're seeing a faster than planned recovery in the store channel, that leverages fixed expenses at a faster rate so that there's a positive momentum there, not just with the pure dollars, but with kind of those underlying leverage of the fixed expenses related to the stores. I think we've done a good job with store payroll. And I think the other piece of that is looking at how we're turning inventory. So, obviously, a very dramatic shift in inventory, down 21% at the beginning of the year. You'll see that continuing to leverage as we move through fiscal 2024 as we're very focused on turning that inventory more quickly and the investments required, slower investments required in order to generate the types of the top line sales and the margin dollars that we're talking about. So for the year it's product margin comps. It's working capital investment and inventory improvements. And it's that channel we distribution with the store recovery that are all going to have positive impacts on the gross profit. But ultimately positive comps in both channels is our goal by the end of the year moving into 2025 that helps exacerbate and increase that to continuing the leverage that we've been able to generate with margin expansion.

Great. Good luck.

Thank you.

Our next question comes from the line of Jeff Lick with B. Riley Securities. Please proceed with your question.

Thanks for taking my question, and congrats on the good end of the year and fourth quarter please. Lisa, I was wondering the five initiatives I've counted that you started talking about sometime in 2Q or 3Q of last year. Your gross margin optimization, sharper price points, the casual assortment in the marketing data platform and then the clearance store conversions. I was just wondering if you could walk through like when do you start -- how much more do you have to go into 2024 before you start to lap those? And then I'm just curious with respect to your guidance and then these initiatives if things could go better where do you see things where there could go better and there would be upside.

Sure. So gross margin is a little bit off in fourth quarter it will increase as you go through this year and we won't be lapping anything until we get to the back end of fourth quarter of 2024. So we have a full year of expansion there. Opening price point, we just launched that as well, it's exceeding our expectations particularly in the store channel. And so that is brand new as well and that rolls out and as refined as we move through the balance of the year. Casualization started in winter of last year, so really more like September, October with the first movement into the casual, casual chic mindset and minimizing the dressier side of the assortment. So you have that for at least three more quarters. But then refinement beyond that, I think is some of the things that I would say on a product basis, we have the right silhouettes and denim now. While we had the new products, the new shapes, the new silhouettes of denim, we weren't invested appropriately there. We've corrected that and have moved more appropriately into those mixes. So there's product improvements as well in the casualization, graphic tees are very, very good. We've appropriately invested in the graphic tees and knits. So those are also improving. I think the Shelly Dress program is exceeding our expectations particularly in the store channel. So some of those things that we've already invested in, in casual are off to a great, a very strong start, and we expect that to continue through the balance of this year. The data platform right now, we had good initial results I think is a little challenging during the holiday period as digital -- the cost for digital marketing changes pretty dramatically. We're continuing to…

I was just curious about where the -- what could go better but you kind of answered that in your -- answer.

Yeah. I mean I think that -- we expect the customer to still be a little worse seeing traffic improve, but it's still negative as we expect it to be negative through the beginning of the year and improve in the back half. And I think it that is that, that assumption is built into our guidance, and if that changes or improves more quickly, if both model search drives traffic at a faster rate that's an opportunity for second quarter as well. But we've we are forecasting it based on what we're seeing now. If that's helpful.

Just to take one for Paula, it would be possible to break out term for Q4 sales that you reported $293.5 million merchandise sales versus PLLC?

The way that I would think about it is PLCC is usually about 1.2% to 1.5% of our net sales in general.

You'll continue to disclose that in the K correct?

We disclosed in the K our total value of our private-label credit card, yes. Correct.

So I'll be able to get it when the K comes out.

That is yes. Correct.

Okay. Great. Thank you.

In a week or so. Thank you.

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

Thanks, and good afternoon. I wanted to ask on promotions. So you've reduced promotions and it seems like merchandise margins are on good trajectory. Product margins are up and inventories are down. So how are you thinking about the prospects for promotions ahead within the context of how you're planning inventories and clearance and markdowns et cetera?

Yeah. I think some I think some of the notable things that happened promotionally and during the quarter were during Black Friday and the cyber weekend, where we discounted much less than we had in the prior year. And again, on running up until the week before Christmas, again, we ran much higher year-over-year margin rates less discounted. And then I think the other thing that was notable is that in January, we continued the momentum that we've been seeing building in toward cash promotion which is as I've said before, our most productive promotion, and had been really suffering at the beginning of last year. And we started to see a little momentum build on in midyear and some improvement in October. And then we saw continued improvement in the January -- January toward cash redemption. So I think the way that plays forward we've gotten back to nearly -- nearly where we expect the Torrid cash promotion to be. I expect that it will continue to improve and continue to remain our best, so that that will be normalized we'll have four of them this year versus the five that we had in 2023. The promotion period has pretty much been normalized on the issuance of policies of, and we're pretty happy with what those are. I think -- I think thinking about day- in, day-out promotions on we're starting to see traction in the stores as we've talked about with inventory levels down. It's just not necessary to promote to move inventory to the same degree that it has been last year, and even 2022 to some degree. So we're pretty -- we're pretty pleased with our initial reads on how we can let off the gas promotionally and allow on allow higher margins lower discounts to drive inventory. And of course, with less clearance inventory also there's much less need to have some clearance promotions to get through that.

Understood. Thank you. And then just a quick one. How are you thinking about marketing expenses as we look throughout the year ahead, I think that you are also adding in an additional marketing event or an activation that you haven't done in the past. Curious what other associated implications of that investment and other marketing expenses might be -- within the outlook for this year? Thank you.

I think as a percent of business, the marketing spend is fairly similar to where it has been slightly increased. And the spend that is -- the additional spend as we continue to test in digital, the model surge, et cetera, that is all being funded within that slight increase as a percent of revenues that marketing spend will be.

As we learn more through the A/B testing, that would -- we would only invest if we see an incremental EBITDA contribution based on that investment. So we -- more to comment the next time we talk with you guys, because we'll have more definitive kind of results based on that that might change the number slightly, but it all is predicated on incremental EBITDA contribution based on that investment.

Great. Thanks so much.

Thank you.

[Operator Instructions] Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Hi. Good afternoon everyone. Interesting to hear about the labor cost and nice to see the progress everywhere. How do you think about labor expenses? Are they coming down because of hours that are being reduced? Is it wage expense -- wage rates -- you're shifting wage rates? What do you expect to see going forward? And are there other -- any other elements of the expense structure either changes up or changes down that we should account for in the margin outlook? Thank you.

Hi, Dana, it's Paula. So what we're doing with our labor expenses, it's truly -- a couple of things. One is creating efficiency and higher productivity in the stores. That's the work and we're seeing the results right now. We started doing this in the second half of last year, and we're finally collecting some of those positive results right now. So what we have done is definitely shifted some of the wages around. So we're seeing the benefit from that. And in addition to that, we're just becoming a lot more effective with our -- with how we spend our time in the stores really from a labor hours. So those are the two items in which we're highly focused.

I would add that we changed the leadership structure in the stores to rationalize kind of the right balance of leadership to hourly associates, and that's having a result in -- we also have had a new Chief Stores Officer, join us and with really a focus on sales culture. And I think we were more oriented toward a task culture, even though our Net Promoter Scores and our CSAT scores are in the high 80s, mid-90s. So the customer is having a great experience, we felt like we could improve that even more. And so there is -- it's not a rate issue. We've managed it really through structural shifts and what we're asking the stores to do and then the leadership structures in the stores.

Got it. And then when you're thinking about new store openings this year, locations off-mall mall any changes in sizes of store and regions?

Yes, it's a very small number of stores and it will all be stripped for Canada.

Got it. And then Lisa, just the competitive environment with the core customer base, how is it changing the competitive environment, whether online or physical? And how do you see your pricing given the better product costs that you're getting?

Yes. I would still say, it's a very highly fragmented space, a lot of small players and it comes. And so it's I don't think it's changed appreciably. I think you know the self-inflicted elevated retail the ticket -- sticker shock has been mitigated somewhat by better with the efforts that we put into better mix of product both casual, as well as initial tickets and rationalizing those tickets through the value of the product and we are seeing some because of that. And I also think because of our inventory positioning, improvement in regular price sales that was not just an initial markup, but through what but in regular price sell through that is benefiting that. So I think that, no always starting to reevaluate the appropriate value pricing of our product is critical. And I think we made some and a big shifts we're seeing. As I mentioned earlier, our core programs are working well, particularly in the store environment. We think we have some opportunity in how we market them online to improve that, but beating the beating our forecast in both on both categories opening price point core items as well as what we've done in the Sally programs which are part of the opening price point strategy. So I think we're making progress there and shifting toward more casual product has also brought the average retail down in the store, but it's not really and it's not really impacting the average unit value going out the door. But still that's still positive. So that I think one of the concerns people had was if you're going more to opening price point or changing those initial tickets, you'd have a challenge on your average ticket price out the door and that we're actually not we're not seeing an impact to that.

Thank you.

Thanks Dana.

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

Thank you. Thanks everyone for joining us today. We really appreciate your focus on the business and looking forward to talking with you in the interim, as well as when we release first quarter later this year. Talk to you soon.

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