CURV - From Bad To Worse Torrid Holdings Investors Were Warned

2023-09-07 04:16:37 ET

Summary

• Torrid Holdings stock is not a good long-term investment and is only suitable for speculative trading.
• The company faces tough competition in the retail industry and has no protective moat.
• Sales are falling, margins are being squeezed, and earnings have declined, indicating a deteriorating financial situation.

We last covered Torrid Holdings ( CURV ) in June of this year and we warned readers plainly that this stock was bleeding out and could only be speculatively traded. We have been following this stock for some time, and have had several successful trades going back to January 2022, as it was and has been a topic of discussion for our trading service. This past winter, we said investing in this stock was akin to playing with fire , and the stock traded down to $2. As summer was just about to start we blessed very speculative trading only, getting in and getting out for rapid-return gains. Well, after the just reported earnings, we resume coverage, as the stock has now round tripped to where we essentially last covered it. Wise traders could have gotten in and achieved some solid gains in a few weeks as we outlined, but folks, this is just not a good investment. We are traders, and that is what this stock is good for. Now that Torrid's stock is heading under $2, we reiterate, it is for speculative in and out trading only. Once again, the stock is very speculative on this round trip. There are simply deteriorating fundamentals that investors should avoid.

Why is this happening? Why is the stock just so poor over the long-term? Let us face facts. The issue with Torrid is that it is a specialty retailer with literally no protective moat and faces tough competition come so many other retailers. Torrid operates retail clothing stores and is selling direct to consumer, specifically targeting the female demographic. Their niche is the average to plus-size women, with their products ranging in sizes 10 to 30. But a lot of other companies are targeting this demographic too. So there is not much that can happen here. Factor in inflation, and a consumer that is likely to be much weaker as student loans start to be paid back and unemployment creeps up, and you can see that investing in a company that is trying to turn around but struggling, simply is not a great play here.

Folks, it is a value trap. Despite the poor performance the valuation receives an "A-" rating from Seeking Alpha. However performance continues to decline slowly. The stock also is dealing with heavy short interest. The company just reported earnings and the situation is worsening.

Sales are still falling and margins are being squeezed

In Q2, sales fell 15.2% from Q2 2022 to $289.1 million. What do we always watch for retailers? Comparable sales. Comparable sales nosedived 18% compared to Q2 2022. There is no sugar coating it, that is horrific. Not only are sales falling but margins have been under pressure

Margins have been hit by promotional activity in the quarter, more so than the year before. Gross profit margin was 35.5% compared to 37.2% in Q2 2022. Further, margins were down from 37.7% in Q1. This was a 170 basis point decline from last year and it came as a result of the inflationary impact on product costs, an increase in store depreciation costs, and merchandising payroll.

Earnings fell, again

So revenues were down 15.2%, and margins fell almost 170 basis points. Adjusted EBITDA came in way worse than expected at $32.2 million, or 11.1% of net sales. This is a significant drop from the $52.1 million, or 14.7% of the net sales in Q2 2022. Net income was just $6.6 million, or $0.06 per share vs. net income of $22.7 million or $0.22 per share last year. This is painful. As earnings have fallen, so has the stock. It is as simple as that. Once again, we will caution you that astute traders can leverage the inevitable short-term bounce for gains, but the long-term investor is best served to avoid this stock.

Balance sheet is getting worse

For a long time there was a balance sheet that reflected strength, but it has been getting worse. Cash and cash equivalents dipped to just $18.5 million at the end of Q2. Total liquidity at the end of Q2, including available borrowing capacity on its revolving credit agreement, was $148.8 million. Cash flow is also down. Cash flow from operations was $31.7 million, compared to $44.3 million for Q2 2022.

Looking ahead

As we look ahead for the full year, sales will be $1.080-$1.115 billion per guidance in the release . which is a decrease of annual size guidance. Previously, just three months ago, we had assumed high 30% margins, to lead to adjusted EBITDA should between $115 and $130 million for the year. Well, EBITDA is now guided for just $90 million to $100 million. As for EPS, we were targeting $0.28-$0.32 for the year. We now see $0.24-$0.29 as likely. At $2.00 this puts the stock at 7.5X FWD EPS, which is actually more expensive than it was a year ago at $5 per share when earnings were projected to be around $1.00 per share. The situation has gone from bad to worse.

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