Torrid (CURV) - 2023 Q2 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements (unaudited) The unaudited financial statements for July 30, 2022, reflect a slight asset decrease, reduced liabilities, and improved stockholders' deficit, with modest net sales growth but declining net income and operating cash flow due to margin compression and prior-year adjustments Condensed Consolidated Balance Sheets As of July 30, 2022, total assets slightly decreased to $556.6 million, total liabilities reduced to $795.2 million, and the stockholders' deficit improved to $(238.7) million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | July 30, 2022 | January 29, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $22,985 | $29,025 | | Inventory | $180,738 | $170,608 | | Total current assets | $223,274 | $220,926 | | Total assets | $556,550 | $578,501 | | Liabilities & Stockholders' Deficit | | | | Total current liabilities | $279,714 | $297,013 | | Term loan (noncurrent) | $312,769 | $320,841 | | Total liabilities | $795,206 | $836,820 | | Total stockholders' deficit | $(238,656) | $(258,319) | Condensed Consolidated Statements of Operations and Comprehensive Income Q2 2022 net sales increased 2.4% to $340.9 million, but gross profit fell significantly due to margin contraction, resulting in a 41.5% decrease in net income to $22.7 million Q2 Fiscal 2022 vs Q2 Fiscal 2021 (in thousands, except per share data) | Metric | Q2 2022 (ended Jul 30) | Q2 2021 (ended Jul 31) | Change | | :--- | :--- | :--- | :--- | | Net sales | $340,876 | $332,870 | +2.4% | | Gross profit | $118,846 | $149,720 | -20.6% | | Income from operations | $39,416 | $(40,049) | N/A | | Net income | $22,710 | $38,787 | -41.5% | | Diluted EPS | $0.22 | $0.35 | -37.1% | Six Months Fiscal 2022 vs Six Months Fiscal 2021 (in thousands, except per share data) | Metric | H1 2022 (ended Jul 30) | H1 2021 (ended Jul 31) | Change | | :--- | :--- | :--- | :--- | | Net sales | $669,285 | $658,617 | +1.6% | | Gross profit | $243,992 | $294,652 | -17.2% | | Income from operations | $79,157 | $(14,555) | N/A | | Net income | $46,776 | $51,712 | -9.5% | | Diluted EPS | $0.44 | $0.47 | -6.4% | - A significant factor in prior year's Q2 results was a $179.0 million SG&A expense, including substantial share-based compensation, leading to an operating loss, contrasting with Q2 2022's $65.9 million SG&A and positive operating income[21] Condensed Consolidated Statements of Cash Flows Net cash from operations for H1 2022 significantly decreased to $44.3 million, primarily due to lower non-cash add-backs and working capital changes, while financing activities focused on share repurchases Six-Month Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended Jul 30, 2022 | Six Months Ended Jul 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $44,293 | $106,478 | | Net cash used in investing activities | $(11,444) | $(5,891) | | Net cash used in financing activities | $(38,826) | $(172,954) | | Decrease in cash | $(5,984) | $(72,450) | - Financing activities in the first six months of 2022 were dominated by $31.7 million in common stock repurchases and $13.1 million in principal payments on the term loan, contrasting with 2021's $300.0 million capital distribution and significant debt refinancing[27] Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the company's business, accounting policies, and financial statement line items, including revenue disaggregation, related-party transactions, debt structure, and share repurchase program specifics - The company identifies as a single reportable segment, combining its e-Commerce and physical store operations, as the Chief Executive Officer evaluates performance and allocates resources on a consolidated basis[41] Revenue by Product Category (in thousands) | Category | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Apparel | $310,827 | $310,976 | $602,480 | $612,093 | | Non-apparel | $30,049 | $21,894 | $66,805 | $46,524 | | Total net sales | $340,876 | $332,870 | $669,285 | $658,617 | - The company has significant related-party transactions, including purchasing merchandise from MGF Sourcing US, LLC, an entity controlled by Sycamore affiliates, with purchases totaling $36.1 million in the first six months of 2022[73] - As of July 30, 2022, the company had $336.9 million in principal outstanding on its term loan and $6.0 million drawn on its revolving credit facility, with $138.5 million availability under the revolving facility[78][93] - Under a share repurchase program authorized in December 2021, the company repurchased 4,464,367 shares for a total cost of $31.7 million during the first six months of 2022, with approximately $44.9 million remaining available[126][127] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q2 net sales growth to transaction increases, offset by lower average values, while gross margin significantly declined due to promotions and costs; SG&A decreased dramatically from reduced share-based compensation, and Adjusted EBITDA fell to $52.1 million Key Financial and Operating Metrics Q2 2022 comparable sales grew 1%, a sharp deceleration from 30% prior year, with 627 stores and Adjusted EBITDA significantly declining to $52.1 million Key Metrics Comparison | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Number of stores | 627 | 608 | 627 | 608 | | Comparable sales | 1% | 30% | 0% | 60% | | Net income (in thousands) | $22,710 | $38,787 | $46,776 | $51,712 | | Adjusted EBITDA (in thousands) | $52,088 | $86,516 | $103,867 | $162,227 | Results of Operations Q2 2022 net sales increased 2.4% to $340.9 million, but gross profit declined 20.6% due to promotions and higher costs, while SG&A expenses dropped 63.2% from reduced share-based compensation - Q2 Gross Profit decreased by $30.9 million, primarily due to a $28.9 million decrease in merchandise margin, with the gross margin rate falling 10.1 percentage points to 34.9% due to promotions, higher product costs, and e-Commerce shipping[168] - Q2 SG&A decreased by $113.1 million, mainly due to a $112.8 million reduction in share-based compensation expense, partially offset by a $5.4 million increase in payroll costs[169] - H1 Gross Profit decreased by $50.7 million, with a $48.1 million decrease in merchandise margin being the primary driver, and the gross margin rate falling 8.3 percentage points to 36.5%[177] - H1 SG&A decreased by $155.6 million, driven by a $150.1 million reduction in share-based compensation and a $13.4 million decrease in performance bonuses[178] Liquidity and Capital Resources The company's primary liquidity sources are cash from operations and its ABL facility, which had $138.5 million available; H1 2022 operating cash flow decreased to $44.3 million, with cash used for capital expenditures and share repurchases - The company believes cash from operations and availability under its credit facility will be sufficient to meet working capital and capital expenditure needs for at least the next 12 months[183] Six-Month Cash Flow Analysis (in thousands) | Activity | Six Months Ended Jul 30, 2022 | Six Months Ended Jul 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $44,293 | $106,478 | | Net cash used in investing activities | $(11,444) | $(5,891) | | Net cash used in financing activities | $(38,826) | $(172,954) | - The decrease in operating cash flow was primarily due to a significant decrease in the non-cash share-based compensation add-back and a decrease in accrued liabilities compared to the prior year[186] - Net cash used in financing activities decreased significantly year-over-year because the prior period included a $300.0 million capital distribution and major debt refinancing, whereas the current period's primary use was $31.7 million for stock repurchases[191] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risk profile has not materially changed from the disclosures in its Annual Report on Form 10-K for the fiscal year ended January 29, 2022 - There have been no material changes to the company's market risk profile since its last annual report[194] Item 4. Controls and Procedures Management, including the CEO and Chief Accounting Officer, concluded the company's disclosure controls and procedures were effective as of July 30, 2022, with no material changes in internal control over financial reporting during the quarter - The CEO and Chief Accounting Officer concluded that the company's disclosure controls and procedures are effective as of the end of the reporting period[195] - No changes occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[196] Part II - Other Information Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings but does not anticipate any material adverse effect on its financial condition or results - The company is not currently party to any legal proceedings that are expected to have a material adverse effect on the business[199] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended January 29, 2022 - No material changes to risk factors have occurred since the filing of the last Annual Report on Form 10-K[200] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1,545,811 shares for $5.72 per share during Q2 2022 under its $100.0 million program, with $44.9 million remaining available Share Repurchases for Q2 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | May 1 - May 28 | 1,107,306 | $5.72 | | May 29 - July 2 | 438,505 | $5.71 | | July 3 - July 30 | — | N/A | | Total | 1,545,811 | $5.72 | - As of July 30, 2022, approximately $44.9 million remained authorized for future repurchases under the existing program[201]