Women’s plus-size apparel retailer Torrid Holdings (NYSE:CURV) announced better-than-expected results in Q3 FY2023, with revenue down 5% year on year to $275.4 million. On top of that, next quarter's revenue guidance ($275 million at the midpoint) was surprisingly good and 3.1% above what analysts were expecting. It made a GAAP loss of $0.03 per share, down from its profit of $0.07 per share in the same quarter last year.
Torrid (CURV) Q3 FY2023 Highlights:
- Revenue: $275.4 million vs analyst estimates of $245.8 million (12% beat)
- EPS: -$0.03 vs analyst expectations of -$0.03
- Revenue Guidance for Q4 2023 is $275 million at the midpoint, above analyst estimates of $266.8 million
- Free Cash Flow was -$3.6 million, down from $3.97 million in the same quarter last year
- Gross Margin (GAAP): 33.2%, up from 31.6% in the same quarter last year
- Same-Store Sales were down 8% year on year
- Store Locations: 643 at quarter end, increasing by 14 over the last 12 months
Promoting a message of body positivity and inclusiveness, Torrid Holdings (NYSE:CURV) is a plus-size women’s apparel and accessories retailer.
Specifically, the company sells tops, bottoms, dresses, lingerie, shoes, and accessories, in sizes ranging from 10 to 30 under its namesake brand. The Torrid aesthetic is trendy, fashionable, and body-positive. The brand offers clothing and accessories that are designed to flatter a larger frame, while also keeping up with the latest fashion trends. Bold prints, bright colors, and unique designs are common.
Torrid clothing is mid-priced. It’s more expensive than fast fashion, which reflects higher-quality fabrics and construction. However, Torrid items are much more affordable than comparable luxury brand merchandise. The core customer is therefore a plus-size, middle income woman who may be underserved by traditional apparel retailers and brands.
The average Torrid store is approximately 3,000 square feet and is located in a mall or shopping center. The entrance usually features new arrivals and promotions while the center features sections such as dresses, tops, and bottoms. The back is usually devoted to accessories, shoes, and sale items. Torrid has an ecommerce presence that was launched in 2005. The company's website also features a blog and social media accounts that provide customers with fashion inspiration and body-positive messaging.
Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.Retail competitors offering some selection of plus-size women’s apparel and accessories include department stores such as Macy’s (NYSE:M) and Kohl’s (NYSE:KSS) as well as off-price concepts such as TJX (NYSE:TJX) and Ross Stores (NASDAQ:ROST).
Torrid is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale.
As you can see below, the company's annualized revenue growth rate of 7.8% over the last three years was decent as it opened new stores and grew sales at existing, established stores.
This quarter, Torrid's revenue fell 5% year on year to $275.4 million but beat Wall Street's estimates by 12%. The company is guiding for revenue to rise 19.6% year on year to $275 million next quarter, improving from the 1.1% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts expect revenue to decline 5.4% over the next 12 months.
Number of Stores
A retailer's store count is a crucial factor influencing how much it can sell, and store growth is a critical driver of how quickly its sales can grow.
When a retailer like Torrid keeps its store footprint steady, it usually means that demand is stable and it's focused on improving operational efficiency to increase profitability. Since last year, Torrid's store count increased by 14 locations, or 2.2%, to 643 total retail locations in the most recently reported quarter.
Over the last two years, the company has only opened a few new stores, averaging 2.1% annual growth in new locations. This sluggish pace lags the broader sector. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.
Same-store sales growth is an important metric that tracks demand for a retailer's established brick-and-mortar stores and e-commerce platform.
Torrid's demand within its existing stores has been relatively stable over the last eight quarters but fallen behind the broader consumer retail sector. On average, the company's same-store sales have grown by 1.1% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, Torrid is reaching more customers and growing sales.
In the latest quarter, Torrid's same-store sales fell 8% year on year. This decline was a reversal from the 8% year-on-year increase it posted 12 months ago. We'll be keeping a close eye on the company to see if this turns into a longer-term trend.
Gross Margin & Pricing Power
Gross profit margins tell us how much money a retailer gets to keep after paying for the goods it sells.
Torrid's unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it's averaged a decent 35.9% gross margin over the last eight quarters. This means the company makes $0.36 for every $1 in revenue before accounting for its operating expenses.
Torrid's gross profit margin came in at 33.2% this quarter, marking a 1.6 percentage point increase from 31.6% in the same quarter last year. This margin expansion is a good sign in the near term. If this trend continues, it could signal a less competitive environment where the company has better pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).
Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
This quarter, Torrid generated an operating profit margin of 2.5%, down 4.4 percentage points year on year. Conversely, the company's gross margin actually increased year over year, so we can assume the reduction was driven by weaker cost controls or operating leverage on fixed costs.
Zooming out, Torrid was profitable over the last two years but held back by its large expense base. It's demonstrated mediocre profitability for a consumer retail business, producing an average operating margin of 6.7%. On top of that, Torrid's margin has declined, on average, by 3.9 percentage points year on year. This shows the company is heading in the wrong direction, and investors were likely hoping for better results.
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q3, Torrid reported EPS at negative $0.03, down from $0.07 in the same quarter a year ago. This print was close to Wall Street's estimates, meaning the result was likely already priced into the stock because investors were aware of expectations and traded accordingly.
Between FY2020 and FY2023, Torrid's adjusted diluted EPS dropped 137%, translating into 45.8% average annual declines. In a mature sector such as consumer retail, we tend to steer our readers away from companies with multiple years of falling EPS. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).
On the bright side, Wall Street expects the company's earnings to grow over the next 12 months, with analysts projecting an average 108% year-on-year increase in EPS.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.
Torrid burned through $3.6 million of cash in Q3, representing a negative 1.3% free cash flow margin. The company shifted to cash flow negative from cash flow positive in the same quarter last year, which happened for several reasons including (but not limited to) the stockpiling of inventory in anticipation of higher demand or unforeseen, one-time events.
Over the last eight quarters, Torrid has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 1.5%, subpar for a consumer retail business. Torrid's margin has also been flat during that time, showing the company needs to take action and improve its cash profitability.
Key Takeaways from Torrid's Q3 Results
With a market capitalization of $441.3 million, Torrid is among smaller companies, but its $15.96 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by how significantly Torrid blew past analysts' revenue expectations this quarter. We were also glad its full-year revenue guidance came in higher than Wall Street's estimates. Zooming out, we think this was a great quarter that shareholders will appreciate. The stock is up 9.4% after reporting and currently trades at $4.56 per share.
Is Now The Time?
Torrid may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Torrid, we'll be cheering from the sidelines. Its revenue growth has been mediocre over the last three years, and analysts expect growth to deteriorate from here. And while its projected EPS growth for the next year implies the company's fundamentals will improve, the downside is its declining profitability over the last three years hurt its performance. On top of that, its relatively low ROIC suggests it has struggled to grow profits historically.
Torrid's price-to-earnings ratio based on the next 12 months is 24.1x. While we think the price is reasonable and there are some things to like about Torrid, we think there are better opportunities elsewhere in the market right now.
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