Torrid Holdings Inc.

greetings and welcome to toward holdings second quarter fiscal 2025 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 any much require operator assistance during conference please press star zero or your telephone keypad please note that this conference is being recorded it is now my pleasure to pass it over to chinwe abuelo 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 2025, which we released this afternoon and can be found on our website at investors.torrid.com. With me on the call today are Lisa Harper, Chief Executive Officer of Torrid, Paula Dempsey, Chief Financial Officer, Ashley Wheeler, our Chief Strategy and Planning Officer is also present, and will be participating in the Q&A session. 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. Managements may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements may include but are not limited to statements containing the words expect, 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, 2025. 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. With that, I'll turn it over to Lisa.

Thanks, Chin-Wei. Hello, everyone, and thank you for joining us. Today I will review our second quarter performance and provide an update on our strategic initiatives, including the enhancement of our product assortment, driving customer growth, and executing our store optimization plan. We are currently executing our strategic plan. Our five new sub-brands are resonating with the customers and will represent 25 to 30% of our assortment next year. We're on track for meaningful cost savings in fiscal 2026 as we execute our store optimization plan by closing up to 180 stores this year, reallocating our resources to respond to our customers' shopping preference. We believe this strategic shift, combined with continued inventory productivity, will deliver a substantive increase in free cash in 2026, as well as delivering approximately 150 to 250 basis points of adjusted EBITDA margin expansion. That margin expansion is net of planned incremental marketing investments. We plan to utilize the growing free cash flow to reduce debt and repurchase shares, which we believe positions us to deliver stronger performance and create long-term shareholder value. Let's go over our second quarter results. We delivered net sales of $263 million and EBITDA of $21.5 million, in line with our expectations. Our comp sales were down 6.9% for the quarter, due in part to headwinds related to restructuring our footwear business and the movement of our model search activation from Q2 to Q3. We experienced strong demand during our semi-annual sale event in June, but softer holiday peaks over Memorial Day and 4th of July which led us to be more promotional than we had anticipated to drive conversion. We continued to see customer sensitivity and value orientation given the current environment. During the quarter, we saw strength in bottoms, both denim and non-denim, dresses and swim, which were offset by tops due to the softness and graphic tees and an over-penetration of crop tops. Having said that, we are seeing green shoots in our tops category as we address short-term product misses. We expect graphics to continue to underperform for the balance of the year with improvements in late Q4 and into 2026. Now turning back to our strategic initiative. We remain incredibly pleased with the performance of our sub-brands and expect the penetration to more than double in the third quarter, and next year we'll reach 25% to 30% of our total assortment. This growth will support adjusted EBITDA margin expansion in 2026 through its higher margin profile due to limited promotions and higher full-price sell-throughs. These lifestyle concepts enable us to offer unique collections, which provide more newness and excitement, while also catering to a broader customer base. The most recent LUFSIC launch exemplifies this strategy, targeting younger demographics with strong engagement rates. Sub-brands generate a halo effect, driving attachment rates to core categories like denim, pants, and intimate apparel, while supporting customer reactivation through targeted community and influencer marketing. We're scaling this strategy through increased delivery frequency, enhanced newness, and additional sub-brand launches. On the marketing front, we are bringing back our popular model search event with a new look and feel. This year's event will be primarily digital and will kick off on September 9th. Historically, our model search has been a very strong customer activation event for us, and we are optimistic that the new format will enable us to reach an even broader audience. We also began to scale our digital marketing efforts toward awareness and new customer acquisition with a diversified approach of paid media, organic social, and a more robust influencer marketing campaign. During the quarter, we launched a Torrid Summer, an influencer-based campaign. These event-based activations were held across the country in key metropolitan areas, creating millions of impressions. Each brand-building moment drove customer engagement and social relevance. We will continue to scale these types of activations into 2026, prioritizing customer file growth through strategic digital marketing efforts, continued influencer marketing campaigns, and organic social media initiatives. We are investing behind these initiatives to increase brand awareness and consideration through top of funnel marketing and have made a strategic decision to increase our digital marketing spend for the balance of this year above the original budget by approximately $5 million, yielding a total investment of approximately 6% in 2025 versus the 5% previously budgeted. Based on the results of this increase, we will make the determination of the total increased investment for 2026. Next, our channel optimization strategy represents a decisive response to evolving customer preferences. With digital sales approaching 70% of total demand, we are executing a comprehensive realignment that capitalizes on this fundamental shift while strengthening customer relationships across all touchpoints. To that end, We have been closely tracking customer retention throughout the course of our store closures, and the results remain in line with our objectives. Our target is to retain at least 60% of customers consistent with historical performance following closures. Encouragingly, retention trends from the 2025 closures are outperforming fiscal 2024, with a greater share of customers migrating to our online platform. This reinforces that our most loyal customers are increasingly channel agnostic and continue to engage with us regardless of format. These outcomes are supported by the more robust retention strategy we introduced this year, which incorporates a multifaceted approach with proactive customer outreach before, during, and after a store closure. Building on this foundation, during the first half of the year, we executed the closure of 59 underproductive stores in line with our plans. We remain on track to close approximately 120 additional stores in the back half of the year, bringing total closures to about 180. These decisions are deliberate and strategic, strengthening the overall fleet and redirecting demand to higher return channels. Importantly, when paired with our enhanced retention playbook, this optimization demonstrates that we can both rationalize our physical footprint and preserve, if not strengthen, long-term customer relationships. As I mentioned, beginning in 2026, we will redeploy a portion of the fixed cost savings from the closure of unproductive stores into acquisition-focused marketing efforts to grow the customer file size. A portion will go toward increased digital marketing efforts and a portion toward more robust organic social influencer marketing. And to reiterate, We expect to realize 150 to 250 basis points of adjusted EBITDA margin expansion in 2026 and a substantive increase in free cash, which will be deployed to retire debt and buyback stock. We currently have an active $100 million authorization for share or purchase, of which we have approximately $45 million remaining. We also intend to deploy free cash flow to further reduce our debt fortifying our balance sheet for long-term financial flexibility. At the same time, we remain committed to investing selectively to initiatives that drive profitable growth and improve customer retention, ensuring that our capital decisions not only provide immediate returns, but also strengthen the foundation for future growth. In closing, I want to thank all of our talented team members for their unwavering dedication and support. We remain confident in our strategic direction, and the progress we're making positions us to drive improved business performance and meaningful shareholder value creation over time. With that, I'll turn it over to Paula.

Thank you, Lisa. Good afternoon, everyone, and thank you for joining us today. I'll begin with a review of our second quarter financial performance, then provide our outlook and guidance for fiscal 2025. Our second quarter results were in line with our expectations for both net sales and adjusted EBITDA. While sales trends fluctuated throughout the quarter, we remained focused on discipline expense management and execution of our store optimization strategy. Net sales for the second quarter were $262.8 million compared to $284.6 million in the prior year. Comparable sales declined 6.9%. Gross profit was 93.5 million compared to 110.3 million last year. Growth margin was 35.6% compared to 38.7% a year ago. SG&A was favorable by 6.3 million, resulting in 70.5 million in Q2 compared to 76.8 million in the prior year. As a percentage of net sales, SG&A leveraged 20 basis points to 26.8 versus last year. The year-over-year favorability in SG&A continues to be primarily driven by our store optimization efforts as well as prioritization of company-wide projects. We strategically increased our marketing investments by 30 basis points in Q2 compared to last year to support the rollout of new sub-brands. We also invested in creative brand building campaigns to attract new and younger customers. Net income was 1.6 million, or two cents per share, compared to a net income of 8.3 million, or eight cents per share, in the prior year quarter. Adjusted EBITDA was 21.5 million, representing an 8.2% adjusted EBITDA margin versus $34.6 million in 12.2% adjusted EBITDA margin last year. We ended the quarter with cash and cash equivalents of $21.5 million compared to $53.9 million in the prior year. As of August 2nd, we had $7.9 million drawn in our revolving credit facility. During the quarter, we repurchased approximately 6 million shares of our common stock at $3.50 per share, utilizing 20 million of the company's cash. The share repurchase was executed simultaneously with the secondary offering in June. Total liquidity, including available borrowing capacity, remained strong at 111.7 million. We continue to strengthen our balance sheet by reducing total debt from the prior year by 8.2 million to 288.4 million. And at the end of the quarter, we proactively extended our ABL agreement from 2026 to 2030. Inventory totaled 130.2 million, which is approximately 1% higher than the prior year, primarily due to in transit timing. We're managing inventory with discipline and anticipate some temporary fluctuations throughout the year. However, we expect year-end comparable inventory to be down in the mid to high single-digit range, with total inventory declining more significantly due to store closures. Turning to our store optimization strategy, we closed 57 stores during the second quarter and are very pleased to see retention from these closures performing at our target rate. which is consistent with historical levels and highlighting both the strength of our brand and the loyalty of our customers. We remain on track to close up to 180 stores in fiscal 2025, with the majority of the remaining 120 closures expected towards the end of the year to align with these expirations, minimizing incremental exit costs. The stores identified for closure are underperformers, averaging roughly $350,000 in annual sales and located in less attractive markets. We expect the sales impact to be minimal as we plan to offset closures through target marketing investments and stronger customer retention strategies. We believe our optimization efforts will generate 150 to 250 basis points of adjusted EBITDA margin expansion, net of additional marketing investments beginning in fiscal 2026 and positioning us for sustained profitability. At the same time, our capital allocation priorities in 2026 will remain disciplined, strategic, and balanced, focused on enhancing shareholder value while maintaining financial flexibility. We intend to deploy cash flow towards share repurchases under our existing 100 million share repurchase program, underscoring our confidence in the inherent value of the company and our ability to deliver attractive long-term returns, while also reducing debt to further strengthen the balance sheet and support long-term growth. Turning to our guidance for fiscal 2025, we're updating our revenue outlook to reflect the current macro environment, which we believe is driving variability in sales trends in our business. We now expect full year net sales in the range of 1.015 billion to 1.030 billion. For the third quarter, we expect net sales of between 235 million and 245 million. Given the changes in tariff rates since our last call, we anticipate up to 10 million in incremental headwinds to margins. We continue to proactively manage country of orange sourcing to minimize impact on our business, as well as negotiating lower costs from our vendors, creating operational efficiencies, and selectively taking price increases where we see value gap in the market. Our total tariff impact for fiscal 2025 is expected to be approximately $15 million, and we have mitigated 80% of that cost. We now expect adjusted EBITDA in the range of 80 to 90 million for the full year, which incorporates the higher tariffs announced in July and incremental marketing investments. As Lisa mentioned, we're investing an incremental $5 million in marketing in the second half of the year, taking marketing as a percentage of net sales to approximately 6%. For the third quarter, we expect adjusted EBITDA to be between $16 and $21 million. We still anticipate capital expenditures to be in the range of $10 to $15 million, focus on digital experience, store refreshes, and fulfillment capabilities to support our omni-channel growth strategy. In closing, we're making transformational changes to our business as we capitalize on lease expirations to optimize the size and locations of our store fleet. These actions will enable us to operate more efficiently, deliver consistent long-term growth and profitability, and fuel continued investment in our fast-growing digital channel. a critical engine of our customer engagement and future growth. We're confident that the steps we're taking today position us to create meaningful value for our customers, our associates, and our shareholders. Now, we will open the call to our questions. Operator?

Thank you. With that, we will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing star keys. One moment while we poll for questions. And our first question comes from the line of Corey Tarlow with Jefferies. Please proceed with your question.

Great. Thanks. Lisa, how would you characterize the health of your customer and the appetite for newness that you've infused into the business? And then is there a way to put context around the lift that you're seeing from some of the sub brands in stores and what that's expected to look like over the remainder of the year?

Sure, thanks, Corey. I would say that the health of our existing customer is very strong. We see continued improvement in terms of especially our top tier customers of their engagement and the transactions associated with that. We made an assessment, I would say 18 months ago or so, maybe a little bit longer, that we needed to reinvigorate the quality and innovation and relevancy of our product. And we've worked very hard over that time period and are very pleased with the customer reaction to the launch of those sub-brands and the halo that it gives some of our core businesses like Denim and Non-Denim Bottoms and Intimates. So we're really pleased with that. We launched our very first sub-brand right after Christmas last year, 12-27-24. And we didn't have a robust delivery of sub-brands in the first half of the year after the initial launches, primarily because we wanted to see if they were going to work before we really chased into them. So the launches that, based on the success of the launches in the first part of the year, we have chased into the back part of the year. And all of the sub-brands, except for LoveSig, will deliver on a monthly basis from here until the end. And on the go forward. As that happens, we would expect sub-brands to be about a total of 10% of our total business next year. And as we, I mean this year, and as we annualize all of that, we expect it to be about 25 to 30% of the business next year. We are bringing new customers to the brand, and in some cases, younger customers to the brand through these launches. Love sticks a little early in terms of assessing the customer impact, the specific customer impact in terms of new or demographic or age. But we are pleased with how all of these are launching. I would say our goals were focused on frequency of our existing customers and new customers in this business. And we're achieving those. The reason that we made a determination to increase our marketing spend for the back half of this year, as it aligns with the more aggressive store closure schedule that we've discussed previously, we think it's prudent and strategically important for us not to wait until next year to really invest in this awareness and consideration and top of funnel. We feel confident with the sub-brand and the core business and assortment improvements that we've seen. And we feel like it's the right time to really press that with a broader range of customers, as well as focusing on the retention efforts that we've talked about as we're closing the stores. So all of that rolls into, we think, a very responsible and exciting strategic initiative to drive both frequency of our existing customers reactivation of customers who might have not shopped with us for a while, and bringing new customers and a broader range of customers to the brand. So very happy about that. I would say broadly, aside from the excitement we see with sub-brands, we do see choppiness with our consumer. We see our consumers have a household income of around $95,000 to $100,000. And we know that based on our conversations with our sales associates and stores, that there is concern in terms of their discretionary spending on clothing. We think we have enough excitement built into the business to help offset some of those macro pressures. And as I said, we are very happy with how they're engaging with both the new brands as well as the categories that receive the HALO effects in conjunction with that. Did I answer everything, Corey?

I think you did. I just wanted to follow up, and thank you for that call, Lisa. I just wanted to follow up on the outlook for the year. Is there a way you could put it into context, the EBITDA outlook change? And I know you're investing more in marketing, but how are you thinking about the other aspects around promotions and investments in the business as we look throughout the remainder of this year and maybe what stays in the business or what comes out. I mean, as you think about what next year could look like as well. Thank you so much.

Yeah. Yeah. There are a few things obviously that have impacted us. We've talked about obviously the largest being tariffs. And so We think the total hit for tariffs this year is accumulatively about $50 million. We've offset 80% of that, offset $40 million of that impact. And essentially, the impact of the EBITDA for the balance of the year really just presumes that we don't have more expenses to cut or more margins to drive associated with that last $10 million of tariff impact. We've done a lot on the sourcing side and will continue to move on the sourcing side to offset that as we move forward. But I think primarily the impact is that hit of tariff that is above and beyond what we had contemplated in our previous communications, as well as Why don't I let Ashley talk about some of the promotional efforts and things like that?

Yeah. Hi, Corey. So from a promotional standpoint, as Lisa noted, we have continued to see some choppiness with the customer. So we've responded to that with some additional promotional activity that wasn't originally contemplated to drive conversion efforts. We expect that to continue throughout the balance of the year in this environment. And then beyond the $10 million associated with tariffs that Lisa mentioned, the incremental marketing investment, that at this point we're really positioning more upper funnel awareness and consideration focused to drive the type of behavior and set us up for a 2026 growth to support sub-brand acceleration.

Great. Thank you very much. Best of luck.

Thanks, Corey.

Thank you. And our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Hi, this is Savannah Summer. I'm from Brooke Roach. Thank you so much for taking our question. There was a lot of ground covered on the call, and it's really great to see the continued momentum with the sub brands. You've discussed planning the sub brands to be 25 to 30% of the assortment next year. I was curious what you expect that mix to go to over time. How do you think about the margin opportunity and the associated timeline there as the brands continue to scale? Thank you.

Are you asking scaling post-26?

Yes, that's correct.

Okay. So we've discussed before and we're still very happy with the margin profile that we're seeing in sub-brands. And it's delivering hundreds of basis points higher in product margins than the bulk of the business. And we're seeing that consistently perform as we roll out more and more deliveries of these. I think there are a few ways that we contemplate expansion past 2026 in this business. And we'll test some of these ideas next year, whether there are stores that we convert to more of a focus on sub-brands. We've refixtured about 135 stores so far this year, and we'll refixture the balance of the stores by the beginning of next year. That refixturing allows a lot more flexibility in the existing stores. We already deliver four or have delivered three and are adding a fourth sub-brand that will roll out to stores, that have rolled out to stores and will continue rolling out to stores through the back half of the year. Some of our brands go up to over 200 stores in terms of their distribution. So we are learning a lot this year in terms of what those expanded assortments provide to the store experience for the customer. There are things that we will test next year, the idea of pop-ups, the idea of standalones for some of these brands. Our two largest brands at this point are Belle Isle which is the more preppy kind of East Coast mentality brand, and then Festy, which is the more boho, free-spirited type of brand. And those are two brands that would be candidates for pop-ups or a more expansive store assortment. And then we'll learn and keep you guys apprised of that as we move forward. The idea was... part of the incubation of these new concepts. First of all, to provide an internal marketplace so that we don't become dated in terms of traditional plus-size mindset or plus-size clothes. The zeitgeist of this customer is very much more focused on fashion as they move forward. We stuck with fit too long as a company, where fit is essentially table stakes, quality is table stakes, and they really are very, very hungry for a broader fashion presentation. So we think we've set ourselves up well. We've set our customers up well to be able to provide many different lifestyle choices for them in these assortments. I think the teams have done a tremendous job in being able to develop these and roll them out. It's been a Herculean effort to really bring this much new product to the customer as well as updating the core product in the Torrid line. I think there's a chance for further expansion as we move forward into 27 as a total penetration. I think there's some chances for pop-ups and stand-alones, and then the potential for converting some of our stores to have a higher percentage of sub-brands in their total assortment mix.

Thanks so much for the color. I'll pass it on.

Thank you. And our next question comes from the line of Janine Stichter with the BTIG. Please proceed with your question.

Hi, everyone. You've got Ethan Saggy on for Janine. Thanks for taking our questions. So to start, could you provide any color on how the business performed exiting Q2 through August?

Yeah. So I would say, based on the results of Q2, what we saw was a little bit softer performance throughout peak holiday period. So we didn't see the acceleration that we would normally see over, say, Memorial Day or Fourth of July. But outside of that, the business performed aligned with our expectations. We had a really, really strong June semiannual sale event that we were very pleased with. The consumer, as we've mentioned, remains a little bit value-oriented more so in this environment. And so we've responded to that with promotional activity to drive conversion efforts. And that's remained fairly consistent throughout August as well so far.

Got it. That's super helpful. And then just a follow-up for me. So have you seen any customer pushback following your price increases? And then just could you elaborate on how you're thinking about additional price increases for the back half of the year?

Our price increases related to tariffs are de minimis and very product specific. It's not an across the board price increase. So we haven't had specific pushback related to price increases related to tariffs. We have, however, and have always had and consistently had, the number one complaint of our customers is pricing. And I'm not sure that we're the only retailer that experiences that. I had announced a couple, I don't know, maybe a year and a half ago, really focused on opening price point product. And we did launch that. However, we lost, I have to be honest, we lost our way a little bit as tariffs kind of came on board and we were managing a very, very different problem in terms of production and pricing, cost of goods, supply chain. While I feel like we've done, the team has done a tremendous job in managing that, we still recognize that we have an opportunity and opening price point product. And to that point, as we move into next year, we anticipate about 25% of our assortment, 25% of our sales in our apparel business will be opening price point. And that is a tremendous undertaking with merchandising design and product development, ensuring that we can uphold our quality but bring a better value to the marketplace for the customer. So if you think about kind of the range of our business next year, I think about 25% to 30% in sub-brands, about 25% in OPP, and the balance is more of the core business. And that's how we're structuring it as we move forward. I think that is an enormous opportunity for us. It's probably as valuable as the product innovation that we've brought to the marketplace and I'm very excited about bringing that to the customer as we go into first quarter of next year.

Great. Thank you so much. That was super helpful. I'll pass it on.

Thank you.

Thank you. And with that, there are no further questions at this time. I would like to pass it back to Lisa Harper for closing remarks.

Great. Thank you everyone for joining us today. We look forward to keeping you in the loop on our then our advancement of our strategic initiative. Thanks. I look forward to talking to you next quarter.

Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect and have a wonderful day.