Greetings, and welcome to the Torrid Holdings Incorporated Third 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]. A reminder, this conference is being recorded. It is now my pleasure to introduce Chinwe Abaelu. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining Torrid's call today to discuss our financial results for the third quarter of fiscal 2024, 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; 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 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 and terms of similar meaning. All forward-looking statements are based on current expectations and assumptions as of today, December 3, 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.

Thanks, Chinwe. Hello, everyone, and thank you for joining us today. I will begin by discussing our third quarter performance and our strategies moving forward. Then I'll turn the call over to Ashlee to discuss our merchandising initiatives. Paula will then provide our third quarter financials and outlook. Let me start by acknowledging that we are clearly disappointed with our results this quarter. Sales trends began to soften in late September, and this continued through October. In hindsight, our fall assortments did not offer enough newness and novelty. Despite the weaker top-line sales, we delivered 285 basis points of gross profit expansion while carefully managing expenses. We ended the quarter with clean inventory levels down 19% to last year and $44 million in cash, which is $28 million higher than last year. Let me provide a little more color on our sales trend. During the quarter, customers responded to products that were new and inspirational, such as our novelty sweaters and our relaunched denim program. However, we saw softness in our core collection, which was not innovative enough in an environment where consumer spending was constrained. We now recognize that our core product was too similar to what had been offering her, and we did not infuse it with enough freshness and fashion. In short, it was too much of the same thing she already had in her closet. Macro trends also had an outsized impact on our business. Trends in both traffic and regular price comp were positive in August until mid-September, softened in late September, and deteriorated in October. The severe hurricanes in October, which occurred during our largest event of the quarter, Torrid Cash, also weighed on our sales trend. We estimated that hurricanes impacted our full-price comps by 100 basis points for the quarter. In addition,…

Thank you, Lisa. Let me start by reiterating that despite a third quarter that fell short of our expectations, we remain confident in our long-term strategy of driving growth and product innovation and assortment initiatives. Our regular price sales comp increased 1% year-over-year, and while our total comp was down 6.5%, this was attributable to a 47% decline in clearance sales, which reflects our strategic shift away from empty calorie sales. This favorable price type mix combined with cost of goods improvement yielded over 285 basis points improvement in growth margin year-over-year. We expect the comp headwind from clearance sales to lessen in the fourth quarter to negative 25 to negative 30 and flatten in Q1 2025 as we begin to lap more reasonable inventory levels. We are already seeing this improvement now. We are pleased with our management of inventory during the quarter despite a top-line sales miss, having ended the quarter with 19% less inventory in total and 34% less markdown inventory than last year. Torrid cash redemption, which remains our most productive loyalty event, was particularly impacted by hurricanes in late September and October. As a result, traffic was down mid-single digit for the quarter, which was lower than our expectations. We estimate the impact of hurricanes during Torrid cash to have had 100 basis points impact to our full price comp for the quarter, resulting in a plus-one comp versus what would have otherwise been a plus-two regular price comp. We saw our customers behave very differently in late September and October, particularly our most engaged customers, resulting in a need to promote more heavily to drive demand and ensure we did not carry forward fall products into the fourth quarter. From a product standpoint, we saw continued growth in positive comps in Denim driven by…

Thank you, Ashlee. Good afternoon, everyone, and thank you for joining us today. I will now provide a detailed discussion of our third quarter performance before transitioning into our outlook for fiscal 2024. Starting with the third quarter, we achieved notable growth margin expansion and maintained disciplined expense management. However, these gains were tempered by softer than expected sales trends, particularly during the end of September and into October. Despite these challenges, one of our key focus areas has been optimizing inventory levels. I'm pleased to share that we ended the quarter with inventory down 19% year-over-year. This strategic reduction has strengthened our cash position, which now stands at $44 million, representing a $28 million improvement compared to last year. Now let's dive into our financial details. Net sales for the third quarter were 263.8 million compared to 275.4 million last year. Comparable sales declined 6.5%, regular price comp was positive 1%, while clearance comp was down 47%. Growth profit grew by 4% to 95.2 million compared to 91.5 million last year. This reflects a significant improvement in growth margin, which expanded by 285 basis points to 36.1%. This increase is primarily due to reduced product costs and an increase in sales of regular price products. SG&A expenses were 74.9 million or 28.4% of net sales compared to 71.9 million or 26.1% of net sales last year. The increase is largely due to performance bonuses, which were not incurred last year. Marketing expenses were 13.1 million, almost flat to last year. As a percentage of net sales, marketing expenses rose slightly, up 35 basis points to 4.9%. This reflects targeted efforts to enhance customer acquisition and strengthen brand engagement. Net loss was 1.2 million or negative $0.01 per share compared to a net loss of 2.7 million or negative $0.03…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Brooke Roach, Goldman Sachs.

Good afternoon and thank you for taking our question. We found something you could quantify, the proportion of newness in the assortment that you have planned in the first half of 25 in comparison to the third quarter, and then help us understand what marketing and consumer engagement strategies you have to drive traffic with that improved product newness. Should we anticipate any changes in toward cash events or other marketing strategies such as model search?

Thanks, Brooke. I don't have an exact percentage of newness. What I will tell you is that we are impacting every category, and there are 12 products, 12 legacy products, that generate a substantial amount of our business. They need to be updated and addressed, but we will protect those businesses. Categories that we've already updated that we're seeing really strong support and continued strong reaction from the customers, obviously denim. We've talked a lot about that. Sweaters, dresses are improving. And so we are impacting every aspect of the business while protecting kind of core franchise programs and updating them. In terms of what we're doing, and I would say separate to the core line, and we've talked a lot about it, are the sub-brands that we're launching. And so, again, it's crawl, walk, run for that business, but the first one is Festi, which is a very boho line that we will launch 12-27 when people return to the malls after Christmas. They like to see newness. They get excited about new product. And we'll see that. We have follow-ups on that product about every four to six weeks for the balance of the year. Then we'll launch Nightfall, which is kind of a traditional legacy edgy concept for Torrid where we are able to really speak to that niche customer, and then Retro Chic, which is another niche customer that we'll appeal to. So it's newness in the core line as well as newness in the sub-brands with an eye toward protecting core franchises, core knits, core wovens, core non-denim bottoms and denim. And we'll see as we move through the year the balance between the newness in the Torrid core line and the sub-brands. Doing this all based on our same kind of table stakes fit…

Great, and if I could just ask a follow-up for Paula. Paula, you gave some helpful guardrails on early thoughts on 2025, low- to mid-single-digit sales growth and improvement in EBITDA margins. Can you help us understand the puts and takes of that EBITDA margin expansion? Is it possible for the business to expand margins even if comps don't return to growth next year or if things take a little bit longer than your expectations?

Brooke, that's a great question. I would say yes. We would still be able to see EBITDA margin expansion, especially as we focus on optimizing our store footprint. So from that standpoint, we would still see it. But to Lisa's point, with all the newness that we were going to be bringing in 2025, we feel very good and we believe that we will return to growth from a comparable sales. I mean, we are in a better place now than we were right a year ago from a comp sale. So we are tracking in the right direction. So I would say yes all across. Just looking at all of our operational efficiencies and projects that we have for next year, aside from comp sales growth, we should still see that EBITDA margin expansion.

Great. Thanks so much. I'll pass it on.

Thank you. Our next question comes from Corey Tarlowe, Jefferies.

Great. Thanks. Lisa, recognizing there was a lot of volatility in the business in the quarter, could you talk a little bit about your view as to what was maybe macro versus micro? It would be curious to hear your perspective as you assess the business performance throughout the quarter and Black Friday. And then just one thing that I think we've talked a lot about, especially over the last year, has been your inventory control. But if you bring in a lot of the newness, I'm curious to get your perspective on the shape of the growth or change in inventory for the remainder of the year and perhaps into the early parts of next year?

Sure. Thanks, Corey. Micro versus macro, we've had a lot of conversations about this. And most of my prepared remarks today were focused on product because that is the side of this that we can control. But there are core KPIs that were very dramatic shifts for us that were anomalous to anything that we've seen before in October. The good news is there's been recovery in November. As we've said, Black Friday and cyber was flat to last year with margin expansion, with product margin expansion. So we were pleased with that. That hit our forecast. But we saw positive traffic and regular price sales in August, moving on through the quarter to very deep negative traffic trends in October. And so we had an incremental new line in late September, fall pre, and we had an extended toward cash. And we could not, besides the traffic, we promoted regular price to try to drive behavior. There were normal elasticity models did not apply. So there really wasn't anything that we could do to incite, entice the customer to change her, to go back to a more normalized kind of behavior. The behavior changed pretty dramatically. Now I can attribute that to weather, hurricanes, election, a lot of things, but I can't slice and dice that from my perspective. All that we can tell you is that traffic changed dramatically from the beginning of the quarter to the end of the quarter, from positive to negative 11 in the end of the quarter and again recovered in November post-election. So we saw that. So that's all I can base that on, that idea that we really couldn't entice her to spend with normal kind of promotional activities. Our most valuable, highly engaged customer was the least engaged for that…

Hi, Corey. So even with all of the newness coming, we expect to end the year, as we've said before, flat to down, low single digits, and believe that we can return to growth, so positive comp in 2025, on relatively flat inventory year over year. So it's really about replacing less productive choices with more productive, new, and inspirational ones.

Got it. Thank you so much. Best of luck.

Thank you, Corey.

Thank you. Our next question comes from Dana Telsey, Telsey Advisory Group.

Hi. Good afternoon, everyone. As you think about it, I think last quarter we talked about opening price point. What did you see as you went through the third quarter in terms of opening price points? Where are the prices relative to where you want to be? And with the introduction of some of these new products, how are the price points going to be versus the average? And then, Lisa, where are you on talent given the addition of the new chief merchant? What else would you like to, any other changes you'd like to see? And with these new capsules coming in, how are you planning marketing spend to introduce those? Thank you.

Thanks, Dana. We still have OPP in the mix. I would say it's less important in the back half of the year than it is in the front half of the year. Overall, our AOV was up for the year, for the quarter, excuse me. So I think that the mix was reasonable. I would say that the new capsules that we're bringing in the sub-brands are a blend, are a mix. Some of them are higher price points, some of them are the same price points that we have now and some of them are lower price point concepts. So it really is a marketplace approach where we are targeting each of these sub-brands to speak to a customer that enters the brand through a size range and a need, a problem that she needs solved or an inspiration that she's asking for. And we've broadened that mix and so some of the price points on the top end will increase a bit, but we'll also add lower price points. So the blend will end up most likely very similar to where we are now. It'll just be more of a broad range. On the talent question, I'm really thrilled to add Laura to the team and have Kate focus completely on intimates. We have a big opportunity in intimates and we've always treated it in an organization like apparel, kind of like an adjunct to the apparel process. It's not the appropriate way to manage those product categories and having a dedicated team and the talent to lead that initiative I think will pay off as we're able to bring new products to market and manage that side of the business more in an activist way. Laura has a lot of experience and specialty. We worked together years ago when she started. She was the merchant that started Janie and Jack. We were at Jamboree. She's worked at J. Crew for a long time managing women's and kids. She was one of the people who started Madewell. She was most recently at Away as the Chief Commercial Officer. So a great merchandising executive focused on the customer, focused on telling the customer's stories and really inspiring and activating that customer, that'll be critical as we are broadening our scope in terms of an end-use product for this mix. I know you asked me a question about capsules at the end.

And marketing?

Marketing, thank you. Sorry, I didn't get the whole question written down. As I mentioned, I think that one of the big opportunities for us that we've touched on, but I think that we will integrate even more aggressively next year is this opportunity to engage influencers and I mean big-scale influencers as well as medium and micro-influencers into this mix. And so we're using influencers in our photography campaigns. We're really engaging them in the mix broadly. We would expect next year marketing to go up slightly as a percentage of total sales, so we are adding money to marketing to be able to support the new customer acquisition. The other thing we're going to do is really front-load some of our marketing spend to drive customer acquisition earlier in the mix. I also think that we have an enormous opportunity. We've done a great job with customer reactivation this year, and I think that will accelerate as we bring new ideas to the marketplace. So some of it is organic and owned customers that we're going to be able to reignite and some of it is investing more broadly in digital, but also specifically in influencer campaigns to support these new ideas.

Got it. And just broadly speaking, given the newness that's coming in in the product, how much of the assortment going forward will be core? How much of it will be new and just how do you frame the assortment in terms of what it should be looking like compared to what you had?

I really -- the easiest way right now is to use denim as a proxy. And so last year, our skinny denim was 65% of our assortment and our sales in denim. This year, it's in the low 20s and we've picked up wide legs, flare, straight, all of the relevant, obviously. All of you know that there's a lot going on in denim right now, but that mix is a very different mix than it was a year ago. That being said, I still consider those silhouettes as being core. Even though they're new to us, flare, wide legs, straight, believe it or not took us a while to get to a straight leg in the mix. All of those would now be considered core businesses and some of them we're buying as such. We're putting them in the wall. We're investing so that they really are becoming core to our mix. So it's not just the old core. It's also developing new core in those categories. The same thing applies in non-denim. So our 12 business used to be a seasonal business. It's a year-round business now. We just introduced the wide leg weekend pant, which has had remarkable receptivity by the customer. And so that weekend franchise has now become core. So what we're doing with the capsules, in addition to bringing new ideas like boho or preppy or other ideas to the mix, we're also - we have more latitude a little bit as we're bringing in these sub-brands to bring in new ideas to see what ignites the customers. And some of those will move to Torrid core products over time. So in Festy even though we're delivering at 250 stores, we identified some woven tops and knit tops out of the Festy development cycle that we feel like are relevant, potential core businesses for Torrid. And those will blend into that mix over time. It's an incubation, but it's also an end use that we think is really exciting moving forward and how we'll move the core brand of Torrid from a very tightly held, controlled legacy-driven business to something that has a lot of legs, a lot of breadth and the opportunity for growth.

Thank you.

Thanks, Dana.

Thank you. And our next question comes from Alex Straton, Morgan Stanley.

Thanks a lot for taking the question. Just on the return to growth next year, I just wanted to clarify, is that comp or total sales or both? And then what exactly is the build you're assuming? Is it like pressure on the front half followed by an improvement in the back half? I'm just trying to understand the build to get to positive. And then the second question is just on when you start lapping that change in the strategy on clearance sales. I think you said the first quarter, but I just wanted to confirm. And I'm wondering just bigger picture, if there's any change you all are having in mindset on whether that was the right strategy to pull back out of that? Thanks a lot.

So next year is about comp and top line, so both are positive. We expect it I'm going to get in trouble for saying this, Alex, but we expect it to be positive for the entire year by quarter. I would say that the clearance sales are going to return to a more normalized level in Q1, so that's when we lap the deep kind of negative headwinds of clearance. I think fundamentally it gets us to a much healthier place. Hindsight being 2020, I might have done it over two years instead of one year, but I'm really glad that we are in such a healthy place in terms of inventory and margin, margin expansion. And I think that that allows us now to really focus and leverage those capabilities to drive growth through the right investments of the right products and distributed and assorted and allocated properly. So hindsight, maybe I could have done it over two years, but the number associated with this is a dramatic number, tens of millions of dollars of empty calorie sales that we walked away from this year that really will drive us to a much healthier place, has driven us to a much healthier place. And so the hard work is done in that sector from both inventory management and how we've managed clearance. And we want to be more emotional and inspirational to the customer as we move forward and wean ourselves off kind of this clearance mentality or being over inventory to manage that as well as kind of our promotional structure. So I feel strongly that we're at the pivot. Third quarter was strange with the October shift, but we feel like everything's on the water coming in to be able to deliver these growth numbers next year. And we've done the hard work of getting the right foundation set for the business and starting from the right place, both from the free cash it delivered as well as really rationalizing what our inventory needs are to drive growth. We feel comfortable.

Thanks a lot. Good luck.

Thanks.

Thank you. And our final question comes from Marni Shapiro, The Retail Tracker.

Hi, guys. Congratulations to Laura. I'm so happy that you guys are back together and that she's gone from throwing blazers. Much better having this girl power moment here. It feels to me like you guys have done a great job now sort of fixing all of the operations and fundamentals. And as you're -- I can't think of a better way of putting this, but as you're turning on those product spigots and the customers reacting, it's almost having a magnified effect on things like margin, et cetera. So can you just talk a little bit about that? Because you've, like you said, a lot of newness coming. Corey touched on the inventory. From my vantage point in your stores, anytime something new comes in, I never think you have enough inventory. It moves so fast. So can you just kind of pair together, you know, a little bit like here's where we are foundationally and this is how we see turning on these spigots of fashion and how it's kind of dropping kind of quickly? You claimed that you're also spending on marketing. If you could just pull it together a little bit cleanly, a little bit more tightly.

Okay, I'll try, Marni. If I understand you correctly, are you asking about the correlation between product expansion and kind of, to your words, turning on the product spigots and inventory levels?

Yes, it feels as if foundationally, am I right to say that you guys are in very good shape on an operations kind of perspective here? And so now as you start to kind of turn on these new brands or turn on new fashion product and it's selling, it feels like it should hit the bottom line in almost, it feels almost in a magnified way because there's not problems in the way anymore, or old inventory in the way, or old stores, or...

Yes, so, I get that, absolutely, that I feel like what we've done, and we were talking a little bit about that, ripping off the band-aid in terms of inventory, in terms of empty calorie clearance sales, in terms of old kind of legacy product that needed to be refreshed. So, the core Ponte business needs to be refreshed. It wasn't, it went, it didn't, we went and brought in a lighter weight Ponte, that's working really well, but we stuck a little bit too long to the legacy pieces. We're not, we're not doing that enough because we have enough newness to be able to inform how we invest going forward. So really exciting part about this is how we rank how we buy bringing in these new concepts that allow us almost a white sheet of paper approach to how we broaden this product for the customer without risking the core business, while we update the core business and bring in new ideas broadly. The operational acumen that we have where we can fulfill from every store and we can do it very effectively allows us to get more fashion deeper into the chain, all the way through the chain, and be more inspiring in the store environment and align the experience the customer is having on the web with the store experience and be more cohesive in that. And I think by cleaning up the inventory, by adding all these operational acuity and capabilities, allows and really leveraging this robust product design team and product development team that we have and with what we've done with sourcing and cost of goods last year, all of those things combined to put us in a great place to kind of jump off and jump into this product expansion and growth scenario. I know it might be hard. I mean, you look at it a little bit differently, Marni, but this customer is hungry for what everybody else is wearing and we have to be able to deliver that in a way that's margin accretive, that's responsible from inventory management and allocation strategies and assortment by channel, and all of those things are in place. We have those capabilities and now it's the fun part.

Well, that's how it feels to me. That's what I guess I'm getting at, like all the hard stuff is done, so now as you drop something like all of these new sub-brands or even your holiday assortment when you dropped it into stores. I see it online, but obviously I go see it in stores. Your sparkles, your holiday, your fashion sold in a minute. It was just gone. And it feels to me, though, if you're dropping things like that on more and more of that without having to do all the grunt work of the other that it should be much margin accretive and things should just move faster and smoother on top of just getting better sales.

Right. So we're looking at top-line growth. We're looking at continued margin expansion. But let's be honest. There's a lot of hard work that got to this point. There's still more hard work ahead of us, but how we assort the merchant mindset that can manage this progression of the core toward the billion-dollar core Torrid business and then also be able to incorporate these additional ideas is incredibly exciting. And I'm happy to have Laura in the mix to do that. I'm happy to have Kate focused on Intimates. I think that's where I felt like the investment needed to be made, and we've made it in merchandising, design, and product development. And I think we're excited about lots to come.

I just have one more quick follow-up. On the product side, is part of the shift to make it a little bit more useful? And I don't mean trendy teen, just a little bit more youthful.

Yes. I've talked about when I left in 16, the average customer age was 35, 36. When I came back, it was 42. I would like it to be 36. And so, yes, there's a blend here that I think is the right balance, and that is really that aging of the customer I think is really attributable to the lack of product newness and innovation over those years.

Yes. Well, best of luck with the holiday season. I'll talk to you guys offline. Thank you.

Operator, is that the last question?

Yes, that is the last question. I would like to turn the floor back to Lisa Harper for closing remarks.

Okay. Thanks, everyone, for joining us today. I hope you all have a wonderful holiday season, and we look forward to sharing fourth quarter results with you next year. Take care.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time.