Expanding Offerings And Omni-Channel Strategy Set To Revitalize Growth And Margins

Key Takeaways

• Strategic focus on broadening customer base and increasing share of current customers' wallet through expanded product offerings and targeting younger demographics.
  
• Emphasis on enhancing omni-channel capabilities and optimizing inventory management to improve sales efficiency and net margins, alongside efforts to boost EBITDA through data and digital strategies.
  
• Challenges in sales volume, risk in inventory management, and strategic shifts may impact revenue, margins, and net income, despite efforts to modernize and optimize.

Catalysts

Operates in women’s plus-size apparel and intimates market in North America.

• Expansion of product offerings and entry into new demographics, particularly younger customers through the introduction of multiple capsule concepts expected to drive revenue growth by appealing to a broader range of customers and capturing a greater share of the current customers' wallet.
  
• Enhanced omni-channel capabilities with the ability to ship directly to customers from all 657 stores and improvements in distribution productivity are expected to optimize inventory investments and increase sales efficiency, potentially leading to improved net margins.
  
• Strategic inventory management and product cost reduction efforts, including sourcing strategy optimization and decreased reliance on markdown sales, aiming to expand gross margins and positively affect both revenue and net income.
  
• Strong focus on data and digital capabilities, leveraging a high engagement loyalty program and dynamic marketing programs to drive both short-term and long-term incremental EBITDA growth through improved customer acquisition, reactivation, retention, and purchase frequency.
  
• Store optimization program, including rightsizing the store footprint by increasing presence in lifestyle centers and closing underperforming stores, expected to improve store productivity and contribute to adjusted EBITDA expansion while maintaining or potentially increasing top-line revenue through enhanced customer experience.

Assumptions

• Analysts are assuming Torrid Holdings's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 5.5% in 3 years time.
• Analysts expect earnings to reach $64.8 million (and earnings per share of $0.62) by about October 2027, up from $13.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.4x on those 2027 earnings, down from 27.7x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.0x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.52%, as per the Simply Wall St company report.

Risks

• Decline in comparable sales by 0.8% due to a significant decrease in markdown sales, indicating potential challenges in maintaining sales volume and impacting net revenue.
  
• Inventory management risks, despite a reduction in inventory by 19%, reliance on dynamic fulfillment, and chasing inventory based on customer demand could affect product availability and sales if not accurately forecasted, impacting revenue and margins.
  
• Dependence on promotional activities and clearance sales to manage inventory levels, as mentioned, can erode gross margins if regular price sales do not offset markdowns.
  
• Strategic store closures and shift towards lifestyle centers may not yield the expected conversion rates and profitability, affecting overall revenue and EBITDA margin expansion.
  
• Substantial investment in new systems and technology, while beneficial in the long term, poses short-term financial risk and may impact operational expenses and net income if the expected efficiencies and sales uplift do not materialize as planned.

Valuation

• The analysts have a consensus price target of $6.75 for Torrid Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.2 billion, earnings will come to $64.8 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 9.5%.
• Given the current share price of $3.62, the analyst's price target of $6.75 is 46.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.