2023-12-05 05:33:36 ET
Summary
- Torrid Holdings is a direct-to-consumer retailer that focuses on providing clothing and accessories for curvy women aged 25 to 40.
- The company has been expanding its physical footprint and has a significant e-commerce presence.
- Recent financial performance has been mixed, with lower revenue and profits, but the company continues to generate attractive cash flows.
- Even so, a cautious approach heading into earnings may be a wise idea at this time.
Generally speaking, I tend to stay away from the retail space, especially anything related to clothing and accessories. There are some exceptions to this. But even outside of these exceptions, I will sometimes find a prospect that is trading at incredibly cheap levels. A great example of this can be seen by looking at Torrid Holdings ( CURV ), a direct to consumer retailer that has a very particular market that it services. Recent financial performance achieved by the company has been truly mixed, with revenue, profits, and cash flows mostly lower year over year. The company also has more debt than I would like to see. But even with these issues, the enterprise is generating attractive cash flows and management continues to focus on growing its physical footprint. All things considered, I have decided to rate the business a ‘hold’ at this time. But for those who like this space and who like the idea of deep value turnarounds, this is most certainly an opportunity that deserves some attention.
A niche clothing play
According to the management team at Torrid Holdings, the company operates as a direct-to-consumer provider of apparel, intimates, and accessories. In particular, it focuses on providing brand quality products to women throughout North America, with an emphasis on those aged 25 to 40 and who wear sizes of between 10 and 30. Management is not afraid to acknowledge that the typical woman the company caters to is ‘curvy’. In fact, its identity as a provider to that particular type of consumer can even be seen in its ticker symbol.
The range of offerings made available to its clientele includes, but it is not limited to, tops, bottoms, denim, dresses, intimates, active wear, shoes, and various types of accessories. Instead of positioning itself as a fashion leader that seeks to invent or stumble across the next big thing in clothing or accessories, Torrid Holdings considers its core offerings products that are already part of a popular trend but that may not have been made widely available for those in the sizes who it caters to.
Over the years, management has worked hard to increase the physical footprint of the company. The firm went from having 608 stores in operation at the end of 2020 to 639 by the end of 2022. That is the same number that the firm had as of the end of its most recent quarter, with weakening conditions likely giving management a pause when it comes to growth initiatives. But even outside of the physical space, Torrid Holdings works to sell to its customers and prospective customers. The company has a sizable e-commerce presence, with 61% of its revenue coming from online channels in 2022. It is worth mentioning, however, that as the company expands its physical presence, that number has come down. Back in 2020, for instance, 70% of its revenue came from online.
Unfortunately, revenue for the company has been rather lumpy in recent years. Sales jumped from $984.2 million in 2020 to just under $1.30 billion in 2021. That was driven by an increase in the number of stores from 608 locations to 624. It was also driven by an increase in the number of active customers, defined as customers that have completed at least one purchase over the past 12 months, from 3.18 million to 3.82 million. And those two factors resulted in a 31% surge in comparable store sales. But then, in 2022, a 3% decline in comparable store sales, driven by a 2.9% drop in sales per active customer, more than offset an increase in the number of active customers to 3.90 million and a rise in the number of stores to 639.
The bottom line for the company has been quite lumpy in recent years. Profits and cash flows have been all over the map. For the most part, 2021 can be seen as the best year for the business of the three. But then last year resulted in quite a bit of pain on the bottom line. As with any player in this space, a drop in revenue, even a small one, can have a large impact on margins. It doesn't help that the business continued to face challenges in this environment, with management having to resort to even greater discounts and promotions to clear up unwanted inventories and having to contend with inflationary pressures when it came to products and transportation costs. This all combined to bring the firm's gross profit margin down from 41.4% in 2021 to 35.7% in 2022.
For the current fiscal year , financial performance remains depressed. Revenue of $583 million came in substantially lower than the $686.7 million reported the same time last year. This was attributed, according to management, to a 16% drop in comparable store sales. The same margin pressures already mentioned were instrumental in pushing the company’s net profits down from $46.8 million to $18.4 million. As the chart above illustrates, the firm's cash flow metrics also took a beating.
Here, I have both good news and bad news for shareholders. The good news is that the management team at Torrid Holdings is expected to announce financial results covering the third quarter of the 2023 fiscal year. That is expected to come out after the market closes on December 7th. The bad news is that while this does give the company an opportunity to show improvements, the likely end scenario will be additional weakness.
You see, according to management, revenue for the third quarter should come in at between $242 million and $251 million. Analysts are forecasting a reading of around $245.8 million. This would all be materially lower than the $290 million reported in the third quarter of last year. On the bottom line, the only guidance that management gave involved EBITDA. The current expectation is for it to come in at between $11 million and $15 million. That would represent a decline from the $32.1 million reported one year earlier. Analysts, meanwhile, are forecasting a loss per share of $0.03, which should translate to a net loss of $3.1 million. In the third quarter of last year, the company generated a profit of $0.07 per share, which resulted in $7.3 million of net income. In the table above, you can also see some other important metrics that investors should pay attention to when management does report data for the quarter.
In the event that the company does not revise guidance for the year as a whole, investors should anticipate sales this year of between $1.08 billion and $1.115 billion. Meanwhile, EBITDA should come in somewhere between $90 million and $100 million. No guidance was given when it came to operating cash flow. But based on my estimates, it should be around $88.9 million. If we use these figures, we can price the company as shown in the chart above. As you can see, the stock is more expensive than if we were to use data from last year. But shares still look cheap on an absolute basis. As part of my analysis, I then compared with the company to five similar firms as shown in the table below. On a price to operating cash flow basis, it was the cheapest of the group. And using the EV to EBITDA approach, I found that only one of the four companies had positive results was cheaper than it.
Company | Price / Operating Cash Flow | EV / EBITDA |
Torrid Holdings | 4.4 | 7.3 |
Stitch Fix ( SFIX ) | 7.5 | N/A |
Genesco ( GCO ) | 13.0 | 8.0 |
Zumiez ( ZUMZ ) | 32.4 | 14.3 |
J.Jill ( JILL ) | 5.7 | 4.7 |
The Children's Place ( PLCE ) | 29.8 | 13.7 |
Takeaway
At this time, I want to like Torrid Holdings a great deal. The company looks incredibly cheap and I am a sucker for cheap businesses. Recent weakness is likely temporary and cash flows remain positive even with that weakness in play. Having said that, the expected decline in revenue for this year is quite steep and the company has net debt as of this writing of $293.9 million. That's not terribly far off from the $395.5 million market capitalization of the business. If we start to see some stabilization of the enterprise or, even better, some sort of nice recovery, I could take a more bullish stance. But as things stand now, I believe that a ‘hold’ rating is the most prudent assessment that I can make.
For further details see:
Torrid Holdings: Taking A Cautious Approach As Earnings Near May Be Advisable