Amid a competitive industry and the lingering effects of the Covid pandemic on retail foot traffic, company executives view 2023 as a “rebuild year” for women’s fashion company Torrid Holdings Inc.
The company is currently testing out several strategies to help stem general declines in key business metrics and to motivate what has been a sclerotic customer base. There has also been some shuffling this year at Torrid’s headquarters that analysts see as a positive for the City of Industry company. And after absorbing a net loss in 2021, the company has for the most part maintained a modest net income in spite of declining sales.
Still, it will be a bumpy road for Torrid as it tries to claw back market share, win over investors and bring back value for current shareholders, who have seen Torrid’s stock price plummet by nearly 90% since its initial public offering in July 2021. Though Torrid has mostly remained in the black since the start of last year, its earnings for the first half of this year represent a step back by comparison.
“Overall, our strategies will continue to emphasize customer file growth, via enhanced marketing investments, additional store openings, value rationalization and improved product offerings,” Torrid Chief Executive Lisa Harper told shareholders in the company’s second-quarter earnings conference call in September. “As we look ahead, we are focused on positioning the business to generate consistent growth over the long term.”
Starting off
For more than 20 years, Torrid has built itself as a contender in women’s fashion, especially in the so-called plus-size world.
Formed in 2001 as an offshoot of the edgy youth-oriented Hot Topic, Torrid offers a full swath of women’s clothing ranging in sizes 10 through 30, in addition to various accessories. While online direct-to-consumer sales drive the business, the company also boasts 639 physical stores as of September – including the original location that opened at the Brea Mall in 2001.
The company went public in July 2021, with leadership boasting of its recovery pace throughout the pandemic.
However, while Torrid reported $1.3 billion in net sales for 2021, it finished the year at a $30 million loss. Things turned around in 2022, with Torrid posting a net income of $50 million in spite of a 2% drop in net sales.
In fact, the company has maintained a positive net income for three of the last four quarters even as net sales have fallen at an increasing clip from their prior years. The most recent quarter, which ended in July, saw a net income of $6.6 million on $289 million in net sales. That was more than an 18% drop in net sales from last year and, at an income of 6 cents per share, underperformed a forecast of between 9 and 11 cents per share.
Difficulties afoot
Analysts pointed to a variety of factors affecting Torrid, including an average rise in product pricing and softer consumer spending earlier in the year.
“We experienced slowing customer traffic during the quarter, as the broader retail environment struggled with consumers shifting their spending to essentials and experiences,” Paula Dempsey, Torrid’s interim chief financial officer, said during the earnings report.
Harper, the CEO, discussed a handful of adjustments moving forward, including an effort to find price points that make customers feel like they’re getting a good deal on whatever they’ve purchased.
“We have not had the ideal balance in value pricing, which we now see as having a negative impact on both customer acquisition and retention,” Harper told shareholders. “Our initial retail prices have risen too much in the last few years, and we are implementing a comprehensive strategy that balances both value and price, which will be fully integrated into our spring lines with a good, better, and best assortments and pricing strategy.”
Harper added that the company would bolster its marketing efforts across all platforms and revisit product sourcing and workforce alignment to improve fiscal efficiency. The company is also testing out clearance stores and may convert additional underperforming locations as such.
Some of these changes were already underway by the time of its most recent earnings report. Harper noted that Torrid laid off 5% of its headquarters workforce at the start of the current quarter. Dempsey became interim CFO in May after the departure of Tim Martin; she joined Torrid in January and was previously a senior vice president at Mattress Firm. And in March, Mark Mizicko – who was chief operating officer in 2016 and held a role with Hot Topic before the brands were separated – returned to the company as chief commercial officer.
“On a strategic note, (Torrid has) outlined three key areas of focus for driving improved execution, all of which we believe are encouraging,” wrote Brooke Roach, an analyst for Goldman Sachs, on the company’s second-quarter financial report. “While we are encouraged by management’s strategic initiatives to improve results, we believe these are likely to be offset by ongoing macro headwinds and product acceptance challenges.”
Class action suits
On top of economic recalibrations, Torrid is also contending with legal issues.
Since last year, a number of law firms have filed securities class action lawsuits against Torrid, all generally claiming that company executives misled investors about the growth and success of the company ahead of its public offering. Similarly, a shareholder derivative lawsuit was filed last month, further detailing allegations of masked supply chain issues and inventory mismanagement that have inhibited the company’s ability to maintain sales.
Securities class actions typically allege some level of fraud by misleading statements or outright omission of details by the company, which the plaintiffs – in these cases, investors – claim influenced their decisions to invest in the company. The damages claimed in these lawsuits tend to concern severe drops in stock price after the investors made their purchases.
When Torrid went public, it started with a first-day close at $26.58 per share. Prices peaked at $29.65 a month later but have since fallen around 89% from the initial price. They closed at $2.90 on Thursday.
The derivative shareholders suit, filed in a federal Delaware court by New York firm Ridrodsky Law, claims that just prior to the offering, Torrid abandoned its vaunted “data-driven” merchandising model in favor of purchasing large amounts of product upfront, to compensate for growing lead-times for manufacturers based in Asia. This was exacerbated by widespread congestion issues at the Port of Los Angeles and Port of Long Beach, which the lawsuit claims caused Torrid to miss seasonal launches and pile up inventory to unfavorable levels, resulting in deeply discounted offload sales.
Retail upswing?
This suit also takes issue with the nature of the public offering, which it says generated more than $230 million for company executives, board members and majority shareholder Sycamore Partners – a New York private equity firm that sold of quarter of its holdings in Torrid for the public offering – rather than for the company itself.
Torrid did not respond to an interview request.
Officials did address inventory levels at the most recent earnings report.
Dempsey, the interim financial officer, said inventory at the end of the second quarter stood at $158 million – a 13% decline from the prior year. She also noted that Torrid opened three stores that quarter and planned to open between 30 and 40 more before the end of the fiscal year.
This, combined with a revised projection of up to $1.12 billion in sales for the year, made her comfortable with the inventory levels at this point.
And there are some indications that consumers are getting back into their groove.
Mark Altschwager, a senior research analyst with Baird, noted that foot traffic at U.S. apparel retailers was up 7.1% this year. He also forecasted slightly improved holiday spending this year, although noted that consumer confidence had seen better days. And while Torrid’s shares are a fraction of what they once were, they have climbed 45% in the past month.
“Turning to our outlook, we recognize consumers are facing external pressures to the current environment,” Dempsey said. “And while we’re encouraged to see our sales trends have stabilized, business has been anything but predictable this year. We believe it is appropriate to assume that the back half of the year will continue to be volatile.
“Despite the near-term pressures,” she continued, “we remain confident in the long-term potential of Torrid. We have a loyal and active customer base which accounts for over 90% of our sales, who shop with us on average four times a year. The changes we’re making to the merchandising and marketing side of our business, combined with our disciplined approach to expense management, should position us to deliver solid top and bottom-line growth over time.”
