Release Date: September 04, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sales and adjusted EBITDA came in at the high end of guidance range, with sales at $285 million and adjusted EBITDA at $35 million.
- Gross margin expanded by 323 basis points year-over-year, driven by reductions in both product cost and depth of discounting.
- The company ended the quarter with $54 million in total cash, reflecting strong free cash flow generation.
- Regular price comps increased by 6.4%, driven by strength across all apparel categories, particularly tops, denim, and dresses.
- The company has successfully implemented significant updates to its enterprise suite of systems, improving operational efficiency and customer service levels.
Negative Points
- Comparable sales declined by 0.8%, primarily due to a 50% decline in markdown sales.
- SG&A expenses increased to $76.8 million, or 27% of net sales, driven by performance bonuses, strategic technology investments, and a one-time expense related to employee severance.
- The company plans to close 20 to 25 additional stores by the end of fiscal 2024, which may impact short-term revenue.
- Marketing expenses increased slightly to $13 million, representing 4.6% of net sales.
- The company has not chased inventory in an appreciable way since 2015, indicating potential challenges in adapting to this strategy.
Q & A Highlights
Q: As you think about the fleet optimization program that you just announced was 65% located in enclosed malls. What is your ultimate target for what the fleet should look like, whether number of stores, locations and these 20 to 25 additional closures by the end of this year, how do you think about the cadence of closures going forward? And then, Lisa, congratulations on the progress on regular price comps. What are you seeing in terms of pricing and the full price sell-through? How are you thinking about product costs and the ability for pricing? And then just anything more on category performance and cadence through the quarter? Thank you.
A: (Paula Dempsey, CFO) For the 20 to 25 additional closures this year, they will most likely all happen at the end of Q4, timed with lease expirations to avoid profitability impact. Our target is to balance our fleet to 50% enclosed malls and 50% outdoor centers over the next three to five years. (Lisa Harper, CEO) We are happy with our full price sell-through and inventory productivity. We have removed clearance sales and focused on developing scarcity in the model, supported by a Chase model. We see continued improvement in cost of goods and inventory optimization, with new systems allowing more specific store-by-store allocation. Categories like denim, tops, sweaters, jackets, and dresses are performing well.
Q: Lisa, you provided a really interesting stat in your prepared remarks around your ability to chase. I think you mentioned it was something like 10% or so of your buy is still open for the fourth quarter. Is there any way to put that into context to talk about sort of where we've been in terms of your ability to chase on the inventory that you had availability in prior season versus what you have now and what that might mean for the P&L going forward as we head into the back half year?
A: (Lisa Harper, CEO) We haven't chased appreciably since 2015. Currently, 10% of our Q4 receipts are chase receipts, and we are filling all of that open to buy. This capability allows us to reorder strong-performing styles based on initial sell-through, making our inventory more productive. We expect this to improve margins as we chase closer to demand and customer preferences.
Q: Could you provide some more color on the cadence throughout the quarter and any trends you're seeing quarter-to-date?
A: (Ashlee Wheeler, Chief Strategy and Planning Officer) May and early June were strong, with a tougher 4th of July holiday, but we had a strong finish to the quarter with a successful Torrid cash event in July. For Q3, we are on track with our expectations.
Q: On the full-year sales guidance, I know you trimmed the high end. Can you walk us through what's driving a little bit more conservatism there? Despite trimming, we still have that comp improvement assumed in the back half. What gives you confidence there? And on the average customer age increasing over time, is the goal to bring that back down?
A: (Paula Dempsey, CFO) We are tightening our guidance based on six months of actual performance. We expect Q3 and Q4 to reflect the inflection point mentioned earlier. Last year, we had an extra week worth $22 million, which affects our Q4 comparison. (Lisa Harper, CEO) Our goal is to rebalance the average customer age slightly younger while retaining our loyal customers. We are focusing on product innovation and expanding offerings to attract different age groups and mindsets.
Q: Broader discussion on structural margin: Are we aiming for a return to pre-pandemic low teens, or is there more efficiency relative to that period? When might we expect to see this flow through?
A: (Lisa Harper, CEO) We delivered a 12.2% EBITDA margin this quarter and see opportunities to rebalance margins in Q4. We believe we can achieve low to mid-teens EBITDA margins over time by leveraging our operational platform and scaling investments. We expect stable flow-through and margin expansion as we optimize inventory and manage costs effectively.
Q: On the store repositioning, are you aiming to get to 50-50 primarily through closures, or is there a balance of closures and openings? Is 50-50 the end target or a medium-term goal?
A: (Paula Dempsey, CFO) We are targeting a 50-50 balance over the next three to five years through a mix of closures and openings. This balance is both achievable and optimal based on current data, but we will continue to analyze and adjust as needed.
Q: What are the key drivers of your adjusted EBITDA as a percentage of net sales?
A: (Lisa Harper, CEO) Key drivers include the expansion of our core product offering, adding new capsule collections, and executing our store optimization program. We are confident in our ability to drive low to mid-single-digit growth in comps and mid-teens adjusted EBITDA margins over time.
Q: Can you provide more details on your merchandising and marketing initiatives?
A: (Ashlee Wheeler, Chief Strategy and Planning Officer) We are focused on delivering relevant and balanced assortments, expanding product offerings with capsule collections, and implementing a merchandise financial assortment and allocation planning system. Our marketing initiatives include successful in-store activations and an improved loyalty program to drive customer engagement and retention.
Q: What are your expectations for the third quarter of fiscal 2024?
A: (Paula Dempsey, CFO) For Q3, we project net sales to be in the range of $280 million to $285 million and adjusted EBITDA to be between $23 million and $26 million. We expect positive comparable sales and robust gross margins driven by improvements in product costs and fewer promotions.
Q: Can you discuss your ongoing store fleet optimization efforts and the impact on your financials?
A: (Paula Dempsey, CFO) We plan to close 10 to 15 stores this year, with an additional 20 to 25 closures expected by the end of fiscal 2024. These closures will contribute to adjusted EBITDA expansion with minimal impact on top-line revenue. We will continue to optimize our store fleet as leases come up for renewal, aiming for a balanced mix of mall and outdoor center locations.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
