Torrid Holdings Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the quarter ended October 30, 2021, representing the third quarter and first nine months of fiscal 2021. The request metadata identifies “2020 Q3,” but the filing compares fiscal 2021 with the quarter ended October 31, 2020.
Business Context
Torrid is a direct-to-consumer apparel, intimates and accessories retailer targeting curvy women ages 25 to 40, primarily through its e-commerce platform and retail stores in the United States, Puerto Rico and Canada. The Company operated 619 stores at October 30, 2021, compared with 608 stores at October 31, 2020.
The Company completed its initial public offering in July 2021. Sycamore Partners continued to own a majority of the voting power. The fiscal periods presented are 13-week and 39-week periods.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | First 9 Months 2021 | First 9 Months 2020 |
|---|---|---|---|---|
| Net sales | $306.2 million | $270.1 million | $964.9 million | $675.8 million |
| Gross profit | $125.1 million | $95.5 million | $419.8 million | $216.5 million |
| Gross margin | 40.9% | 35.4% | 43.5% | 32.0% |
| Income from operations | $43.7 million | $14.7 million | $29.2 million | $54.4 million |
| Net income (loss) | $(58.9) million | $4.3 million | $(7.2) million | $33.3 million |
| Adjusted EBITDA | $55.2 million | $30.8 million | $217.4 million | $56.8 million |
| Adjusted EBITDA margin | 18% | 11% | 23% | 8% |
| Operating cash flow | Not separately provided | Not separately provided | $125.3 million | $120.4 million |
At October 30, 2021, cash and cash equivalents were $61.8 million, inventory was $159.5 million and total assets were $636.3 million. Total liabilities were $850.9 million, including $341.0 million of term debt net of discounts and financing costs and substantial operating lease liabilities. The Company reported a stockholders’ deficit of $214.6 million.
Material Changes Versus the Prior Comparable Period
- Quarterly net sales increased 13.4% to $306.2 million; nine-month sales increased 42.8% to $964.9 million. Comparable sales increased 14% in the quarter and 42% year to date.
- Gross margin expanded by 5.5 percentage points in the quarter and 11.5 percentage points year to date, primarily from lower promotional activity, lower inventory reserves and operating leverage.
- Quarterly operating income increased substantially, but nine-month operating income declined because of a $157.2 million share-based compensation expense, including a $151.2 million incentive-unit remeasurement expense.
- The quarterly net loss was driven principally by a $96.5 million tax provision and the unusual share-based compensation-related tax effects. The effective tax rate was 256.5% in the quarter and 222.9% year to date.
- Cash from operations increased modestly despite the reported loss, largely because share-based compensation was a non-cash expense. Inventory increased $53.7 million from January 30, 2021.
- The Company entered into a new $350.0 million senior secured term loan in June 2021, repaid the prior term loan and increased ABL commitments to $150.0 million. No ABL borrowings were outstanding at quarter-end, and reported ABL availability was $119.0 million.
- Financing activities included a $300.0 million distribution to Torrid Holding LLC. Cash and restricted cash declined by $61.1 million during the first nine months.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative sales or earnings guidance. Management stated that operating cash flow and available ABL capacity or other financing arrangements are expected to satisfy working capital needs and anticipated capital expenditures for at least the next 12 months, while noting that future cash generation and borrowing availability are not assured.
- Global supply-chain disruption, port congestion and COVID-19-related factory closures caused significant product delays and limited product availability, particularly in the Asia-Pacific sourcing region.
- COVID-19 remains a risk to customer demand, store traffic, staffing, suppliers, distribution operations and future store closures.
- The Company is exposed to variable interest rates on approximately $341.0 million of term debt; a 1% rate change would affect annual interest expense by approximately $3.5 million.
- The new term loan matures in June 2028, bears interest at approximately 6% as of October 30, 2021, and includes mandatory repayments, potential excess-cash-flow prepayments and restrictive covenants.
- The Company identified an unremediated material weakness related to the accuracy and presentation of share-based compensation and related capital contributions. Disclosure controls and procedures were therefore not effective as of October 30, 2021, although management concluded the financial statements were fairly presented.
- Share-based compensation associated with pre-IPO incentive units generated significant volatility and is a major reason reported GAAP earnings differ from Adjusted EBITDA.
- Subsequent to quarter-end, the Board authorized a share repurchase program of up to $100 million; the authorization does not require the Company to repurchase any shares.
- Management reported no pending litigation expected to have a material adverse effect on the Company’s financial condition or results of operations. The filing states that there were no material changes to previously disclosed risk factors.
Investor Verification Items
- Reconcile the large difference between GAAP net loss and Adjusted EBITDA, particularly the $151.2 million incentive-unit remeasurement and related tax effects.
- Assess liquidity after the $300.0 million distribution, the reduction in cash, higher inventory and required term-loan repayments.
- Review the new term loan’s interest-rate exposure, maturity profile, mandatory amortization and covenant restrictions.
- Monitor inventory availability, freight costs, port congestion and sourcing concentration in China and other Asian markets.
- Determine whether comparable-sales growth and gross-margin gains persist after the easier COVID-affected prior-year comparisons.
- Track remediation of the material weakness and the effectiveness of the Company’s enhanced share-based compensation controls.
- Review related-party transactions with Sycamore affiliates, Hot Topic and affiliated suppliers.