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spk11: Greetings. Welcome to Torrid Holdings Incorporated fourth quarter fiscal 2022 earnings conference 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 Paula Dempsey, Senior Vice President of Finance and Investor Relations. Thank you. You may begin.
spk05: Good afternoon, everyone, and thank you for joining Torrid's call today to discuss the fourth quarter and fiscal year financial results for 2022, which will release 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, and Tim Martin, Chief Operating Officer and 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 familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements include, but are not limited to, statements containing the words expect, believe, plan, will, may, should, estimate, and some other expressions. All forward-looking statements are based on current expectations and assumptions as of today March 23, 2023. 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 I included in the earnings released, furnished to the SEC, and available on our website. With that, I will turn the call over to Lisa.
spk02: Thanks, Paula. Good afternoon, everyone, and thank you for joining us for a discussion of our fourth quarter and full year results. Before I begin, I'd like to thank the Torr team for their dedication in providing our customers with exciting new products and a compelling customer experience. We've navigated a year of retail challenges with new leadership in many parts of the organization, elevated inventory levels resulting in a higher promotional environment, and decreased customer discretionary spend. Despite all of this, the team has accomplished a great deal in a short time. I believe that the changes we've made have been essential to reignite profitable long-term growth. I'm also very happy to announce the return of Mark Mazzucco to Torrid as Chief Commercial Officer. Mark previously served as the Chief Operational Officer of Torrid back in 2016, and prior to that he served as the Chief Planning Officer at both Hot Topic and Torit. He brings a wealth of experience and expertise in retailing, and we are excited to have him rejoin the team. Mark will be leading all aspects of margin optimization, inventory planning, and buying, as well as working with Vivian Alhorn, our Chief Marketing Officer, on marketing and e-commerce activities. Essentially, he's focusing on all things that drive product sales for the company. We believe that with Liz Munoz focused on design, Vivian's expertise in marketing and e-commerce, my involvement in product selection, as well as Mark's leadership of inventory planning, marketing, e-commerce, and planning functions, we had a strong team focused on delivering the very best product for our customers. Now moving into our fourth quarter performance, we delivered net sales at the upper end of our guidance range. Customers responded favorably to our Black Friday and Southern Monday events, taking the pressure off to our cash later in the quarter. Our gross margins began to stabilize in the fourth quarter as the rate of gross margin declined significantly lower than the third quarter. This sequential improvement in gross margin enabled us to exceed the upper end of our guidance, delivering an adjusted EBITDA of $16 million. Our primary focus for 22 was on enhancing the organization's focus in order to reignite sustainable long-term growth. We brought on Tim Martin, our Chief Operating Officer and Chief Financial Officer, Han Park, Chief Technology Officer, Bridget Zetterberg, Chief Human Resources Officer and Chief Legal Officer. We promoted Vivian Alhorn to Chief Marketing Officer, and we have now brought on Mark Mazzico as our Chief Commercial Officers. These new leaders have a wealth of experience from public and private retail and consumer-facing companies. and they will be instrumental in bringing our teams into alignment and driving our strategic initiatives. We also invested in new technology across the business that will enable us to provide customers with a more seamless experience moving forward. In the distribution center, we put in place new technology that has increased our capacity and allows us to deliver product to our customers faster than ever before, much improved over last year. Our new ERP system provides the foundation for an improved shopping experience on the website and enhanced data integration across the organization. Within inventory and product, we prioritized right-sizing our inventory with the goal of entering 2023 with adequate levels to support demand and the environment. Although we had to be more promotional to move these units last year, we were successful in these efforts and ended the year with inventory up only 6% compared to prior year. with the year-over-year increase coming solely from basics and early spring receipts. Normalizing for these categories, we were down 5% to the prior year, representing the most efficient levels of inventory we have seen in some time. We know that new product consistently drives customer anticipation and demand. We delivered new collections to her this year with the successful relaunch of our studio collection, the launch of SESTI, another collaboration with Betsy Johnson, and a refined focus on delivering more colors and fashion forward pieces that drove frequency and demand from our loyal customer base. And finally, we focused on expanding our customer file through re-engagement of lapsed customers and new customer acquisition. We shifted our marketing efforts toward customer retention, bringing back lapsed customers, and reaffirmed our commitment to attract new customers into our brand through our store channels. These efforts allowed us to deliver an increase in our active customer file this year. Overall, 2022 was a year of new learning, transformation, and laying the groundwork for the brand's continued success and expansion. We believe that the changes we made this past year were critical to set us up for future growth. As we look ahead to 2023, we will continue to expand our store footprint, driving customer file growth, delivering exciting merchandise to fill every need in our closet, and enhance our customer relationships. With these key areas in mind, we will keep investing in optimizing and growing our store footprint to acquire new customers into the brand and expand our customer file. Our store base is profitable and they remain our primary new customer acquisition channel. New stores drive significant web sales from newly acquired customers and the net spend of these customers in their first year is approximately 25% higher than that of web-acquired customers in their first year. Customers develop a connection with our product and brand by interacting with us in our stores. We are committed to bringing customers into our stores where we believe a compelling and personalized experience will increase engagement and loyalty. We plan to open between 30 and 40 new stores in 2023 as stores are a proven competitive advantage for this business. We understand that customer loyalty is determined by her ability to provide her with new and innovative products that increase her frequency of purchases. In 2023, we plan on launching a steady stream of new products across multiple categories to peak her interest and increase her engagement with the brand. The new products we introduced generated positive feedback and customer interest, and we will build on this throughout the year. In terms of marketing and promotional strategies, We are focused on improving our promotional cadence. We plan to offer a more consistent flow of smaller, exciting events to engage our customer and drive spend frequency. As part of this, we are redesigning our Torrid Cash promotion from a quarterly event to smaller and shorter events throughout the year. This change will reduce our reliance on large Torrid Cash events at the end of every quarter. While there is a lot of discussion in the retail industry about the macro environment, we will remain laser-focused on what we can control. We believe that the product and operational improvements we've made will position us for success and allow us to focus on key areas that we know will drive the business, such as enhancing the customer experience, driving productive growth in our customer file, and delivering exceptional product. I am thrilled to see our team continue to provide our customers with world-class fit and products that are truly life-changing, as well as unmatched in-store customer experience. With that, I'll turn the call over to Tim, who will provide more detailed quarterly and annual financials.
spk06: Thank you, Lisa, and good afternoon to all of you. Before I begin, I'd like to recognize the TORI team for how much they've accomplished while navigating through uncertainties associated with all the change they've dealt with this past year. We implemented operational and strategic changes that have improved the foundational health of our business, and we focused on controlling what we can control. I believe that the changes we've made will allow us to increase short-holder value and deliver long-term growth. I would like to begin by highlighting the accounting policy change that you may have seen in today's press release. In the fourth quarter of fiscal 2022, we made a voluntary change in our accounting policy regarding the classification of private legal credit card funds. Historically, we recorded PLCC funds as a reduction to SG&A expenses. Under the new policy, we record PLCC in net sales and all metrics reported using net sales will be impacted. We believe the recognition of the PLCC funds in net sales is preferable because it will enhance the comparability of our financial statements with those of many of our industry peers and provide greater transparency into the performance metrics related to our industry. This reclassification has been retrospectively applied to all periods discussed in today's prepared remarks. I will now provide a detailed discussion of our financial results followed by our outlook. Starting with the fourth quarter results, net sales came in at $301 million compared to $318 million last year. Comparable sales in the quarter declined 5.4%. We had a strong start to the quarter as customers were eager to shop during our Black Friday and Cyber Monday events, which took the pressure off our Tory cash event later in the quarter. Gross profit for the fourth quarter was $96 million, or 31.9% of net sales, compared to $104 million, or 32.6% of net sales in the fourth quarter of last year. The 70 basis point decline was primarily driven by promotional events and higher inflationary costs. partially offset by the higher PLCC funds. Selling, general, and administrative expenses in the quarter were $78 million, compared to $70 million for the fourth quarter in the prior year. As a percentage of sales, SG&A increased to 25.8% from 22.0% compared to the fourth quarter of last year. The increase of 380 basis points was primarily driven by higher wages, one-time expenses related to employee separation agreements, and disposal of assets and other miscellaneous items. I should note that approximately 110 basis points of our increase is related to unusual items, with 70 basis points related to severance, which is in our adjusted EBITDA ADMAC, and 40 basis points related to the disposal of assets. We continue to be focused on controlling the controllables and leveraging SG&A as we see sales volume increase going forward. Marketing expenses in the quarter came in at $16 million compared to $17 million last year. As a percentage of sales, marketing expenses were relatively flat last year at 5.3% compared to 5.5% in the fourth quarter of last year. Net loss for the quarter was $4 million or a loss of $0.04 per share compared to a net loss of $23 million or a loss of $0.21 per share for the same period last year. We did not have any adjustments to net income in the fourth quarter of 2022, but for comparison purposes, adjusted net income last year was $10 million, or $0.09 per share. In addition to the GAAP measures, we believe that adjusted EBITDA is an important measure that we use to evaluate and manage our business. Adjusted EBITDA came in above our guidance range at $16 million, or 5.4% of net sales, compared to $28 million in the fourth quarter of last year, or 8.9% of net sales. Now turning to our fiscal 2022 results. For the full year, net sales were down 1% to $1.29 billion compared to $1.30 billion last year. And comparable sales were down 3.4% to last year. Although we delivered an increase in transactions and units sold, we saw lower average order values that impacted our total sales. Our total customer base grew by 2% in fiscal 2022 to 3.9 million customers, and net sales per customer was down 3% to last year. The size of our customer loyalty program grew from 3.5 million customers in 2021 to 3.7 million customers in 2022, as they represented 95% of our total sales. We continue to be focused on delivering product anchored in a compelling fit, which we believe delivers an industry-leading return rate and speaks to the quality of our fit and assortment as evidenced by our 10% return rate. As mentioned in prior calls, we renegotiated a new private label credit card agreement this year and continue to see growth and positive reception to the program. In 2022, over 30% of our sales came from the private label credit card. We saw higher tender share rates coming from our most valuable VIP customers and new customers shopping the brand. Our private label credit card has been instrumental in helping drive frequency and retention from our customers, as evidenced by our credit card holders spending more than two times more than non-credit card holders this past year. We opened six storage stores and six curb stores in the fourth quarter, and we closed two storage stores. We opened a total of 18 Torrid stores and eight Curve stores in fiscal 2022, and we closed 11 Torrid stores. Our stores continue to be our primary acquisition channel to bring customers into the brand, and customers acquired through our stores are more likely to shop in both channels and become omnichannel customers. This behavior strengthens our channel mix, contributing to a 61% e-commerce penetration rate in 2022 compared to the 63% we delivered last year. Our omnichannel customers also shopped 3.4 times more than a single channel customer and drove over half of our total sales across the brand. Gross profit in fiscal 22 was $460 million or 35.7% of net sales. Adjusted EBITDA was $152 million or 11.8% of net sales compared to 246 or 19.0% of net sales in 2021. Although we were promotional in order to clear our inventory in what the retail industry has referred to as a difficult macro environment, we still delivered double-digit adjusted EBITDA margins, which speaks to the strength of our brand and its ability to drive profitability. Net income for the year was $50 million, or $0.48 per share, compared to a net loss of $30 million, or $0.27 per share for the same period last year. For comparison purposes, adjusted net income for fiscal 2021 was $121 million, or $1.10 per share. Turning to the balance sheet, our cash and cash equivalents at the end of fiscal 2022 totaled $14 million. Total liquidity at the end of the year, including available credit, was $147.8 million. Total debt at the end of the year was $329 million, compared to 341 million at the end of 2021. Our net debt to adjusted EBITDA was 2.1 times at year end. Inventory at the end of the quarter was 180 million, an increase of 6% compared to the 171 million in the prior year. The increase is from early spring receipts and basics, which have a longer life. We are very pleased with the quality of our inventory and excluding the spring and basics, Our inventory levels were down 5% until last year, putting us in a good position as we enter 2023. Turning to the outlook for the year. Our outlook is based on our current understanding of the environment and business trends. However, we continue to operate in an uncertain macro environment in 2023, and material changes beyond our control may have an impact to our projections. For the full year, which is a 53-week for 2023, We expect net sales to be between $1.265 billion and $1.320 billion. We anticipate that growth will be skewered towards the second half of the year, owing primarily to the net new stores and 53rd week reporting period in the fourth quarter. We estimate that adjusted EBITDA to be between $140 and $152 million. Although we expect to see growth margin stabilization for the full year, We are finding a slight increase in SG&A primarily due to incentive compensation plans. In the first quarter of 2023, we expect next sales to be between $305 million and $313 million. Our guidance incorporates deceleration of demand trends we've seen in the most recent quarters as we navigate through the current environment. We estimate that adjusted EBITDA in the first quarter to be between $35 and $40 million. This assumes the same continued pressure on our gross margin rate as we copped a tighter comparison to last year. Capital expenditures are projected to be between $40 and $45 million for fiscal 23, reflecting infrastructure improvements and investments, and between 30 and 40 new store openings. Our new stores in 2023 are planned late in the third and fourth quarter, with the majority of the stores opening in the fourth quarter. We are also planning to close five stores this year. In closing, we navigated a number of challenges and still delivered a double-digit adjusted dividend margins and profitable net income for the year, as well as growth in our customer file. As we look ahead into 2023, we believe that the changes implemented in the past year will position us to deliver positive long-term growth for our shareholders. We will remain focused on the results that we can control, emphasizing the customer experience, productive customer file growth, and ensuring we have the best quality of product. With that, I will now turn the call over to the operator for questions.
spk11: 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 your handset before pressing the star keys. Our first question is from Lorraine Hutchinson with Bank of America. Please proceed.
spk12: Thanks. Good afternoon. I wanted to follow up on the changes you're making to Torrid Cash. Have you been able to test these and what's the customer reaction look like?
spk02: So we've just tested our work in the midst of testing our first shift in the first quarter. So normally we would have the redemption rate toward the end of the quarter. This year we've had an earlier toward cash redemption time period about, I guess, 10 days ago it ended. And we'll have another one toward the end of the quarter. A lot of the shipping for that redemption rate will happen and move into the second quarter. So we'll have a better indication of how we see that moving forward. Lorraine, I would say that we're offsetting the historical strength of the toward cash program, softened in the last year with other types of promotional stories for the customer. And we've been testing many of these over the past, since I arrived at the company, hampered a bit by the large inventory position that we had last year, but have accumulated a lot of very positive learnings in terms of how to promote and compel the customer in a much more positive and healthy gross margin return on that. And so one of the reasons we're bringing and very excited about bringing Mark into the company is he has an extensive amount of experience in not just inventory management and planning, but also in margin optimization through these promotional elements. So more to come on this, but what we've done is really This year mitigated the risk of the program as we saw it softening over time by switching it to six smaller time periods and also augmenting that with other promotional activity that has been very margin accretive at this point in the testing stage.
spk12: Thank you. And then on the growth margin front, can you speak a bit about the product cost inflation that you expect and any transportation savings that you think will flow through this year?
spk02: Sure. So we do feel that and have planned that we will have some recovery in gross margin this year. As we are moving toward the back of the year, we're starting to see some improvement in first costs on product, and we're also starting to see some improvement as we have been seeing and will continue to see in freight. But that is in inbound freight and outbound freight related to Customer delivery is still growing and expanding, so it offsets some level of that. But we are seeing some improvement in costing. We also brought in a new SVP of product development and sourcing last year, and his strategies are in terms of new vendor bases and new country of origin that have the quality that we expect. are being able to be integrated into our sourcing strategies and those are also helping our Costagas as we move forward.
spk12: Thank you. Thank you.
spk11: Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed.
spk03: Good afternoon, everyone, and nice to see the progress that you're making. Can you give us an update on the studio line, what you've seen from the studio line, how it's performing relative to your expectations? And if you went through the fourth quarter, how is the exit rate? And Lisa, how would you define the health of the consumer? And then just lastly, with the SG&A uptick slightly, how do you think of that cadence through the year if you unpack the measures of the margins going forward? Thank you. Thank you, Dana.
spk02: We're really pleased with how Studio is performing. The core product there for core fabrication is Ponte, but we also have four to five other fabrics that we've been testing and that will become part of the core assortment of that line. We are expanding it as we move forward and adding polished denim, so studio denim in that line, some what I would call studio street wear. So very happy. We see any time that we introduce a new idea, is very compelling to our customer. It drives frequency. It drives conversion. And it meets the need that she absolutely has. So that's exciting. We have linen in it now and that's a linen blend and that's doing well in addition to that. So great launch and more opportunity as we move forward. I'm not quite sure your second question is about the fourth quarter.
spk03: The cadence of the quarter, how are you seeing the health of the consumer as the quarter ended? Or any update on how the consumer is? Sure.
spk02: So what we've seen is some positive momentum over the fourth quarter back to stores, which was very exciting. And at the beginning of this quarter, we also saw an improvement in store traffic. It has become choppy in the last couple of weeks, but we There's a lot of seasonality and lots of different conversations that could be had about that. But some really nice green shoots in terms of the customer's recovery and return to the stores. That combined with our focus in the stores on customer acquisition and getting that customer to the dressing room and tracking conversion rates in the stores in conjunction with traffic, we're seeing some nice improvement there. And the focus of getting the customer to the dressing room, the conversion rate almost doubles once you get a customer in the dressing room. And so we've done some additional training in the stores and onboarding in the stores that really focuses on that customer journey and we're seeing some very positive reaction from that both from customer acquisition as well as conversion. Again, nice positive shoots, a little bit choppy on the store return and actually we're seeing some Now we had a little bit of softness online. I think it's a lot of people have discussed, and we're seeing a bit more of a shift back to online. Again, we look at it as an omni-customer, and we've baked in what we think are the most likely scenarios for this year with, again, one more year of really having a lot of moving pieces on the macro front that could have an impact at any time. And so really managing this as Tim says, controlling the controllables and being nimble and aggressive in a multichannel environment. So I'm happy with some of the things we're seeing, looking for margin recovery this year, really thinking about that done in two steps on the Merch Margin side. And then I'll let Tim, who always loves to talk to me about SG&A, tell you about SG&A.
spk06: Data from an SG&A perspective, I think on a full year basis, we are going to see a slight deleveraging just because of the return of incentive compensation, although we're going to do everything we can to mitigate that over time. I think you'll see that start to improve itself by the back half of the year as we expect that the sales velocity in the back half will be better than the front half. We are still seeing a lot of the same things that other retailers are talking about around wage pressure in stores and things like that, but we are focusing on a lot of efficiency activity around how we staff our stores, how we staff and run our distribution centers, overall costing programs in terms of understanding how we source non-merch procurement. And my goal is to drive that number down as we talked about controlling the controllables and find a way to drive leverage in that number.
spk03: Got it. Thank you.
spk11: Thanks, Dana. Our next question is from Mark Altrager with Baird. Please proceed.
spk07: Good afternoon. Thank you for taking my question. I guess first, with respect to the revenue guidance, it does imply a strengthening trend as we move through the year. Can you talk a little bit more about what's giving you the confidence there and key drivers you'd call out aside from the timing of the store openings and the 53rd week, as you mentioned? And then just also on the revenues, any color on your underlying expectations on customer growth versus spent per customer?
spk06: We do expect that we will have easier comparisons, by the way, in the second half of the year. The new store growth will be an opportunity. And then we're seeing that we're getting more and more receptivity to new product launches. And I think we're excited about sort of what we're going to see that contribute over the course of the year. So it's a combination of all those things. So the easier comparison being one of the major aspects of it.
spk07: Okay, thank you. And then on gross margin, for the fourth quarter, results were a little bit better than we were looking for, and it seems like you beat perhaps your plans. I know the quarter was really about clearing the inventory to set you up for a better 2023, but I'm curious what drove the upside or the better trend maybe than expected in the fourth quarter, and if there's any takeaways from some of the tests and learning that you're doing on new promotional tactics that you would call out.
spk02: I think that there was less pressure to clear than there had been in third quarter, number one, because receipts mitigated at the end of the year. We really had our early spring receipts, as we had mentioned in the body of the comments. We also are starting to see some positive movement in gross margin efforts. Some of the promotional and marketing strategies that we have put in place are starting to see some leverage in gross margin and so I think the rate was slightly better than we anticipated and that just by a smidge but we're still making better progress and less of a delta on a year-over-year quarterly gross margin basis. So I think the nice news on that is for us internally when we didn't have the excess inventory that was overwhelming at the level of the business we were actually able to employ some of our strategies to see some margin improvement. And that's positive as we move forward.
spk07: Great. Thank you for all the detail.
spk11: Thank you. Our next question is from Corey Tarlow with Jeffrey. Please proceed.
spk09: Hi. Good afternoon, and thanks for taking my questions. So, Lisa, I wanted to ask you on new customer acquisition. You have clearly emphasized that stores serve as a great way to acquire new customers. But I'm just curious, over the last quarter, what has worked from a marketing or product perspective, obviously outside of stores, that has really helped to drive some new customers into the Torrid brand?
spk02: Sure. So we look at the total customer file, and one of the big successes we had last year was customers who had lapsed, bringing them back to the brand. And so that was a growth area for us in the customer scenario. We've also just – this didn't really apply as much to the last year, but some of the nice things that we're seeing early this year is we've just switched to a new digital marketing agency with a very clear strategic direction to build customer files throughout all categories – reactivation, new customers, and then focus on retention and frequency as well. And we're feeling like we're on the right path in terms of doing that. But to your point in reinforcing what we said in the call, what has really worked for this business over many years is the customer experience that she has in the dressing room of the stores as a new customer, her conversion into an Omni customer, and the incredible – lifetime value and dedication that customer has with very high retention rates. And that is fundamentally the underlying philosophy of this business, of this organization. Definitely Omni, the most effective, most productive opportunity for us to acquire new customers, retain them and build frequency is through the store experience. All of our data on the customer experience in the stores is the highest I've ever seen in a retail environment and that opportunity to get her in a dressing room and double the regular store conversion rate by getting her in there and then the long focused marketing strategies to build frequency are really the strategy that we're moving forward and move that customer quickly to an Omni environment because they do spend more as an Omni customer. So that's simply the story and by moving from I think when I walked in the door, all of the focus in marketing was top of funnel awareness and consideration, moving that to a much more robust 360 degree focus that starts with the journey that the customer has primarily in the store. So we'll start opening more stores this year and we will accelerate that as we move into following years. We have all of the data that we need to indicate that this is a very sound business strategy for us as we move forward. And we're going to go into this very thoughtfully, strategically with a test and react mentality as we do this. But I'm feeling excited about the opportunity, the runway that we can build by reigniting this method that we've used historically in the brand to drive the growth of the brand. That was a big answer to your question, Corey. So I hope I answered what you wanted to hear.
spk09: Yes, thank you very much. It's very helpful. And then just, Tim, we've talked about controlling the controllables. I know that that is your focus. And I recognize there's a lot that you probably couldn't control at the onset of COVID and now there's probably a little bit more in your control now than there has been in quite some time. But as you think about what you can control and you think about prioritizing those actions that you need to take, how do you think about ranking some of those aspects that you have on your priority list?
spk06: Yeah, I think we look at sort of the biggest and best bang for our buck, and that's always going to be managing inventory and how we buy, rank, and sell through the product. That's always going to be the biggest contribution to profitability and growth of this business. I think overall we're also going to dig into every aspect within SG&A. We're going to look at how we staff our stores, how we're compensating our store associates, how efficient we can be in the distribution center, and how we can drive efficiencies to leverage SG&A the lowest possible sales volumes possible. So we're taking a look at pretty much everything, how we buy bags in stores, how we're doing distribution of store supplies, basically everything and anything that is driving cost in the organization or causing inflationary cost pressure we're going to take a look at.
spk09: Great. That's very helpful. Thank you very much and best of luck. Sure. Thanks.
spk11: Our next question is from Jonah Kim with TD Cowan. Please proceed.
spk10: Thank you for taking my question. Just curious what you're assuming in terms of the promotional environment in your guidance. And also, as you continue to open new stores, have you noticed any difference in the store ramp and performance of your new stores versus historical levels? And how do you think about store productivity as you continue to open stores? Thank you. Thanks.
spk02: So as we considered this year, we realized we were coming off of a very aggressive promotional environment due to the inventory scenario that we had at the company. So we're taking a measured approach. We don't think we can just pull the rug out from under the customer, that we have to be compelling from a promotional story. But we're also focused on mitigating that over time with smaller events and more margin-rich events as we move forward. And then again, of course, inventory management will help control that promotional environment as well. So we're focused on all of those things. We haven't opened a lot of stores in the last four years. So COVID to now, we really haven't been opening a lot of stores. The stores that we are opening and the performance that we're seeing for new stores are very, very healthy. Our ramps, we basically don't have a ramp. Our ramp is very, very fast on stores. And of the limited number of new stores that we've opened, they're hitting or beating their performance, so we're happy with that.
spk10: Got it. Thank you.
spk11: Thank you. Our next question is from Don Cardon with William Blair. Please proceed.
spk08: Thanks. I guess to sign up on that one, on the promo, I mean, I kind of understand that, but there's a lot of margin to put back. in the business for just stabilizing gross margin from a promotional standpoint? I mean, what's the risk that you kind of, after two years, get that customer fully used to a more promotional business figure?
spk02: Well, we're pulling back this year, to be clear. What I said is we're pulling back and being more, I would say, surgical about it and that because we don't have an inventory issue that we are not having to be highly promotional. The other thing that's going to make a difference for us as we move forward is really fundamentally how we buy products, buy channels, how we rank products and using all the analytics that we have at our disposal to make better inventory investment choices based on customer behavior. So the quality of the inventory, the channel assortment of the inventory, the overall investment combined with much more surgical promotional cadence is a combination of how we see moving forward. So we think we'll have a level of recovery this year, and then we should be back next year in due time to some historical merge margins. So we're not trying to get it all back in one year, but we also are telling a different promotional story than we had been telling and managing inventory more appropriately by channel, which allows us to pull back on the promotional messages as well.
spk08: So the offset then as it relates to kind of the language around gross margin guidance for the year would be input inflation, cost inflation?
spk02: I'm sorry, could you ask that again?
spk08: Yeah, so I thought that the gross margin commentary was more or less a stabilization of gross margins. And so I guess if you are pulling back even to some extent on promotional activity, why you wouldn't expect to give – why there wouldn't be more flow through the gross margin?
spk02: There is flow through the gross margin. We're just mitigating that to make sure that we're not – we are up against a highly promotional year. We don't think we're going to get it all back in one year. And we're doing – we're thinking about the recovery over a two-year period.
spk04: Okay.
spk02: The question is how quickly that comes through. And we also, I would say, have factored in a variable related to an uncertain economic situation. And so there's a balance between what we've invested, margin recovery, and some, I guess, some hedge against macroeconomic issues. Does that make sense?
spk08: So gross margin, yeah. I think I just misunderstood the language around gross margin.
spk02: the commentary for gross margin. First margin expands this year.
spk08: Yeah, we do expect expansion. And no, okay, I'll take that offline. My actual question was more along the lines of, so it sounds like sort of inventory is a big piece of the recovery this year. Is that, are you increasing the frequency of newness? How are you thinking about kind of like the architecture kind of coming out of this year or last year? Yeah.
spk02: The newness is similar to prior years. The It might be slightly different and shifted, but in general, we're not changing the rhythm of the business. We're changing how we're buying it and how we're promoting it, and just the base level of inventory will help mitigate and soften the level of promotion. Excellent. And we know that the, I'm just, you know, What drives this customer are new ideas, new product, new fashion, studio, those types of things. And so we have a calendar for the year of introducing new ideas to this customer. So the two things that we really think about as a business is store expansion, customer acquisition related to that, and the drive to Omni, and then the launch of new ideas to this customer. Not always just fashion, but core ideas as well. because we can't provide everything she needs to buy for her closet. And so we focus on that as well as we move forward.
spk08: And last year, as far as from a mix standpoint, am I correct in remembering that those were skewed more towards basics and less occasion?
spk02: Well, we overbought everything last year. Certainly, we're not left out when inventory was spread around. approach to basics was we just didn't, we weren't as aggressive because of the longer shelf life of that product and so we have a bit more time this year to work through the basics and we just made sure that we were as clean as possible in the prior season codes and that we started the year as fresh as possible and we did. Our fall holiday inventory is down substantially. The increase in And inventory, the DOP is really related to spring early receipts or on-time receipts because of supply chain challenges in the past. So I am happy with how we were able to get through the excess inventory last year without taking the liability into this year. Excellent.
spk08: Thank you very much.
spk02: Okay, thanks.
spk11: Our next question is from Brooke Roach with Goldman Sachs. Please proceed.
spk01: Good afternoon, and thank you so much for taking our question. My question is on the marketing outlook for the year. Can you talk to any further changes that you see on the horizon to improve the customer engagement? And do you need to reinvest some of the promotional recapture into additional marketing spend to continue to fuel the business's growth?
spk02: Sure. Thank you for your question. What I would tell you is that we've engaged two new digital marketing agencies. One is a more traditional approach where we have a strategy. We deploy the funds within that strategy. They optimize it and make the investments. As we move through with this new agency that is much more focused on retail in general than our previous agency was, we will invest as we start to see productivity in that. We're also testing with a different agency things like connected TV, very small, very minimal, but again, giving us the visibility to how we should invest. And we will continue to invest as we move forward. I think on a multi-year basis, as we start accelerating store openings, we will also supplement that customer acquisition with more investment in marketing as we move through. And not just marketing for top of the funnel, but marketing to actually also drive customers to the stores so that they can convert at a higher level there and become Omni. So I think I'm very happy, I'm very pleased with the marketing team that we have in place and their strategic approach to the business. And we're seeing nice progress there. To your end, once we see productivity, we will continue to invest in it to that productivity. And on a longer-term basis, we are anticipating a higher level of investment, particularly to support the customer acquisition through both stores and digital.
spk01: Thank you. And if I could just ask one more for Tim. Can you speak to your priorities for cash use, including the debt level and any plans for potential repayment this year?
spk06: Thank you very much. Our plan for any excess cash we have right now is going to be focused on growing the business and that store growth that we talked about. It seems to be the best source of generation both of new customers and return on investment. So that's the number one focus as of today and we'll see as the business evolves through the course of the year where we are. But we're very comfortable from a liquidity perspective. We're very comfortable with cash flow generation and we feel like we've got enough to manage what we need to do to grow this business and then beyond that we'll we'll come back with the highest and best use after we focus on that growth.
spk12: Thank you. I will pass it on. Thank you.
spk11: Our next question is from Alex Stratton with Morgan Stanley. Please proceed.
spk00: Great. Thanks for taking my question today. Two from me. First on SG&A, I'm trying to understand how much of the $78 million number this quarter was unusual and how you think about that going into 2023. And then second, a bit related to the last question, it looks like cash levels are at the lowest of the year and down quite a bit year over year. Seems like that might be normal cadence for you, but I want to understand is that right and kind of how you feel about cash levels at the moment. Thanks.
spk06: I'll answer your second question first. We're very comfortable with cash levels. It is a seasonal thing as we come out of the holiday and also as we build up the inventory that we came through last year with to pay that off. So I'm not at all concerned about cash flow or liquidity. As I mentioned, we have more than an ample amount of liquidity and we'll drive the business to generate incremental cash flow throughout 2023. And we'll focus that cash flow on investment at the growth vehicles, primarily the store things we talked about. From a SG&A perspective in the fourth quarter, I kind of tried to address in my commentary, we had about $2 million related to severance-related activities. Those were included in our SG&A, backed out for adjusted EBITDA. And then we had close to $1 million associated with with some non-cash write-off of some assets that we no longer were utilizing in our technology space. So those are the quantities of the SG&A unusual items. I did break out for you in my script the basis point impact of that, which was 70 basis points of our increase was due to severance and 40 basis points due to exposure of assets.
spk00: That's great. Thanks.
spk11: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.
spk02: Thanks so much for joining us today and your interest in the company. We look forward to sharing our progress with you as the year progresses.
spk11: Thank you.
spk04: Thank you, everyone.
spk11: This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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