Greetings. Welcome to Torrid Holdings Second Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Chinwe Abaelu, Chief Accounting Officer and Senior Vice President. Thank you. 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 2024, which we released this morning 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; Paula Dempsey, Chief Financial Officer; and Ashlee Wheeler, our Chief Strategy and Planning Officer. Before we get started, I would like to remind you of the company’s safe harbor language, which I’m sure you’re already 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 except, 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 4, 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.

Thank you, Chinwe. Hello everyone, and thank you for joining us today. We are pleased with our second quarter results in which sales and adjusted EBITDA came in at the high end of our guidance range. For the quarter, sales were $285 million and adjusted EBITDA was $35 million, resulting in 103 basis points of adjusted EBITDA expansion as a percentage of net sales to 12.2%. This was driven by strong regular price comps, which increased 6.4% and our diligent inventory and expense management, which we will discuss shortly. Additionally, we successfully generated meaningful free cash flow, allowing us to end the quarter with $54 million in total cash. Before Ashlee and Paula provide more details on our second quarter performance, I’d like to take some time today to share where we are and our strategies for the business transformation. Our first phase, which is nearing completion, was focused on driving operational excellence. Phase 2 is focused on scaling that platform to expand product offerings, gaining additional wallet share and building our active customer file while delivering top- and bottom-line growth. Since my return approximately two years ago, we have focused on many initiatives building talent, improving operational execution, realigning product sourcing and driving supply chain capabilities, enhancing financial discipline, optimizing inventory levels, and expanding technical and digital capabilities. We worked on building a scalable operational foundation that positions us to accelerate into the next phase of our strategy, which is product evolution and expansion. We’ve discussed many of these initiatives over the last several calls, but I’d like to highlight a few of these today. Historically, Torrid has had a best-in-class data and digital capabilities. Our direct business now delivers 60% of our total demand and 93% of our customers are engaged in our loyalty program. Our data centric…

Thank you, Lisa. I will begin today by discussing our Q2 results and then give an update on our margin optimization strategies as well as our merchandising and marketing initiatives. We are pleased with the trends we are seeing in our business as customers are responding to our newer collections driving higher regular price sales. During the quarter, we continued to gain momentum with our regular price comps increasing 6.4%, driven by strength across all apparel categories and in particular tops, denim and dresses which all saw double-digit positive comps at regular price. While our total comp was down 0.8%, this was attributable to a 50% decline in markdown sales, which we have been strategically managing and which resulted in a significantly healthier inventory position throughout the quarter. We expect the pressure of negative clearance sales comp to abate as we move through the back half of the year, having reached the peak of clearance comp headwinds in the second quarter. By the fourth quarter, we anticipate the drag from negative markdown comps to be half of what we saw in the second quarter, which will be offset by healthy regular price selling, allowing us to deliver positive comps in total. We remain very encouraged by the health of our business as reflected in an apparel category comp that was up 3.6% in total. Gross margin expanded 323 basis points year-over-year, driven by reductions in both product cost and depth of discounting. We continue to be very pleased with our management of inventory, having turned our inventory historically fast during the quarter and ending with 19% less inventory in total and 52% less inventory at markdown than last year. We have built scarcity into our business model, which reduces our reliance on deep promotional discounts supported by a flexible chase…

Thank you, Ashlee. Good morning everyone and thank you for joining us today. I will now begin with a detailed discussion of our second quarter performance, followed by our outlook for fiscal 2024. We’re very pleased with our second quarter results. Our sales and adjusted EBITDA came in at the high end of our guidance as customers responded favorably to our product offering. While we continue to tightly manage inventory levels, ending the quarter with inventory down 19% from the previous year. All of this drove our total cash and cash equivalents to $54 million, an increase of $35 million compared to the same period last year. For the second quarter, net sales came in at $285 million compared to $289 million last year. Comparable sales declined 0.8% due primarily to lower levels of markdown sales relative to a year-ago, which had a minus 50% comp offset by a positive 6.4% comp in regular price sales. We continue to expect this impact of clearance rebate in the back half of the year as we begin to anniversary more normalized inventory levels. Gross profit increased 7.4% to $110 million from $103 million last year, reflecting a gross margin increase of 323 basis points to 38.7%, driven by lower product costs and fewer markdowns. SG&A expenses in the quarter were $76.8 million, or 27% of net sales, compared to $69.6 million, or 24% of net sales last year. The increase is primarily driven by performance bonuses, strategic technology investments and a one-time expense of $2.1 million, or 80 basis points related to employee severance. As a reminder, we did not incur performance bonus expense last year. Marketing expenses in the quarter were $13 million compared to $12.9 million in the second quarter of last year. As a percentage of net sales, marketing…

Thank you. [Operator Instructions] Our first question is from Dana Telsey with Telsey Advisory Group. Please proceed.

Hi, good morning everyone. As you think about the fleet optimization program that you just announced with 65% located in enclosed malls, what is your ultimate target for what the fleet should look like? Are there number of stores, locations and this 20 to 25 additional closures by the end of this year, how do you think about the cadence of closures going forward? Then, Lisa, congratulations on the progress on regular price comps. What are you seeing in terms of pricing and the full price sell through? How are you thinking about product costs and the ability for pricing? And then just anything more on category performance and cadence through the quarter? Thank you.

Hi, Dana. This is Paula. I’ll take the first part on the fleet recommendation. So when it comes to cadence for the 20 to 25 additional closures this year, they will most likely all happen at the end of Q4. We’re timing it pretty well with when the leases will expire, so there will be no actual impact to our profitability. And then in regards to where our target should be, we’re really targeting more on that 50/50 percent. It will take us a few years to get there. It’s not going to be overnight. We’re going to be balancing our fleet while we’re doing these closures. So not only we’re going to be closing them, there’s also going to be openings in outdoor centers. So I would expect the fleet to be a well balanced place anywhere in the next three to five years.

And then on the other questions, we have a lot there. So as Ashlee mentioned in the comments, we’re happy with our full price sell-through. We’re turning faster than we’ve turned in a while, and I don’t know if it’s historically the fastest ever, but we definitely made progress in terms of that we’re really comfortable with our inventory levels and productivity of that. We removed the empty calorie sales in terms of clearance sales and really focused on developing scarcity in the model again and really being able to reinforce that with the chase model. I think all of those combined together are – exemplify our strategy, and I’m really proud of the organization and their capabilities to make these, I think pretty dramatic shifts in terms of how we’re managing inventory and managing chase, so really happy about that. Even with the chase, we’re still seeing benefit in terms of cost of goods. We’re platforming fabrics that’s giving us some additional savings in terms of cost of goods. And we’re really reinforcing what we talked about previously, which was the focus on our core vendors and their capabilities and really strong partners with them as we move forward into this. So all of those have combined into the capability – and bringing us the capability to continue to see some improvement in cost of goods. Again it won’t be at the level that we are currently – that we’ve seen for this year, but we still have opportunity. We also still have opportunity in inventory productivity wherever some of our core kind of milestock assumptions that we’ve made historically have room for improvement. So that we see, even with these dramatic improvement in inventory levels, we still think that we have opportunity to improve how we’re managing model stocks and core programs. And as Ashlee mentioned, we have a new system that will be fully, that’s part like half. Two of the four modules are in play right now, and the balance of them will be done by the early first quarter. But this will allow us more specificity and detail into store-by-store allocation based on the customer demands in those specific regions and geography. So lots more to come on both the product cost inventory optimization with always kind of that idea of the full price sell through improving and being able to chase into that which will augment that sell through over time. Category performance, I just reinforce what Ashlee said. Denim, we’re still very happy with that. In fact, we moved through all of our platform fabrics and are replenishing our platform fabrics there as we chase products into the fourth quarter and first quarter of next year. And then knit tops, particularly sweaters, jackets are working; dresses are working, so really happy with the balance performance through multiple categories.

Thank you.

Thanks, Dana.

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

Great. Thanks. Lisa, you provided a really interesting stat in your prepared remarks around your ability to chase. I think you mentioned it was something like 10% or so of your buy is still open for the fourth quarter. Is there any way to put that into context to talk about sort of where we’ve been in terms of your ability to chase and the inventory that you had availability in prior seasons versus what you have now and what that might mean for the P&L going forward as we head into the back half year?

Sure. Hey, Corey. We really haven’t chased in an appreciable way since 2016, I would say. So this ability to chase is kind of reawakening a muscle that the organization did have but hasn’t really utilized in a bit? We’re currently 10% of our receipts in Q4 are chase receipts. So we’re in play currently. We’re being able to fill all of that open to buy and so that that’s exciting. I think that chase could get to a little bit higher than this, maybe 15% at the most but we’re more to come on that. Do think obviously there’s margin opportunity as you are chasing closer to need, closer to demand, understanding customer preferences. Many of these chase styles are reorders based on initial sell through. So it overall makes our inventory more and more productive as we have more information before making – making the investment and core to our strategy of inventory productivity and being able to manage that more effectively will be this chase capability. And our vendors are in our product development sourcing teams are doing a great job in being able to meet these needs.

That’s great. And then could you just provide some more color on the cadence throughout the quarter and then maybe any trends you’re seeing quarter-to-date? Thanks so much.

Can you take that Ashlee?

Yeah. I mean, trends throughout the quarter Corey, May was really strong early part of June as well. I think we saw similar to many retailers, a tougher 4th of July holiday, but then we had a very, very strong finish to the quarter with a really, really strong cash event that we were proud of in July. So I think a little bumpiness around the 4th of July holiday, but otherwise the quarter exceeded our expectations. As for the start of Q3 with a month in we are – we’re on track.

Great. Thank you so much and best of luck.

Thank you.

Thanks. Great.

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

Perfect. Thanks a lot for taking the question. Just a couple for Paula on the full year sales guidance, really kind of a two-part question. I know you trimmed the high end. Can you just walk us through sort of what’s driving a little bit more conservatism there? And then despite trimming, we do still have that comp improvement assumed in the back half. So just a little bit more detail illuminating what gives you confidence there? And then just secondly, just for Lisa, just on the average customer age increasing over time, some of that data you gave. Is the goal to bring that back down or just help me understand, I guess, what the strategy is there, if you’re okay with where it sits or what the plan is from here? Thanks a lot.

Yes. Hi, Alex. This is Paula. So I think in regards to guidance for the second half of the year, we’re really just tightening our guidance, right? Six months of actual have already taken place. So we know we have a good understanding of where the business is. So I think from our perspective, we just tightened our guidance from a top-line standpoint. We do expect, and we saw our guidance for Q3 and Q4, we do expect for our results to start reflecting that inflection point that Lisa had brought up. And specifically in Q4, we do have, one thing that you have to remember is that last year, we had an extra week, right? So – and we were very clear that last year that was worth about $22 million. So I don’t think we’re being that conservative with our quarter for Q4. It’s a realistic quarter in which we are chasing inventory. We’re also launching – we’re going to be launching new capsules during that time to be able to get to where our targets are. So hopefully that covers.

And hi, Alex. I’ll talk about the average customer age. My goal, our goal as an organization would be to rebalance that age a little bit younger. But again, I think the stickiness of our customer is world class. We’re really happy that they stay with the brand. Our core franchises have really resulted in great levels of productivity and consumer demand. But our focus on customer, on product innovation as we move forward with the capsule concepts and making sure, like I spoke to the denim assortment, become – making sure we are relevant commercial in terms of those decisions. I think that will all guide towards growing the total customer file. And as we grow that customer file, I expect the average age of it will come down slightly. I think that it’s important to note, I mean, we announced the winner of the Model Search today, and most of our applicants in that Model Search were in their, like 29, I think was the average age of that. We had a lot of activation and interest in that. We had the most involvement and engagement that we’ve ever had in this type of program before. And target is – and the competitors were targeted right into that core age group naturally without us managing it in any other way. And so I’m excited with some of the product initiatives that we have. While we will not walk away from our tried and true [ph] dedicated evangelical customer. We certainly have an opportunity to expand those product offerings to incorporate different mindsets and age groups into the brand while leveraging all of our capabilities in our web and store platform. So excited about the opportunity associated with that and very focused on ensuring that we protect the core business while we look to expand product and expand the opportunity.

Thanks a lot. Good luck, ladies.

Thank you.

Thank you.

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

Thanks a lot. Just curious sort of a broader discussion on structural margin. I mean, you’ve rattled off so much that you’ve done to improve just the broader efficiency of the business, really soup to nuts. And I’m just kind of curious, are we playing here for return to kind of where you were low teens that pre pandemic or is there more efficiency even relative to that period? And I guess when from a timing standpoint you might expect flowing through some of the nice gross margin that you’re seeing? Thanks.

Just for clarity, Dylan, you’re referring to EBITDA margins?

Yes. I mean, either really operating or EBITDA, maybe you want to talk about it.

I mean, I think that we delivered 12.2% EBITDA margin in this quarter. We think we have opportunity to kind of rebalance margins in fourth quarter. I think we’ve overinvested. Our sales are pretty flat quarter-to-quarter. We don’t have the same type of seasonal gift giving build that some players have, and I think we overinvest in that. So I think one piece of the opportunity and margin expansion is kind of rightsizing the investment in fourth quarter, whether it’s payroll or marketing or some of the promotional pressure that you have. We don’t feel like with our position in terms of inventory and assortment, that we’re going to have to be as promotional as perhaps the company has chosen to be in the past. So I do feel like we have a path back to the low teens. And I think over time, kind of low- to mid-teens would be reasonable. Based on what I talked about the fourth quarter, but also that we built this platform, we’ve built this operational platform that we can – we feel very strongly that we can leverage at this point. So flow-through should be at or above current levels in terms of growth, and EBITDA flow through should start. I don’t want to say accelerate, but I think the flow-through should be very stable. We feel like fundamental to this is the investments have been made, the platform has been developed, and now it’s about leveraging that and scaling that investment. So I’m happy with our path back to the low- to mid-teens and feel like that can be accomplished in the next several years.

Thanks. And just a point of clarification on the store repositioning, is this that you’re going to get to 50/50 primarily through closures, or is there a healthier balance of closures with opening sort of further out? And then I guess I’m just curious, is 50/50 mix the end target, or is that just sort of where you’re looking to get to in the more medium term? Thanks.

Yes.

Go ahead. Sorry.

So, yes, this is Paula. So we are targeting the 50/50. And like we said mentioned earlier, it will not be overnight. It will take three to five years to get there. But it’s not going to be just through closures. It’s definitely going to be closures and mix in with openings. So there’s going to be a timing there that we may be closing more than opening. And there might be times where it'll be opening more than closing. So it’s going to be a mix and that’s why I believe it’s going to take three to five years to get to that 50/50 balance.

Makes sense. And is 50/50 optimal, or is 50/50 just something that’s achievable over the three to five years?

That’s – it’s both, to be fairly honest. I mean, we do have very good centers are enclosed malls, specifically, like, in geographical locations that might be like the weather might be colder [ph] and et cetera. So we wouldn’t necessarily want to get out of all enclosed loans, but I would say 50/50, it meets both.

I mean, based on what we know today, that’s what we think as optimal. But things change over time and we’ll continue to analyze it. I think our path to getting there in the next three to five years is reasonable and I’ll just reinforce that. Yes, there’s going to be a short term kind of aspect of closures. But over time, we’re still opening, I think 12 to 15 this year. So it’s not just a closure game. It is a net remix game.

Yes. Make sense. Thanks a lot. Nice work.

Thanks.

[Operator Instructions] Our next question is from William Reuter with Bank of America. Please proceed.

Hey, guys. Good morning.

Good morning.

Good morning.

Sorry, we can’t hear you. Operator?

We lost William’s line. We have no further questions at this moment. Unless you want to pause and I could see if I can reconnect him.

We’ll just close at this time. Thank you guys so much for joining us today. We look forward to sharing our third quarter results with you imminently. So thank you. Thank you for your interest in the company.

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