Torrid Holdings Inc.

Greetings. Welcome to Torrid Holdings Second Quarter Fiscal 2024 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 Chinwe Abelu, Chief Accounting Officer and Senior Vice President. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining Torrid's call today to discuss our financial results for the second quarter of fiscal 2024, which we released this morning 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, Paula Dempsey, Chief Financial Officer, and Ashley Wheeler, our Chief Strategy and Planning Officer. Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're already familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements may include, but are not limited to, statements containing the words accept, believe, plan, anticipate, will, may, should, estimate, and other words and terms of similar meaning. All forward-looking statements are based on current expectations and assumptions as of today, September 4th, 2024. 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 are included in the earnings release, furnished to the SEC, and available on our website. With that, I will turn the call over to Lisa.

Thank you, Chin-Wei. Hello, everyone, and thank you for joining us today. We are pleased with our second quarter results in which sales and adjusted EBITDA came in at the high end of our guidance range. For the quarter, sales were 285 million, and adjusted EBITDA was 35 million, resulting in 103 basis points of adjusted EBITDA expansion as a percentage of net sales to 12.2%. This was driven by strong regular price comps, which increased 6.4%, and our diligent inventory and expense management, which we will discuss shortly. Additionally, we successfully generated meaningful free cash flow, allowing us to end the quarter with $54 million in total cash. Before Ashley and Paula provide more details on our second quarter performance, I'd like to take some time today to share where we are and our strategies for the business transformation. Our first phase, which is nearing completion, was focused on driving operational excellence. Phase two is focused on scaling that platform to expand product offerings, gaining additional wallet share, and building our active customer file while delivering top and bottom line growth. Since my return approximately two years ago, we have focused on many initiatives, building talent, improving operational execution, realigning product sourcing and driving supply chain capabilities, enhancing financial disciplines, optimizing inventory levels, and expanding technical and digital capabilities. We worked on building a scalable operational foundation that positions us to accelerate into the next phase of our strategy, which is product evolution and expansion. We've discussed many of these initiatives over the last several calls, but I'd like to highlight a few of these today. Historically, Torrid has had a best-in-class data and digital capabilities. Our direct business now delivers 60% of our total demand, and 93% of our customers are engaged in our loyalty program. Our data-centric approach to our business has allowed us to build a dynamic marketing program over the last several years that delivers both short and long-term incremental EBITDA growth. We have focused on a balanced approach to acquisition, reactivation, retention, and frequency, and have the talent and disciplines to manage this dynamic process. Lately, we have seen an appreciable increase in brand awareness, increasing from the low 40s last year to 52% in our most recent measurement. We continue to have an industry-leading customer satisfaction score of 95%. Our focus on customer activation in our stores has increased, most notably with the reintroduction of our casting call model search, which had the highest engagement of any program of this type that we have ever executed. We see opportunities to invest in broader digital and store activation, both of these in the upcoming years. We operate our stores as the center of our Omni experience for our customers. We know that over 60% of our customers learn about the brand from their store experience, becoming the most evangelical lifetime value customers. Using stores as the primary source for customer acquisition allows us to operate with a very favorable CAC that supports first purchase profitability. If she tries product on in a store, she converts to a purchase at a rate of 50%. Store activated customers are the stickiest with the highest propensity to become omni customers. And omni customers spend 3.4 times the amount of single channel customers. We have always been laser focused on our customers as we acknowledge that she has minimal retail options dedicated to her even though she represents approximately two-thirds of U.S. women. While we remain committed to stores, we believe that we can better service our customers by right-sizing our store footprint. As our leases come up for renewal, our focus is on increasing our presence in lifestyle centers and improving the productivity of our current store base. We are her cheerleaders as we introduce her to products that change her life a claim that very few retailers can make. Our mission-driven store associates are most often customers that have experienced that life-changing store experience and found product that fits and flatters her while encouraging her to live her very best life. We experience torrid tears over and over in our dressing rooms, tears of joy, relief, and beauty. Despite our clear focus on the customer, the company had not scaled our investments with our business, Systems needed to be updated. The supply chain was fractured and could not keep up with servicing the customer. We have implemented significant updates to our entire enterprise suite of systems with a final phase to be completed by the end of 2025 when we roll out our financial system upgrades. Our talented leadership and distribution and supply chain now provides excellent service levels that include 98% of orders that leave the DC the same day they are ordered. with a 35% improvement in distribution center productivity over the last year. We also now have the capability to ship directly to our customers from all of our 657 stores, including the recent expansion of that capability in Canada. Our customers can choose to have product delivered to their store, and our store associates can order any product for a customer and have it shipped to either their home or to their store. Simply put, our Omni capabilities are dynamic, efficient, and allow for all customer preferences. These fully flexible options allow for optimal inventory investments as we can be agnostic on demand and fulfillment choices. In addition to these changes, we have spent the last two years identifying and executing dramatic improvements in overall inventory investment and product costs. Our inventory at the start of Q3 2024 is approximately 40% lower than the inventory levels when I rejoined the company. Additionally, our retail ticket prices had increased by 15% in 2022, and we were heavily committed to China as our primary country of origin. Two years later, our inventory is highly productive, our product costs have decreased as we have focused on sourcing strategies with our strongest partners, and our China penetration will be in the mid-teens by the end of the year. We have added opening price points to better balance our overall retail mix. This improvement in inventory position and quality has delivered appreciable expansion in gross margins, which were up 323 basis points in Q2 2024, compared to the same period last year. It has also generated substantial improvement in working capital, resulting in $54 million in cash and cash equivalents at the end of Q2 2024. Important to this discipline strategy is that we have eliminated many empty calorie sales. The second quarter was the inflection point for this, with our clearance sales comping negative 50%, while our regular price sales comp positive 6%. That yielded a blended comp of negative 0.8%. We believe Q2 represents the peak of our strategic clearance actions and the combination of improving clearance sales comps and strong regular price sales comps to result in blended positive comps in the second half of the year, in addition to further product margin expansion. One of the biggest benefits of this inventory strategy is still ahead of us as we start to chase inventory again. With 10% of our receipts in Q4 of this year, being chased based on customer demand. Chasing allows us to quickly reorder strong performing styles and also allows us to place product bets closer to delivery with greater insight into trends and customer preference. This is a game changer as we move forward and I'm so impressed with our team's nimble and dynamic approach to making this happen. Our team has worked hard to build a platform that will support the transition of Torrid back into growth mode with perhaps the most important element still ahead of us, because in retail, it is always about the product. When we converted Torrid from a market-driven brand to a vertical retailer in 2012, prior to the first round of explosive growth, it was important to develop fit and quality that exceeded her expectations and give her product that flattered her. Our strategy was to give her what she was seeing in the mall but couldn't buy, and we could provide everything in her closet because she was so underserved. But over the years, innovation stalled to mitigate risk and protect the historical business results. Over the last year, we've focused on reexamining our standards and process to rebuild a culture of innovation while ensuring our product is relevant and inspirational. But we know that there is one cardinal rule that we will not break. We will not fire our existing customer. Our average customer age has increased from 35 to 42 since 2018. This shows the power of the brand to retain customers, but it also highlights enormous opportunities. I'll use denim as a proxy for what we have implemented to date. Last year, skinny denim was approximately 65% of our denim assortment. Our approach to denim had to change to move forward and remain relevant to our customer. This year, skinny silhouettes have decreased to approximately 25% of our denim assortment And we have added a wide range of silhouettes and finishes that the customer is loving. Wide leg, flare, utility, baggy, updated boot, and straight. We relaunched Denim in August and are chasing product to satisfy the exciting demand. The team worked together and did a fantastic job, including design, tech design, product development, sourcing, merchandising, planning, and marketing to deliver this transformation. We have so much talent in the organization, and their excitement is palpable. In addition to a new energy and excitement highlighting the team's ability to deliver world-class product for our core brands and collections, we know that the overall plus-size market opportunity is vast. To that end, we will be introducing multiple capsule concepts next year to capture more of our current customers' wallet share, as well as appealing to broader demographics, most notably younger customers. You will start seeing this new product in January 2025 with the release of three capsule collections. While Torrid has developed a certain aesthetic over the years, we know that the customer's appetite for a variety of looks and price points exists. Imagine our customer shopping a traditional brand. She sees product after product that's not for her. We will use this product expansion to test customer demand as well as to gauge the opportunity to introduce new customers to the brand. In addition to product expansion and apparel, we are building a robust pipeline of innovation in our Intimates category. For the next two years, we will be reworking our core frames to incorporate new technology, as well as expanding our catalog of franchises to provide more solutions to our customers. The expansion of Intimates will also be supported by the existing platform. Critical to this overall strategy is the ability to scale our curtain capabilities. We will leverage our existing Omni store and web platforms, our internal design, sourcing, merchandising, and planning team, as well as distribution and supply chain. This strategy also gives us an opportunity to leverage what we have learned in our marketing efforts, and we believe this will result in expansion of both reactivated and new customers. There's more to come, and we will look forward to sharing our progress with this initiative. Simply put, we will scale our existing capabilities disciplined inventory practices, and omni platforms to introduce new product concepts to our existing and new customers. This is the second phase of our transformation, product expansion, providing every type of product that you find in the other brands for this remarkably underserved sector. The teams are excited and deeply engaged in executing these new ideas while also serving up more relevant product to the core Torrid brand. We will use what we learn to inform and scale our third phase, which is focused on accelerated and optimized growth. We are confident that we have made the right changes to the business, positioning us to drive low to mid-single-digit growth in comps and mid-teens adjusted EBITDA margins over time. Key drivers of our adjusted EBITDA as a percentage of net sales are through expansion of our core product offering, adding new capsule collections, and executing our store optimization program. And with that, I'd like to turn the call over to Ashley to discuss more details about Q2 results.