Torrid Holdings Inc. Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended July 31, 2021, compared with August 1, 2020. Although the request identifies “2020 Q2,” the filing is a fiscal 2021 second-quarter report. Torrid is a direct-to-consumer apparel, intimates and accessories retailer serving curvy women ages 25–40 through e-commerce and stores in the United States, Puerto Rico and Canada. The company operated 608 stores at July 31, 2021, versus 606 a year earlier.
Key Financial Metrics
| Metric | Three months ended July 31, 2021 | Three months ended August 1, 2020 | Six months ended July 31, 2021 | Six months ended August 1, 2020 |
|---|---|---|---|---|
| Net sales | $332.9 million | $249.2 million | $658.6 million | $405.7 million |
| Comparable sales | 30% | (2)% | 60% | (20)% |
| Gross profit | $149.7 million | $80.0 million | $294.7 million | $120.9 million |
| Gross margin | 45.0% | 32.1% | 44.7% | 29.8% |
| Income from operations | $(40.0) million | $19.7 million | $(14.6) million | $39.7 million |
| Net income | $38.8 million | $16.8 million | $51.7 million | $29.0 million |
| Adjusted EBITDA | $86.5 million | $34.2 million | $162.2 million | $26.0 million |
| Adjusted EBITDA margin | 26% | 14% | 25% | 6% |
| Diluted EPS | $0.35 | $0.15 | $0.47 | $0.26 |
Six-month operating cash flow was $106.5 million, compared with $61.4 million in the prior-year period. Capital expenditures were $5.9 million, compared with $8.2 million. Cash, cash equivalents and restricted cash totaled $50.8 million at July 31, 2021, including $50.5 million of unrestricted cash.
Inventory was $110.3 million, compared with $105.8 million at January 30, 2021. Total assets were $662.5 million and total liabilities were $820.1 million, resulting in a stockholders’ deficit of $157.6 million.
Material Changes Versus the Prior Comparable Period
- Net sales increased 33.6% in the quarter and 62.3% year to date, primarily reflecting recovery from COVID-19-related store closures and restrictions in the prior-year period, higher order volumes and higher average order value.
- Gross margin expanded by 12.9 percentage points in the quarter and 14.9 percentage points year to date, driven by reduced promotional activity, lower inventory reserve levels, lower distribution costs and operating leverage.
- Operating expenses increased sharply because of share-based compensation, store payroll, performance bonuses and other public-company and operating costs. Selling, general and administrative expense included $115.0 million of share-based compensation in the quarter and $154.8 million year to date.
- Despite operating losses of $40.0 million for the quarter and $14.6 million year to date, reported net income was positive because of income-tax benefits of $91.5 million and $83.5 million, respectively.
- On June 14, 2021, Torrid refinanced its prior term loan with a new $350.0 million senior secured term loan due June 14, 2028. Net term-loan borrowings outstanding were $340.7 million at quarter end.
- The company completed its initial public offering in July 2021. Selling stockholders sold 12.65 million shares at $21.00 per share; net proceeds to selling stockholders were $248.4 million, while Torrid did not receive proceeds from those shares. IPO-related offering costs borne by Torrid were approximately $6.0 million.
- Torrid made a $300.0 million distribution to Torrid Holding LLC during the quarter and received $340.5 million of net proceeds from the new term loan.
Liquidity, Debt and Other Financial Considerations
- The new term loan bears variable interest; the elected rate was approximately 6% at July 31, 2021. A 1 percentage-point change in variable rates would affect annual interest expense by approximately $3.5 million.
- The amended asset-based revolving facility had $150.0 million of commitments, $145.5 million of availability and no borrowings at quarter end. Standby letters of credit totaled $4.5 million.
- Management believes operating cash flow and available ABL capacity will be sufficient for working capital and anticipated capital expenditures for at least the next 12 months, while acknowledging that future cash generation and borrowing availability are not assured.
- Estimated annual future occupancy payments, including periods covered by lease-extension options, were $323.2 million at July 31, 2021. Operating lease liabilities totaled $271.2 million.
- The company was in compliance with the covenants under both the new term loan and amended ABL facility at quarter end. Debt agreements restrict additional debt, liens, investments, distributions and other corporate actions.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quantitative revenue, earnings or margin guidance. Management expects continued investment in marketing, personnel, technology, store expansion and customer experience, but states that recent favorable trends may not continue.
- COVID-19, including the Delta variant, could again affect store operations, customer demand, staffing, distribution and suppliers.
- Supply-chain exposure includes reliance on third-party manufacturers and transportation providers, significant sourcing from China, potential tariffs, raw-material cost volatility and shipping disruptions.
- Consumer spending, shopping-center traffic, competition, changing product preferences and the effectiveness of the company’s omni-channel strategy could materially affect results.
- The $111.4 million remeasurement of legacy management incentive units following the IPO materially increased share-based compensation and produced an unusually large tax benefit. The related $87.1 million income-tax receivable is expected to become an income-tax payable by fiscal year-end.
- Interest expense included a $5.2 million write-off of unamortized financing costs and a $2.1 million prepayment penalty associated with repayment of the prior term loan.
- A previously identified material weakness in internal control over financial reporting related to the accuracy and presentation of share-based compensation remained unremediated. Management concluded that disclosure controls were ineffective as of July 31, 2021.
- Sycamore controlled a majority of the voting power, making Torrid a controlled company and creating potential conflicts between Sycamore, its affiliates and other shareholders.
- The company reported no pending litigation expected to have a material adverse effect on its financial condition, results of operations or cash flows.
Most Important Facts for Investors to Verify
- Confirm the correct comparison period: this is fiscal 2021 second quarter, not fiscal 2020 second quarter.
- Separate recurring operating performance from the $154.8 million year-to-date share-based compensation expense and the related unusual tax benefit.
- Review cash generation after the $300.0 million related-party distribution and assess leverage under the $340.7 million term loan.
- Evaluate the sustainability of the 44.7% year-to-date gross margin and 25% Adjusted EBITDA margin after COVID-19 recovery effects normalize.
- Assess liquidity against substantial lease obligations, mandatory debt repayments and variable interest-rate exposure.
- Monitor remediation of the material weakness in share-based compensation controls and the effectiveness of disclosure controls.
- Review COVID-19, China sourcing, tariffs, freight, labor, inventory and consumer-demand risks, as well as Sycamore’s control and related-party transactions.