Torrid Holdings Inc.

Greetings and welcome to Torrid's second quarter of fiscal 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Jessica Schmidt with ICR. Thank you. You may begin.

Good afternoon, everyone. Thank you for joining Torrid's call to discuss its second quarter results, which we released this afternoon and can be found on our website at investor.torrid.com. With me on the call is Liz Munoz, Chief Executive Officer of Torrid, and George Wayless, Chief Financial Officer. Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're all familiar with. Management may make forward-looking statements, including guidance, and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our filings with the SBC. This call will contain non-GAAP financial measures such as adjusted EBITDA and adjusted EBITDA margins. Reconciliations of these no-gap measures to the most comparable gap measure are included in the earnings release, furnished to SEC, and available on our website. Now I would like to turn the call over to Liz Munoz.

Good afternoon, everyone. I'd like to thank you for joining our earnings call. We are super excited to be hosting our first earnings call as a public company following our successful IPO. today we will be discussing our strong financial performance for the second quarter and providing detail on the growth strategies that position us to deliver strong and sustainable financial performance over the long term before i get started i'd like to thank our associates and our customers throughout this trying and difficult environment our associates remain dedicated to and focused on serving our customers who are truly at the center of everything we do. Our IPO in July was a tremendous milestone for everyone at Torrid and we could not have achieved any of this success without the commitment and enthusiasm of our associates as well as the loyalty of our customers. At Torrid, our mission is to help curvy women everywhere know the confidence and excitement that comes from getting dressed every day in apparel and intimates that accept, celebrate and honor her and her body. We aim to be the best direct-to-consumer apparel and intimates brand for women across a wide range of sizes from 10 to 30 by providing an unparalleled fit and a meaningful customer experience that truly empowers curvy women to love the way they look and feel. We attribute the strength of our brand to our maniacal focus on fit and on delivering an incredible customer experience that underscores our commitment to this underserved market. Turning briefly to our extraordinary performance in the second quarter, and George will discuss this in much greater detail, net sales grew 34% to the second quarter of last year and 29% compared to 2019. We were very pleased with the strong growth in our business. which was driven by new and existing customers. We saw heightened customer demand for new outfits as she returned to a more social lifestyle. Our comparable sales growth is a continuation of our long track record, reflecting positive comps in 36 of the last 38 quarters. Adjusted EBITDA of $87 million was meaningfully above last year's 34, and our EBITDA margin expanded over 1,300 basis points to a record 26%. All that said, we are still in the early innings of our growth and the opportunity is massive. But before sharing our strategies, I would like to take a moment to ground everyone on why Torrid is so uniquely positioned within a highly attractive and underserved market. First, we operate in a large and growing market that is categorically underserved and has meaningfully untapped potential. Apparel and Intimates for women, size 10 to 30, is an $85 billion market that is growing two times faster than the U.S. women's apparel market. No one serves this customer the way we do because it takes years years and years of focus, dedication, and expertise to build the arsenal of fit and solution-based products that we offer her. Second, our deep connection with our customers has allowed us to build a loyal and passionate customer base, as well as create exceptional visibility into our customers' preferences. We have a comprehensive and growing loyalty program with over 3 million members, which make up 95% of our sales. Within social media, we have two and a half million followers across Facebook, Instagram, Pinterest, YouTube, and more recently, TikTok, with a growing customer following and an abundance of impactful user-generated content that our customer loves to see. Our customer testimonials are powerful examples of this authentic connection we have created. And I would like to share a letter I just received to demonstrate how we are changing her life. It starts with, I can't begin to tell you how good your clothes make me feel. I never thought I could feel as beautiful. To wear clothes I love that fit me the way clothes should is nothing short of a miracle. Your clothes have given me a confidence I didn't know I had in me anymore. I am brought to tears just writing this because I'm so thankful to you and to all. Thank you for helping me love myself. Thank you for making it fun to get dressed every day. That is just one of many that we receive and it is a testament to how much she loves our product. Third, our data-driven, low-risk merchandising model helps us provide a broad assortment of proprietary products with a distinct style, and we provide them when and where she wants them. Our flexible operating model allows us to quickly read and react to our customers' preferences and to consistently meet her needs for great, fitting, quality product at a tremendous value. Our close relationships with our customers provides us with constant valuable feedback that we deploy to continually provide her with the things she needs and wants. We further leverage this feedback and our extensive fit capabilities to expand into categories that drive high loyalty, such as blue jeans, bras, swim, and shoes. The effectiveness of our merchandising strategy is illustrated by our ability to grow our business across all of our categories year after year, as well as by our consistently high penetration of regular price sell-throughs at over 80% of our total sales and also supported by our wildly low 9% return rate. And finally, we have created a dynamic direct-to-consumer unified commerce model that truly offers an inspiring shopping experience whenever and wherever she wants to shop the Torrid brand. Our stores offer an immersive fit experience, and that, along with our passionate associates, helps her find what she needs to look and feel as great as she can. For so many of our customers, there is no other place where she can get dressed up and hear, oh my gosh, you look amazing. This only happens in our stores. This exceptional in-store experience in turn fuels growth in our e-commerce business. Our e-commerce platform provides convenient access to our broad product assortment and accounted for nearly 70% of our net sales in the trailing 12 months ending Q2 of 2021. In that Q2, we saw sustained momentum in our e-commerce business, while traffic to our stores continued to improve sequentially as customers returned to in-store shopping. To further enhance our shopping experience, we have invested in omnichannel capabilities, including buy online, pick up in store, ship-from-store, curbside pickup, order-in-store, and Zoom store consultations. We launched ship-from-store in 400 locations in the second quarter and have plans to further expand our BOPUS offering as well. We will continue to build upon these capabilities as we launch our next generation mobile app by early next year. We believe our stores will continue to play an integral role in customer acquisition and providing an immersive customer experience post-COVID. Longer term, we will continue to selectively open approximately 25 new stores annually in targeted markets. From an organizational standpoint at Torrid, we are committed to cultivating a workplace where diverse perspectives and experiences are welcomed and respected. During the second quarter, we advanced our diversity and inclusion goals with the implementation of a four-course series called Leading for Inclusivity, encouraging our leaders to support and foster both open dialogues and collaboration. Among other initiatives, we also launched an internal D&I website to provide employees with diversity, equity, and inclusion resources, as well as information and educational opportunities. This initiative is important to all of us at Torrid, and one we are committed to. Our organization is diverse in many ways, with 93% of our employees identifying as female, and we will continue to do the work to hire into and promote diversity and inclusion in all areas of our business. Looking ahead to third quarter and beyond, we remain focused on executing our strategic plan and leveraging our existing infrastructure to drive profitable, sustainable long-term growth. Our key drivers of growth consist of the following. First, we have significant opportunity to grow our Torrid Curve Intimates business. We believe the Intimates category will continue to drive customer acquisition, enhance customer loyalty, and increase basket size. As evidence of this, bras are the number two entry item purchased by new Torrid customers in both stores and online. Our bras are game changers for our customers. From our patent pending 360 smoothing technology, to our revolutionary wire-free bra. We are truly giving her things she has asked for, but in a very new and compelling way. To continue the momentum in our Curve business, we are in the process of testing an expanded assortment of Curve products in select stores, of which we are seeing promising results, and we plan to launch a dedicated Curve web experience in 2022. We are supporting this with marketing campaigns that target specific customer segments with personalized offerings to encourage first purchases of Torrid Curve. Second, we are taking initiatives to deepen our customer relationships and expand wallet share with our existing customer base. We constantly offer product flows to create customer excitement and keep her engaged. Some recent examples include brand collaborations like Betsy Johnson, the launch of Lovesick, and our unique licensed offerings. We also plan to leverage our customers' trust in products and fit by expanding our offering into nascent categories such as footwear, scrubs, and special occasions, among others. We're also building on our loyalty program to improve customer engagement through various activation initiatives. These include offers that strategically drive customer purchases across categories that deliver long-term customer value. For example, we know a customer that buys into bras, jeans, and tops is our most valuable. So we are sending customers who have purchased tops and denim from Torrid a reward to be used on bras to drive our curve business. We are highly encouraged by the participation in this test, by the incremental results on bra customers, and that it is still merch margin accretive. Third, we are focused on attracting new customers to Torrid by increasing brand awareness and accelerating customer acquisition across all channels. Our brand awareness is approximately 31% today, and we only have captured 4% of the potential customer base in the United States, illustrating the massive opportunity ahead of us. To capture this opportunity, we are continuing to invest in social media channels where we are currently present, as well as testing emerging platforms. We are expanding our influencer ambassador program, which we launched during the second quarter and are encouraged by the social engagement we're seeing. We are also expanding our presence on TikTok, which we know is a big untapped opportunity for us. We will also continue to invest in community events both online and in-store to drive customer engagement and further our commitment to represent the diversity of our brand. In May, we launched a virtual casting call to discover and celebrate inspiring women within their communities. We had over 7,000 applicants and our customers chose 10 winners who we will feature in our holiday 2021 campaign. We are following up this successful campaign with one focused on highlighting our own employees and associates, many of which started out as toward customers before joining our company. We are also continuing collaborations which generate excitement and support causes that are important to us and to our community. During the second quarter, we launched our Celebrate Love Collection, which is a collaboration with GLAAD, and our performance exceeded all of our expectations. In the third quarter, we will launch our Breast Cancer Awareness Collection with the National Breast Cancer Foundation. And finally, we will continue to leverage the investments we've made in our organization and our infrastructure, particularly related to data analytics and omni-channel capabilities to drive continued profitable growth. As evidenced by our company record EBITDA margining Q2, our investments in our distribution facility and rollout of omni-channel capabilities provide a significant operating leverage, which we will continue to benefit from as we grow. And before I turn the call over to George, I would like to discuss the macro challenges we are seeing as an industry today. Our manufacturing base and our long-term relationships with our vendors remain very strong. Our primary concerns are around getting products into the United States and the related costs. The global supply chain remains challenged with the resurgence of COVID in certain markets, as well as port congestion, higher freight costs, coupled with inflation. While we believe these challenges are largely transitory and will not impact our long-term view of the business, we are actively taking steps to mitigate the pressure in any area we can, which George will speak to more in a moment. In conclusion, over the last four years, we've taken measures to enhance our infrastructure and strategies, which have enabled us to establish a leading market position in North America. What's even more exciting is that we believe we are just getting started. We have enormous opportunity to serve this meaningfully underserved customer segment in a way that she has never experienced. I am inspired by the brand loyalty we have garnered over the years, as well as by the passion of our team. We are confident that our proven strategy will drive profitable long-term growth for years to come. I will now turn the call over to George to discuss our second quarter financial performance in greater detail. He will also provide you with our financial outlook for the full year as we grow and build upon the success of our brand.

Thank you, Liz, and good afternoon, everyone. Thank you for joining us today. As Liz mentioned, we are very excited to be sharing our strong financial performance with you in our first earnings call as a public company. Before I review our performance and discuss our outlook, I would like to thank our team for their continued hard work and dedication throughout the pandemic, especially our stores teams and our DC teams who continue to be the face of our brand to our customers on a daily basis. In my remarks, I will make select comparisons to our second quarter 2019 to normalize for the anomalies created by COVID-19 in the prior year. We believe this comparison will provide you with a better understanding of our growth profile. Now turning to our financial results in the second quarter. Net sales grew 34% to $333 million compared to $249 million last year and increased 29% from 2019. Our growth was better than anticipated and was primarily driven by our continued strength in our e-commerce business and the ongoing recovery in our store productivity, which is nearing pre-pandemic levels. Comparable sales for the quarter increased 30%, driven by an increase in transactions as well as higher average transaction size. We are extremely pleased with our sales performance as we continue to attract new customers to the brand and drive spend per customer. We attribute this momentum to greater acceptance of our curve offering, stronger engagement with our loyalty customers, and increased acquisition from our stores as customers are increasingly shopping both channels. Growth profit in the second quarter was $150 million or 45% of net sales compared to $80 million or 32.1% of net sales in the second quarter of 2020 and $103 million or 39.8% of net sales in the second quarter of 2019. This nearly 1,300 basis point expansion in our gross profit rates from the prior year was primarily due to an improved product margins resulting from less discounting during the quarter as compared to the prior year. Our gross profit also benefited from leveraging distribution expenses, store occupancy costs, and store depreciation expenses. Selling general and administrative expenses in the quarter were $179 million as compared to $51 million in the second quarter of 2020. This increase was primarily due to the charge associated with revaluing our legacy incentive units as part of our IPO, totaling $111 million. This non-cash charge was a one-time in nature, and we do not expect to incur this expense again in the future. Additionally, we incurred approximately $12 million of incremental store expenses due to increased store openings versus last year. Excluding the one-time non-cash stock-based compensation cost for re-measuring incentive units, SG&A increased 10% as compared to the second quarter of fiscal 2019. Marketing expense in the quarter was $11 million as compared to $10 million in the second quarter of 2020. As a percentage of sales, marketing decreased 72 basis points to 3.2% compared to 3.9% in the second quarter of 2020 due to sales leverage despite our increased investment. Given the strong organic momentum in our business during the quarter, we made the decision to redeploy some of our marketing budget to the back half of the year. Turning to profitability, in addition to GAAP measures, we believe that adjusted EBITDA and adjusted net income are important measures that we use to evaluate and manage our business. The adjustments are particularly relevant this quarter and for the remainder of the year due to the one-time non-cash impact on GAAP earnings from the charges associated with revaluing our legacy incentive units as part of our IPO. Adjusted EBITDA was $87 million, or 26% of net sales. compared to $34 million or 13.7% of net sales in the second quarter of 2020. This compares to $40 million or 15.4% of net sales in the second quarter of 2019. For the quarter, our tax rate was 174.3% compared to a negative 21.3% in 2020 due to an increase in the amount of non-taxable items that were associated with the share-based compensation during the three and six months periods ended July 31st, 2021. This increase was largely driven by the $111 million non-cash charge associated with revaluing our legacy incentive units as part of our IPO. The remeasurement non-cash charge also drove the $87 million income tax receivable in our condensed consolidated balance sheet as of July 31, 2021, which we expect to become an income tax payable by the end of fiscal 2021. Net income was $39 million or $0.35 per share, an increase of 131% from net income of $17 million or $0.15 per share in the second quarter of last year. Adjusted net income was $39.1 million or $0.36 per diluted share, an increase of 372% from adjusted net income of $8.3 million or $0.08 per diluted share in the second quarter of 2020. Turning now to the balance sheet. Cash and cash equivalents at the end of the quarter totaled $51 million. We achieved strong cash flow from operations totaling $107 million for the six-month period ended July 31st, 2021, as we continue to deliver profitable growth and tightly manage our working capital. Total debt as of the end of the quarter was $341 million, reflecting the due term loan we implemented prior to our IPO which lowered our interest rate and extended our maturity to 2020. As a result of our strong EBITDA growth and cash generation in the quarter, we quickly deleveraged to approximately 1.3 times net debt to adjusted EBITDA at the end of the quarter. Inventory at the end of the quarter was $110 million, compared to $128 million at the end of the second quarter of 2020. Strong product sell-through combined with delays associated with global supply chain challenges resulted in lower inventory levels at the end of the quarter. Although our inventory levels are lower than we would like, we are very pleased with the composition of our inventory. Turning to our outlook, while we are very pleased with our strong sales performance in the first half of the year, we are closely monitoring customer behavior given the potential impact of the Delta variant. In addition, the global supply chain has become more challenged, and we expect continued shipping delays, poor congestion, and manufacturing disruptions. While we continue to carefully monitor the supply chain situation and take proactive measures, such as air freighting goods, pulling forward purchase orders as appropriate, the situation is highly dynamic. We're also facing inflationary pressures from rising product costs and anticipated wage increases. As part of our normal review of our pricing architecture, we will be selectively adjusting pricing as appropriate throughout the second half to largely mitigate these macro cost pressures. Notwithstanding these pressures, we expect to be able to deliver the exceptional results that we have guided to for the remainder of the year. Given the one-time nature of these factors and related uncertainties, we are providing both quarterly and full-year 2021 guidance on what we're seeing today. Going forward, we will continue to assess our approach to the guidance as the situation merits. For the third quarter, we expect net sales to be between $305 million to $350 million and adjusted EBITDA to be between $47 and $52 million. Our guidance assumes more modest gross margin expansion than we delivered in the second quarter, reflecting current trends as well as anticipated impact of supply chain challenges. This also reflects our expectation for elevated expenses in the second half of the year, including increased marketing expense, as well as the impact of the new costs associated with being a public company. For fiscal 2021, we expect net sales between $1.29 billion to $1.3 billion and adjusted EBITDA between $248 and $258 million. This assumes gross margin pressures in the back half of the year from the supply chain challenges that I previously referred to. As a reminder, the seasonality of our sales is not as pronounced as other retailers in the fourth quarter, although this is typically our lowest gross margin quarter due to our seasonal promotional cadence. Capital expenditures are expected to be approximately $25 million for fiscal 2021, reflecting roughly 25 new store openings in the second half of the year. In conclusion, we are very pleased with the strength in our business and we remain focused on executing our strategic growth initiatives while carefully monitoring and adjusting our business in the current macro environment. With that, I will now open the call up for your questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Lorraine Hutchinson with Bank of America. Please proceed.

Thank you. This is Alice Hale on for Lorraine Hutchinson. Thanks for taking our question, and congrats on the nice quarter. Do you expect to see an impact from Old Navy's recent boat equality launch? And as other brands publicize efforts to participate in plus-size apparel, how will Torrid continue to gain market share?

Yeah, great question. Thank you. Well, There are plenty of big girls to go around that are wildly underserved, you know, close to 90 million. So I personally welcome other people coming into this space. I think it excites the customer about her possibilities. That said, I also will remind you that Old Navy has been doing Plus for a long, long time. Before Torrid, I used to, you know, wear that. So it's not as new as this inclusivity, and they've had it in stores and pulled it out of stores. What I will tell you about Torrid is we – We fit her head to toe. Our product fits like no one else's. We do extensive competitor research. We are and always have been aware of all the competitors in the space, and they have traditionally not had any impact on our business. I will tell you, at the end of 2018, a lot of announcements were made of people going into the plus-size space. sphere or expanding their size range. And we went on to have a very, very, very good year. So, I don't see one store capitalizing on a market that's this vast and this underserved. And the final thing I'll say is with Old Navy, the product is categorically casual, and it is at a much lower price point, which is prohibitive of doing the kinds of things that our customer would want. And our customer does want dressy, wear-to-work, or even occasion wear, which we do offer. So we're really happy with where we are, and we welcome the competition. Like I said in the beginning, there are plenty of big girls to go around. Happy to hear that. Thank you.

Thank you.

Our next question is from Kimberly Greenberger. Please proceed.

Hi. Thank you so much. Really great quarter. And Liz, thank you for the wonderful overview. Obviously, the long-term opportunity here looks very clear. They're just these sort of, you know, wobbles here in the short term because of supply chain. So I just wanted to dig a little bit more into the back half outlook. I'm wondering if you can talk about, you mentioned inventory, which is about 10% below 2019 levels here at the end of Q2 being just a little bit low. Do you feel like there could be potentially some sales opportunities that you could miss out on in the back half of the year for lack of inventory? Maybe that creates pent-up demand and opportunity for next year. I'm just wondering if you can look at the inventory flow through the back half of the year and help us understand if you feel like you can deliver at the potential of the brand or if there is potentially a little bit of shortfall there. And if it falls in either Q3 or Q4, if there is a little bit of flow disruption. On the gross margin, I wanted to just ask about the guidance gave George on gross margin for the third quarter. Expansion in the third quarter, just a little bit less robust than the really nice expansion we got here in the second quarter. Are you comparing that versus last year, or are you looking at that compared to 2019? Thanks so much.

Sure. So I'll start with the gross margin one. We are really looking at compared to 19 from that perspective. Since 2020, it was kind of an anomaly in various quarters. So the comparison really is to 19 for that incorrect, a little bit less robust than we saw in the Q1, Q2 arena.

As far as inventory and how we are thinking about the back half of the year, there's a little bit of it that's unclear. But for the most part, there's a couple of things that I think are really important. One, Torrid does not rely on Q4 like traditional retailers. Our fourth quarter is, in general, kind of the same size as every other quarter. So we're not one of those retailers that does 60% of their business in that last quarter. It is just like another quarter for us. And I think that's going to help us unlike many others as we head into these wobbly times, as you describe them. I like that word. I think that the second thing about us is our collection is so vast. that we do have a lot of opportunities to flex in different directions. And if we have abundance of some categories and shortfalls in others, we can use our loyalty program to encourage her into the categories that we do have inventory in. But I think we are going to run lean for the rest of the year. What I find remarkable is how much we've been able to do with running lean and our stores feel lean and are still making it happen. So I think it's going to be a little wobbly, but I feel like we're in a good position to continue on the road that we're on.

In addition to that, as Liz mentioned, the model that we have being the unified commerce piece is that opens up to where we have inventory. Customers have access to our inventory, whether it be e-com or stores, with our ship-from-store capabilities that we did not have prior to the pandemic. So that opens up some capabilities for that as well.

Right, we're not limited to, oh, the inventory is online and we wish we had it in stores or it's in stores. That accessibility is certainly a really good thing for us going into the back half of the year for sure.

Our next question is from Janine Stitcher with Jefferies. Please proceed.

Hi, good afternoon and congratulations. I want to ask a bit more about the commentary around raising pricing. It sounds like this is still in the works. Maybe you could give a little bit more detail around how broad or how large you expect those pricing pieces to be. And then maybe in the past, any time you've taken price, what you've seen from the consumer and what gives you confidence in your ability to adjust tickets. Thank you.

So glad you asked that. We have a long heritage. I've been here 12 years. We have a long heritage of raising prices where we see the value, so where we have built more into the product and believed that if we did that, she would come. And so we have a long, long, long heritage of having done that from our best-selling – cami and and legging um i'll give you a good example in i'd say about five years ago we raised prices on black pants we raised them a whole ten dollars and saw no slowdown of any kind in our business um what we do that's very different as far as raising prices and i think it's an important thing at least for us to do is we don't just unilaterally raise prices The merchants will look at every style and make decisions about whether there is value there, there is the possibility of a higher price there, and we will raise prices on garments that we know the customer will see the value in and still want. So we are looking at that. We look at it in a very different way from a customer and product perspective, and we do it style by style, making sure that the value is there. And if it's not, then we don't raise the price on it and we make a determination whether we want to run it the way it is or we want to make it, you know, stand out and be more special and demand the price it should.

Great. It's a couple of colors. And then just one more on the supply chain. I know in the past, You talked about flexibility and leaving open to buy is a big advantage. Maybe speak to your ability to, it sounds like your ability to chase in the fourth quarter will be limited, how you feel like that impacts your flexibility and maybe how to think about markdown risk or inventory risk just with a bigger upfront inventory commitment.

Yeah, I think that our ability to chase into Q4 will be very different from what we were able to do in the front half of the year. That said, we feel like we are in a good place as far as what we've purchased. George, you can talk to that, but I don't see...

Yeah, I think part of that is also with the flexibility that we continue to have as we have 16 different collections that come throughout the year. So we're not bringing in just like a chunk all in the fall, spring collections. It's kind of throughout the year that spreads that risk out a bit as well for that, and we can adjust for that piece of it. So I think that gives us some flexibility on an ongoing basis related to our inventories and a lot of – Liz also said it relates to our assortment. A lot is core, and it's not necessarily the high fashion trend items, and that also helps limit our exposure as well.

Yeah, that's such a great point because we don't go after trend. It's not like we have a ruffle collection that's coming that's only going to be as hot as ruffles are hot. because of how we build our assortment, because of the type of product we do, because it's more fit and experience focused versus fashion, there's a lot less risk in products coming at different times. The only thing that we'll look at is anything that is truly seasonal, which isn't a lot, but we will make sure to look at and watch.

Our next question is from Oliver Chen with Callendon Company. Please proceed.

Hi, Liz and George. Torrid Curve is a big ongoing opportunity. What would you say, A, sets you apart, and, B, how will you acquire and think about acquiring new customers to Torrid Curve? And would love your thoughts as you continue to plan this assortment, how the assortment architecture and or pricing may evolve there. Thank you.

Okay. Thanks, Oliver. So I believe that what fundamentally sets Torrid Curve apart from most other bra companies is I find as a woman myself, you are often forced to choose sexy or comfortable, but they rarely come in one bra. So our approach to our bra building was to create bras that were not only sexy but that were also functional and that they were solution-based. So we have a patent-pending smoothing technology in a lot of our bras that our customer just loves because it creates a comfort ratio that she's never had while still having the back look very pretty and not look orthopedic in any way. She asked us for a wire-free bra. That has been a huge success. We spent over two and a half, three years building that bra because any of those of us that remember our mothers in wire-free bras will know that they generally do not look good, sexy, or young. So we spent a lot of years, broke a lot of rules to create this bra. I have never worn a bra like this in my life. It is incredibly comfortable while still being sexy. So I think that's the point of differentiation for us. As far as what we will do forward, one of the big opportunities we have is to capture more customers within the Torrid brand and move them into Curves. So one of the things I mentioned when we were on the road, and I'll mention again because I'm very excited about these results, but we tested the idea of sending a coupon to new customers that came to the brand through a top or a blue jean to get them into a bra. What we found, the early results on this test were that we were able to get twice as many women into bras than we would have had we not done this. And to top it off, even though we gave them a discount coupon, it was actually margin accretive. So it's a small test, but it's one of the ways that we are intending to usher our customer into bras because a customer that buys a bra, a blue jean, and a top is our most valuable customer. We're three times more than one that doesn't. I think I answered all your questions. Was there a part I didn't, George?

And I think just to reiterate to Oliver, the second most highest way we attract a new customer is through author just as well.

Was there more there, Oliver, that I didn't answer?

No, that's very helpful. I would also love, it was a great quarter, which classifications drove upside indoor channels or it may have been broad-based. And as you think about managing inventory levels in this environment where there's not enough, what areas of the assortment Do you have less product in? And how do you think customers will respond in the supply-constrained environment? Thank you.

Okay, so performance in Q2, as always, kind of what this brand was broad-based, we tend to be a company and a brand that is able to grow all of its categories simultaneously without sacrificing one over the other. So Q2 was very broad-based. I would say going into the back half, how will the customer respond? I think that she will be excited. by what she's going to see, particularly in Q4, because it's fun, it's playful, it's sexy. We are all hoping that we're going to have a Christmas where we can go out this year, so lots of dresses and things that she can buy for whatever celebration she intends to have. As far as the being lean on product, this is not new to Torrid. Throughout Torrid's years of growth, because our growth was so outsized, we were always chasing product. We were always chasing this bigger, broader volume. So we're kind of comfortable in this space. And we know how to flex one direction or the other based on what we have inventory. And, again, to what George said, part of the game changer for us is this accessibility of ship-from-store BOPIS. She can do Zoom consultations. And she can obviously shop online. So the inventory will be available to her in multiple ways, which we didn't have last year and I think is a huge benefit this year.

Lastly, Liz, on that topic with digitization and the integration of physical and digital, as you think about both business and ship from store, how will you manage execution risk and also both the opportunities and the path ahead and merging and blending those inventory buckets as well? Thank you.

How will we manage the execution risk? You mean as far as making sure that the inventory is in the right place when she makes a purchase and we don't disappoint her?

Is that what you mean? Rethinking the store as a fulfillment point and blending the inventory between your digital and physical channels. But, yes, that would be great. Any thoughts there?

Yeah, so Oliver, from that standpoint, so far the stores have really embraced the whole ship from store and BOPIS. Part of their incentive comp is based on that as well. So kind of going back to the unified commerce piece of it, tying it together, it's not a store versus the e-com, it's total collective. So the stores really have embraced what those programs are. And again, we don't have the big seasonal buildup in Q4, So, therefore, it's a little bit more even. So, our stores are moderated a little bit more than a lot of other retailers are, especially in Q4. So, the reaction at the store level has been very excited, and we think that will continue as we go through the rest of this year.

And the stores are doing a great job. One of the stats I think I quoted earlier, but is just I think very exciting, is a customer 25%. of the customers that come in to pick up a BOPUS order make another purchase that doubles the value of their initial purchase. So we're incredibly excited about connecting this amazing group of humans we have with the technology we have so that the customer truly gets not an omni-channel but a unified commerce experience.

Our next question is from Mark. Allschweiger with Baird. Please proceed.

Good afternoon. Thanks for taking my question. I guess just to start off with Delta variant increasingly in focus, are you seeing any impact on your consumer behavior at this point? More broadly, we've seen consumer confidence take a dip recently. Has there been any change to your view on the health of the customer or potential spend per customer versus your expectations at the time of the IPO?

Yeah, I think that our customer shops with a clear want or desire or because something is really emotional and excites her. What we have seen with the Delta variant is I think so many people started to think, okay, I'm going to go back to work. And we saw our customers start to buy back-to-work clothing. And I think that that has I think what's going to happen next for her is somewhat unclear to her. So she's taking a moment to figure that out. So, you know, when we opened up the country, it was a very specific time where we were about to open up the country and spring break was happening and she needed clothing to go out and there was pensive demand. And I think we're in a different place now where things are leveling off more toward a normal type of business. I don't know if you want to add anything to that, George.

Yeah, Mark, I think part of that related to the, you know, unknown related to the Delta was some of the hotspot areas. I think we're, you know, not that much different from others as we see a little bit of an impact on traffic necessarily, you know, when those do happen. But across the board, we're seeing that the customer has come back to the store and she wants to shop at her store.

That's really helpful, Culler. I also wanted to follow up regarding marketing spend. It seems like you saw some really nice efficiencies here in the second quarter. Just any help understanding what's driving that, what factors are at play there, and just any thoughts with respect to marketing for the back half of the year? Thank you.

yes so we did see some efficiencies um what we have been doing you know torrid has primarily historically in the past acquired customers through stores and we were really good at it what we have expanded is to continue to acquire customers through stores but also to re-look at our margin marketing budget and make sure that we are spending money in places that are designed to acquire customers And I think that's an important shift. What we found is we do not need to keep repurchasing the same customer. When we bring a customer into this brand, they are in to the point that it was 90% of, what was that? 90% sign up for loyalty, but then we also retain 90% of the dollars from 2020. So retention was not something that we felt we needed to focus marketing dollars on to that level. So the efficiency, some of it is because we redeployed dollars that were going to a mailer that was no longer effective. We redeployed those dollars into social and digital and paid search or connected TV or all the different areas. So many of the efficiencies were driven from really taking things that we felt like were unnecessary or weren't working and redeploying them into areas that were. We're in the process of really learning a lot and testing a lot, and we will scale up as we see success in, whatever projects that come down the line. What we're excited about as far as marketing go forward is we have just concluded our ambassador search where we have 7,000 entrants, and we were able to put together a group of women that are really inspiring and that will be in our fourth quarter marketing. We also did a search for employees and had a nice – Sign up from employees and we intend to use them also in different ways What we know is that our customer loves UGC and what's great about user generated content is She interacts with it four times more than she does with a regular photo and they are significantly cheaper to get So we're working on how to drive more user generated content. And then finally we do have this ambassador this influencer program that we are working on that we've launched that we think has tremendous potential as well. So those are the things we'll be focused on the back half of the year. And again, as we see things work, we invest in them.

Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed.

Good afternoon, everyone, and congratulations on the terrific results. As you think about marketing in the back half of the year, how do you see the marketing profile differing from what you've done in the past? And will there be more spend that you're adjusting for Q3 or Q4? And just lastly, on bringing product in, how do you expect inventories to balance between the third and the fourth quarter? And given the supply chain disruptions, are there some things where you'll expect to have more of than you originally would have or less of? Thank you.

I'll talk to the inventory question first, Dana. Related to inventories, we are really monitoring what those what those arrivals are and shifts are in our inventory, and to the extent that if we see that, as Liz mentioned about seasonal goods, if there's something that we're really going to be delayed on, we'll look at potentially cutting the tail of that so we're not bringing in, continually bringing in something seasonal. We're really looking at what that looks like. Again, looking at the products, the categories related to their seasonality, if it's more of an ongoing item, So, therefore, we have some of that flexibility to be able to control some of that and working with our vendors. Again, we work with a lot of our vendors, long-term relationship with them, working with them to work on related to their production issues, timing, and how do we get the goods here. So, we're really, really concentrating on how do we manage that whole flow to be able to get it in. And, again, we have multiple collections coming in throughout the year. So, again, that also helps. They're not big, gigantic collections coming in at certain times of the year.

And we are looking at things if we do have any items that are highly, highly seasonal, and we're either cutting them off, we're cutting off the tail end of the delivery, and making a decision to either not bring them in or to reduce what we are bringing in, and that's a small part of what we do. As far as the marketing, I think one of the things that traditionally happens going into Q4 is that the marketing costs in general just go up because everybody is in there trying to make – you know, for everyone else, Q4 is a really big deal. So it drives the just general cost of marketing in the digital space up, but that happens every year, so we're prepared for that. I think our focus is really what we can do with influencers, with this ambassador program, with our own employees as far as creating A lot of excitement creating TikToks that ideally will go viral and making sure that we're able to tell our story. One of the things that I find very exciting about TikTok is that it gives Torrid the opportunity, because you have a little bit more time, gives Torrid the opportunity to really show the world the difference in our product and the difference that it makes on her. So that'll really be our focus. Did that answer your question? Yep.

Thank you very much.

Okay.

Thanks Dana. Thank you.

Our next question is from Brooke Roach with Goldman Sachs. Please proceed.

Good afternoon and thank you so much for taking the question. I'd love to dig in a little bit more and hopefully get some additional context on the results that you're seeing by channel.

in your stores how is productivity trending and how has that shifted throughout the quarter so we've seen you know our productivity stores continue to do well throughout q2 um we're you know we're very excited about you know the stores and how they continue to perform they uh started off well in q1 and that just continued into q2 and improved there as well so again The connection with the customer, she was wanting to come back to the store, and we've seen that she has come back to the store, and we see that connectivity still going on between the store associates and the customers. And we believe that that, you know, again, is a key part of how we're attracting new customers. So we're very pleased with the results of what that looks like and expect, you know, the stores to continue to perform.

Great. And then if I could just follow up on – In the quarter, you saw very strong fixed-cost leverage. Can you talk to your outlook for fixed-cost leverage into second half, and how much of that leverage can you get from growing the top line regardless of channel? What additional leverage can you get as you start to see that store productivity continue to improve with your customer connection? Thank you.

Thanks, Brooke. Yeah, I think we'll still be able to see leverage as we go into the back half of the year. We won't see it as pronounced related to the sales level that we're projecting out, but we still, again, will be the investments that we've made in our infrastructure we will continue to see leveraging off of those pieces as well as we move through the back half of the year. So I don't really see any significant change related to the way we're approaching our fixed cost and making sure that we can leverage off of those in the back half of the year.

And our final question is from Dylan Cardin with William Blair. Please proceed.

Oh, boy. Okay, great. Thanks. for squeezing in. So small one here to round us out. Just curious, the new store number here, the 25 stores, just want to confirm that that's a net number. And then maybe just how you're thinking about what these stores look like go forward from a location standpoint, integrating some of the more complex fulfillment capabilities, maybe expanding the assortment. What can we expect from the newer part of the fleet? Thanks.

The 25 are gross, actually, new stores. We'll have some closures, but we're not expecting any significant closures in the back part of the year. As far as the composition of them, again, we will probably filter more towards outside mall locations. We've seen those respond quicker as far as from the pandemic recovery, and that's where we're concentrating most of our store openings for this year. We will potentially look at mall locations, but, you know, most of the opportunities we're seeing is off mall, and our customers seem to be responding to that piece of it as well. It gives us a little bit bigger footprint sometimes that we can have and potentially put a little bit larger assortment in there, especially related to curb product as we move forward. So it'll probably give us a little bit more flexibility from that standpoint as well as using it as a little fulfillment related to ship from store as well.

Great. And are you seeing kind of opportunities here on the cost side as it relates to sort of new storage, or are you trying to be in better locations that sort of is a wash?

So we're seeing still good opportunities from a real estate location standpoint. Those are still there, so we're not concerned about that piece of it. The cost of the build-out, we are seeing a little bit of an increase, again, with some of the cost increases, but nothing that's so significant that it is impeding what we're going to do from a productivity standpoint because we look at every store individually, so we are factoring in that cost when we're looking at do we do the store deal or not.

Excellent. Thank you very much. Thank you. Thank you.

We have reached the end of our question and answer session. I would like to turn the conference back over to Liz for closing comments.

Just like to say thank you. Thank you for your interest in our brand, for your questions. We're excited about what's happening today and where we're going, and I guess we will talk to you soon. Thank you so much.

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