Torrid Holdings Inc. Form 10-Q Summary
Business Context and Reporting Period
Torrid is a direct-to-consumer apparel, intimates and accessories brand serving women wearing sizes 10 to 30 through its e-commerce platform and stores in the United States, Puerto Rico and Canada. This filing covers the 13 weeks ended April 29, 2023, compared with the 13 weeks ended April 30, 2022. Fiscal 2023 is a 53-week year. The company operated 638 stores at April 29, 2023, compared with 625 stores a year earlier.
Financial Performance and Liquidity
| Metric | Q1 Fiscal 2023 | Q1 Fiscal 2022 | Change |
|---|---|---|---|
| Net sales | $293.9 million | $333.2 million | Down 11.8% |
| Gross profit | $110.6 million | $129.9 million | Down 14.8% |
| Gross margin | 37.7% | 39.0% | Down 130 basis points |
| Income from operations | $26.1 million | $39.7 million | Down 34.4% |
| Net income | $11.8 million | $24.1 million | Down 50.9% |
| Diluted EPS | $0.11 | $0.23 | Down $0.12 |
| Adjusted EBITDA | $38.3 million | $51.8 million | Down 26.1% |
| Cash flow from operations | $11.2 million | $9.2 million | Up $2.1 million |
Cost of goods sold was $183.2 million, or 62.3% of sales, compared with $203.3 million, or 61.0%, in the prior-year period. Selling, general and administrative expense declined 1.4% to $71.2 million but increased to 24.3% of sales from 21.7% due to sales deleverage. Marketing expense declined 25.7% to $13.4 million, or 4.5% of sales, primarily because of lower television and digital marketing spending.
Interest expense increased to $9.5 million from $6.3 million, primarily because of higher variable interest rates on the term loan. The effective tax rate was 28.6%, compared with 28.1%.
Cash and cash equivalents were $18.3 million at April 29, 2023, plus $0.4 million of restricted cash. Inventory was $174.8 million, compared with $180.1 million at January 28, 2023. Capital expenditures were $5.7 million. Net cash used in financing activities was $0.8 million, including $4.4 million of term-loan principal payments and no share repurchases.
Total liabilities were $731.8 million and stockholders’ deficit was $216.3 million. Term-loan debt, net of discounts and financing costs, was $316.8 million, and ABL borrowings were $12.0 million. The ABL facility had $130.7 million of availability, subject to borrowing-base limitations, and $7.4 million of outstanding standby letters of credit. Management reported compliance with debt covenants and stated that cash from operations and available financing should be sufficient for working capital and anticipated capital expenditures for at least the next 12 months, while noting that future availability and cash generation are not assured.
Material Changes Versus the Prior Comparable Period
- Comparable sales declined 14%, compared with a 2% decline in the prior-year quarter, despite a 2.1% increase in store count.
- Sales declined primarily because of fewer transactions; the increase in private-label credit-card funds partially offset the decline.
- Gross margin contracted because of inflationary product costs, higher store occupancy costs and higher merchandising payroll costs, partly offset by pricing actions, higher credit-card funds and lower e-commerce shipping costs.
- Operating margin declined to 8.9% from 11.9%, and net margin declined to 4.0% from 7.2%.
- Operating cash flow increased despite lower earnings, primarily because of lower inventory purchases and a smaller reduction in accrued liabilities.
- No shares were repurchased in the quarter, compared with 2.9 million shares repurchased for $22.9 million in the prior-year quarter. Approximately $44.9 million remained under the authorized repurchase program.
- The company retrospectively reclassified private-label credit-card royalties, profit-sharing and marketing funds from SG&A to net sales. The change had no effect on operating income, net income, EPS, cash flows or stockholders’ deficit.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quarterly or full-year sales, earnings or EBITDA guidance. Management expects to continue investing in brand marketing, customer acquisition, product design and development, technology, operations, store expansion and the omnichannel customer experience.
Management cited softening consumer demand, inflation in wages, transportation and product costs, supply-chain constraints, competition, changing customer preferences and customer-acquisition challenges related to privacy and tracking changes. The company sources all merchandise from independent manufacturers and a significant amount from China, creating exposure to raw-material costs, freight, disruptions and geopolitical conditions.
Debt-related risk is significant. The term loan carried an elected interest rate of approximately 11% at April 29, 2023, with $240.6 million of scheduled principal repayments due in 2028. The company amended both its term-loan and ABL agreements after quarter-end to replace LIBOR with SOFR; management stated that the amendments did not materially affect the financial statements.
A class action lawsuit filed in November 2022 and amended in May 2023 alleges that statements in the IPO registration statement and subsequent SEC filings and earnings calls were false or misleading. The company disputes the allegations, but cannot estimate the probability or reasonably possible loss. No material impairment charges were recorded. The company recognized $0.7 million of inventory write-downs and incurred $0.4 million of other expenses, including severance and certain Sycamore-related management expense reimbursements, in the quarter.
Important Facts for Investors to Verify
- Whether negative comparable sales and lower transaction volumes persist despite store expansion.
- Whether gross-margin pressure from inflation, occupancy and labor costs continues or improves.
- The effect of approximately 11% variable-rate term-loan interest and future refinancing or maturity requirements.
- Actual borrowing-base availability under the $150 million ABL facility and continued covenant compliance.
- Whether operating cash flow remains sufficient to fund inventory, leases, capital expenditures and debt service.
- The outcome and potential exposure from the shareholder class action litigation.
- The impact of the private-label credit-card funds reclassification when comparing reported sales and SG&A with earlier filings or other retailers.
- Progress on customer retention, omnichannel migration, marketing efficiency and inventory quality.