TORRID: Management Discussion and Analysis of Financial Position and Results of Operations (Form 10-Q)

0
The following discussion summarizes the significant factors affecting the
consolidated operating results, financial condition, liquidity and cash flows of
our Company as of and for the periods presented below. The following discussion
and analysis should be read in conjunction with the condensed consolidated
financial statements and the related notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. This discussion contains forward-looking
statements that are based on the beliefs of our management, as well as
assumptions made by, and information currently available to, our management.
Actual results could differ materially from those discussed in or implied by
forward-looking statements as a result of various factors, including those
discussed below and elsewhere in this Quarterly Report on Form 10-Q,
particularly in the section entitled "Risk Factors."
Overview
Torrid is a direct-to-consumer brand of apparel, intimates and accessories in
North America, targeting the 25- to 40-year old woman who is curvy and wears
sizes 10 to 30. Torrid is focused on fit and offers high quality products across
a broad assortment that includes tops, bottoms, denim, dresses, intimates,
activewear, footwear and accessories. Our proprietary product offering delivers
a superior fit for the curvy woman that makes her love the way she looks and
feels. We offer a broad assortment of high quality products including tops,
denim, dresses, intimates, activewear, footwear and accessories. Our style is
unapologetically youthful and sexy. We believe our customer values the appeal
and versatility of our curated product assortment that helps her look her best
for any occasion, including weekend, casual, work and dressy, all at accessible
price points. We specifically design for stylish curvy women and are maniacally
focused on fit. Through our product and brand experience we connect with
customers in a way that other brands, many of which treat plus-size customers as
an after-thought, have not.
Key Financial and Operating Metrics
We use the following metrics to assess the progress of our business, inform how
we allocate our time and capital, and assess the near-term and longer-term
performance of our business.

                                           August 1, 2020        July 31, 

2021

Number of stores (as of end of period)           606                  608


                                                       Three Months Ended                             Six Months Ended
                                                                      (in 

thousands, except percentages)

                                              August 1, 2020         July 

31, 2021 August 1, 2020 July 31, 2021
Comparable sales (A)

                                     (2) %                  30  %                 (20) %                  60  %
Adjusted EBITDA(B)                           $      34,245          $      86,516          $      26,047          $     162,227
Adjusted EBITDA margin(B)                               14  %                  26  %                   6  %                  25  %





(A)The computation of comparable sales includes results from stores that were
temporarily closed due to COVID-19.
(B)Please refer to "Results of Operations" for a reconciliation of net income to
Adjusted EBITDA.
Comparable Sales. We define comparable sales for any given period as the sales
of our e-Commerce operations and stores that we have included in our comparable
sales base during that period. We include a store in our comparable sales base
after it has been open for 15 full fiscal months. If a store is closed during a
fiscal year, it is only included in the computation of comparable sales for the
full fiscal months in which it was open. The computation of comparable sales
includes results from stores that were temporarily closed due to COVID-19.
Partial fiscal months are excluded from the computation of comparable sales.
Comparable sales allow us to evaluate how our unified commerce business is
performing exclusive of the effects of new store openings. We apply current year
foreign currency exchange rates to both current year and prior year comparable
sales to remove the impact of foreign currency fluctuation and achieve a
consistent basis for comparison. Comparable sales allow us to evaluate how our
unified commerce business is performing exclusive of the effects of
non-comparable sales.
Number of Stores. Store count reflects all stores open at the end of a reporting
period. In connection with opening new stores, we incur pre-opening costs, which
primarily consist of payroll, travel, training, marketing, initial opening
supplies, costs of transporting initial inventory and fixtures to store
locations, and occupancy costs incurred from the time of possession of a store
site to the opening of that store. These pre-opening costs are included in our
selling, general and administrative expenses and are expensed as incurred.
                                       30
--------------------------------------------------------------------------------

Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA
margin are supplemental measures of our operating performance that are neither
required by, nor presented in accordance with GAAP and our calculations thereof
may not be comparable to similarly titled measures reported by other companies.
Adjusted EBITDA represents GAAP net income (loss) plus interest expense less
interest income, net of other (income) expense, plus provision for less (benefit
from) income taxes, depreciation and amortization ("EBITDA"), and share-based
compensation, non-cash deductions and charges and other expenses. Adjusted
EBITDA margin represents Adjusted EBITDA as a percentage of our total net sales.
We believe Adjusted EBITDA and Adjusted EBITDA margin facilitate operating
performance comparisons from period to period by isolating the effects of
certain items that vary from period to period without any correlation to ongoing
operating performance. We also use Adjusted EBITDA and Adjusted EBITDA margin as
two of the primary methods for planning and forecasting the overall expected
performance of our business and for evaluating on a quarterly and annual basis
actual results against such expectations. Further, we recognize Adjusted EBITDA
and Adjusted EBITDA margin as commonly used measures in determining business
value and, as such, use them internally to report and analyze our results and we
additionally use Adjusted EBITDA as a benchmark to determine certain non-equity
incentive payments made to executives.
Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools.
These measures are not measurements of our financial performance under GAAP and
should not be considered in isolation or as alternatives to or substitutes for
net income (loss), income (loss) from operations or any other performance
measures determined in accordance with GAAP or as alternatives to cash flows
from operating activities as a measure of our liquidity. Our presentation of
Adjusted EBITDA and Adjusted EBITDA margin should not be construed as an
inference that our future results will be unaffected by unusual or non-recurring
items. Among other limitations, Adjusted EBITDA does not reflect:

•interest expense;
•interest income, net of other (income) expense;
•provision for income taxes;
•depreciation and amortization;
•share-based compensation;
•non-cash deductions and charges; and
•other expenses.
Factors Affecting Our Performance
We believe that our performance and future success depend on a number of factors
that present significant opportunities for us but also pose risks and
challenges, including those discussed below and elsewhere in this Quarterly
Report on Form 10-Q in the section titled "Risk Factors."
Customer Acquisition and Retention. Our success is impacted not only by
efficient and profitable customer acquisition, but also by our ability to retain
customers and encourage repeat purchases. It is important to maintain reasonable
costs for these marketing efforts relative to the net sales and profit we expect
to derive from customers. Failure to effectively attract customers on a
cost-efficient basis would adversely impact our profitability and operating
results. New requirements for consumer disclosures regarding privacy practices,
and new application tracking transparency framework that requires opt-in consent
for certain types of tracking were implemented by third party providers in 2021
which has increased the difficulty and cost of acquiring and retaining
customers. These changes may adversely affect our results of operations.
Customer Migration from Single to Omni-channel. We have a history of converting
customers from single-channel customers to omni-channel customers, defined as
active customers who shopped both online and in-store within the last twelve
months. Customers that shop across multiple channels purchase from us more
frequently and, spent approximately 3.2 times more per year than our
single-channel customer.
Overall Economic Trends. Consumer purchases of clothing generally remain
constant or may increase during stable economic periods and decline during
recessionary periods and other periods when disposable income is adversely
affected. Consequently, our results of operations during any given period are
often impacted by the overall economic conditions in the markets which we
operate. Additionally, the COVID-19 pandemic may continue to have a materially
adverse impact on the macroeconomic environment in the United States as well as
our results of operations.
                                       31
--------------------------------------------------------------------------------

Demographic Changes. Our business has experienced growth over recent periods
due, in part, to an increase in the plus-size population. Slower or negative
growth in this demographic, in particular among women ages 25 to 40, specific to
certain geographic markets, income levels or overall, could adversely affect our
results of operations.
Growth in Brand Awareness. We intend to continue investing in our brand, with a
specific focus on growing brand awareness, customer engagement, and conversion
through targeted investments in performance and brand marketing. We have made
significant historical investments to strengthen the Torrid brand through our
marketing efforts, brand partnerships, events and expansion of our social media
presence. If we fail to cost-effectively promote our brand or convert
impressions into new customers, our net sales growth and profitability may be
adversely affected.
Inventory Management. Our strategy is built around a consistent and stable base
of core products that provide our customer with year round style. At the same
time, we introduce new lines of merchandise approximately 16 times per year,
thus providing a consistent flow of fresh merchandise to keep our customer
engaged, encourage repeat business and attract new customers. We employ a
data-driven approach to design and product development, proactively and quickly
incorporating sales and operational performance information alongside customer
feedback from thousands of product reviews. We engage in ongoing dialogue with
customers through social media and customer surveys. Shifts in inventory levels
may result in fluctuations in the amount of regular price sales, markdowns, and
merchandise mix, as well as gross margin.
Impact of COVID-19. The COVID-19 pandemic has caused general business disruption
worldwide. The full extent to which the COVID-19 pandemic will directly or
indirectly impact our business, results of operations, cash flows, and financial
condition will depend on future developments that are uncertain. As a result of
the COVID-19 pandemic, we temporarily closed our headquarters, distribution
center and retail stores, required our employees and contractors to work
remotely, and implemented travel restrictions. The operations of our suppliers
and manufacturers and behaviors of customers have likewise been altered. There
have been some positive developments in recent months. Concurrently with the
vaccine rollout, business restrictions and stay-at-home orders have eased out
(although we remain subject to the risk of future restrictions). Consumer
spending has also increased with additional U.S. government stimulus payments.
Consequently, our operating results improved significantly in the first and
second quarters of fiscal year 2021. However, the impact of the COVID-19
pandemic remains highly uncertain and depends on future developments that cannot
be accurately predicted at this time, such as the extent and effectiveness of
the vaccine rollout and containment actions taken in relation to new variants of
COVID-19. As a result, recent favorable trends may not continue and our results
of operations may continue to be adversely affected by the COVID-19 pandemic.
Investments. We have invested significantly to strengthen our business,
including augmenting leadership across our organization and enhancing our
infrastructure and technology, and have delivered significant growth as a
result. In order to realize such growth, we anticipate that our operating
expenses will grow as we continue to increase our spending on advertising and
marketing and hire additional personnel primarily in marketing, product design
and development, merchandising, technology, operations, customer service and
general and administrative functions. We will also continue to selectively
expand our store footprint and make investments to improve the customer
experience both in-store and online. We believe that such investments will
increase the number and loyalty of our customers and, as a result, yield
positive financial performance in the long term.
Seasonality. While seasonality frequently impacts businesses in the retail
sector, our business is generally not seasonal. Accordingly, our net sales do
not fluctuate as significantly as those of other brands and retailers from
quarter to quarter and any modest seasonal effect does not significantly change
the underlying trends in our business. Additionally, we do not generate an
outsized share of our net sales or Adjusted EBITDA during the holiday season.
Typically, our Adjusted EBITDA generation is strongest in the first half of the
year as we benefit from more favorable merchandise margins, lower advertising
and lower shipping expenses relative to the second half of the year. The lack of
net sales seasonality provides structural cost advantages relative to peers,
including reduced staffing cyclicality and seasonal distribution capacity needs.
Components of Our Results of Operations
Net Sales. Net sales reflects our revenues from the sale of our merchandise,
shipping and handling revenue received from e-Commerce sales and gift card
breakage income, less returns, discounts and loyalty points/awards. Revenue from
our stores is recognized at the time of sale and revenue from our e-Commerce
channel is recognized upon shipment of the merchandise to the home of the
customer; except in cases where the merchandise is shipped to a store and
revenue is recognized when the customer retrieves the merchandise from the
store. Net sales are impacted by the size of our active customer base, product
assortment and availability, marketing and promotional activities and the
spending habits of our customers. Net sales are also impacted by the migration
of single-channel customers (i.e., customers shopping only in-store or online)
to omni-channel
                                       32
--------------------------------------------------------------------------------

customers (i.e., customers shopping both in-store and online), who on average
spend significantly more than single-channel customers in a given year.
Gross Profit. Gross profit is equal to our net sales less cost of goods sold.
Our cost of goods sold includes merchandise costs, freight, inventory shrinkage,
payroll expenses associated with the merchandising department, distribution
center expenses and store occupancy expenses, including rent, common area
maintenance charges, real estate taxes and depreciation. Merchandising payroll
costs and store occupancy costs included within cost of goods sold are largely
fixed and do not necessarily increase as volume increases. We review our
inventory levels on an ongoing basis in order to identify slow-moving
merchandise and generally use markdowns to clear that merchandise. The timing
and level of markdowns are driven primarily by customer acceptance of our
merchandise. The primary drivers of our merchandise costs include the raw
materials, labor in the countries where we source our merchandise, customs
duties, and logistics costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include all operating costs not included in cost of
goods sold or marketing expenses. Our historical revenue growth has been
accompanied by increased selling, general and administrative expenses. For
instance, we continue to make payroll investments to support our growth.
Marketing Expenses. We continue to make investments in marketing in an effort to
grow and retain our active customer base and increase our brand awareness.
Marketing expenses consist primarily of (i) targeted online performance
marketing costs, such as retargeting, paid search/product listing advertising,
and social media advertisements, (ii) store and brand marketing, public
relations and photographic production designed to acquire, retain and remain
connected to customers, (iii) direct mail marketing costs and (iv) payroll and
benefits expenses associated with our marketing team.
Interest Expense. Interest expense consists primarily of interest expense and
other fees associated with our Existing ABL Facility, as amended, Amended Term
Loan Credit Agreement and New Term Loan Credit Agreement. On June 14, 2021, we
repaid and terminated the Amended Term Loan Credit Agreement with borrowings
under the New Term Loan Credit Agreement and amended our Existing ABL Facility.
Provision for (Benefit from) Income Taxes. Our provision for (benefit from)
income taxes primarily consists of an estimate of federal and state income taxes
based on enacted federal and state tax rates, as adjusted for allowable credits,
deductions and uncertain tax positions.
Results of Operations
Three-Months Ended July 31, 2021 Compared to Three-Months Ended August 1, 2020
The following table summarizes our consolidated results of operations for the
periods indicated (dollars in thousands):
                                                                                   Three Months Ended
                                                                            % of Net                                        % of Net
                                                 August 1, 2020               Sales               July 31, 2021               Sales
Net sales                                      $       249,226                   100.0  %       $      332,870                   100.0  %
Cost of goods sold                                     169,245                    67.9  %              183,150                    55.0  %
Gross profit                                            79,981                    32.1  %              149,720                    45.0  %
Selling, general and administrative expenses            50,493                    20.3  %              179,041                    53.8  %
Marketing expenses                                       9,819                     3.9  %               10,728                     3.2  %
Income (loss) from operations                           19,669                     7.9  %              (40,049)                  (12.0) %
Interest expense                                         5,885                     2.4  %               12,662                     3.8  %
Interest income, net of other (income) expense             (50)                    0.0  %                   49                     0.0  %
Income (loss) before benefit from income taxes          13,834                     5.5  %              (52,760)                  (15.8) %
Benefit from income taxes                               (2,943)                   (1.2) %              (91,547)                  (27.5) %
Net income                                     $        16,777                     6.7  %       $       38,787                    11.7  %





                                       33
--------------------------------------------------------------------------------

The following table presents a reconciliation of net income and Adjusted EBITDA for the periods presented (in thousands of dollars):

                                                            Three Months Ended
                                                    August 1, 2020       July 31, 2021
Net income                                         $        16,777      $       38,787
Interest expense                                             5,885              12,662
Interest income, net of other expense (income)                 (50)         

49

Benefit from income taxes                                   (2,943)         

(91,547)

Depreciation and amortization(A)                             8,310          

8,574

Share-based compensation(B)                                  5,810          

115,009

Non-cash deductions and charges(C)                             435                  35
Other expenses(D)                                               21               2,947
Adjusted EBITDA                                    $        34,245      $       86,516





(A)Depreciation and amortization excludes amortization of debt issuance costs
and original issue discount that are reflected in interest expense.
(B)Prior to the consummation of our IPO on July 6, 2021, share-based
compensation was determined based on the remeasurement of our
liability-classified incentive units.
(C)Non-cash deductions and charges includes losses on property and equipment
disposals and the net impact of non-cash rent expense.
(D)Other expenses represent non-routine expenses, including IPO-related
transaction fees and the reimbursement of certain management expenses, primarily
for travel, incurred by Sycamore on our behalf, which are not considered to be
part of our core business.
Net Sales
Net sales increased $83.6 million, or 33.6%, to $332.9 million for the three
months ended July 31, 2021, from $249.2 million for the three months ended
August 1, 2020. This increase was primarily driven by an increase in orders
placed and an increase in average order value relative to the three months ended
August 1, 2020, which were impacted by disruption caused by the COVID-19
pandemic. The increase in net sales was also as a result of temporary store
closures due to the COVID-19 pandemic during the three months ended August 1,
2020. The total number of stores we operate increased by 2 stores, or 0.3%, to
608 stores as of July 31, 2021, from 606 stores as of August 1, 2020.
Gross Profit
Gross profit for the three months ended July 31, 2021 increased $69.7 million,
or 87.2%, to $149.7 million, from $80.0 million for the three months ended
August 1, 2020. This increase was primarily due to higher net sales volumes that
drove a $71.9 million increase in merchandise margin. Gross profit as a
percentage of net sales increased 12.9% to 45.0% for the three months ended
July 31, 2021 from 32.1% for the three months ended August 1, 2020. This
increase was primarily driven by higher merchandise margin rate, lower
distribution costs and leverage of our store occupancy costs and store
depreciation expense as a result of higher net sales volume. The higher
merchandise margin rate was primarily driven by decreased promotional activity
and lower inventory reserve levels and leverage of e-Commerce shipping costs as
a result of higher net sales from the reopening of stores.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended July 31,
2021 increased $128.5 million, or 254.6%, to $179.0 million, from $50.5 million
for the three months ended August 1, 2020. The increase was primarily due to a
$109.2 million increase in share-based compensation expense, increased store
payroll costs of $11.7 million, increased performance bonuses of $3.3 million,
increased headquarters general and administrative expenses of $2.3 million and a
$2.0 million increase in other store operating costs. Selling, general and
administrative expenses as a percentage of net sales increased by 33.5% to 53.8%
for the three months ended July 31, 2021 from 20.3% for the three months ended
August 1, 2020. This increase was driven by increased share-based compensation,
performance bonuses and store payroll costs, partially offset by leverage of
headquarters general and administrative expenses and other store operating costs
as a result of higher net sales volume.
                                       34
--------------------------------------------------------------------------------

Marketing Expenses
Marketing expenses for the three months ended July 31, 2021 increased $0.9
million, or 9.3%, to $10.7 million, from $9.8 million for the three months ended
August 1, 2020. This increase was primarily due to increased digital, store and
brand marketing, partially offset by decreased direct mail program spend.
Marketing expenses as a percentage of net sales decreased by 0.7% to 3.2% during
the three months ended July 31, 2021 from 3.9% during the three months ended
August 1, 2020. This decrease was driven by leverage of our marketing expenses
as a result of higher net sales volume.
Interest Expense
Interest expense was $12.7 million for the three months ended July 31, 2021,
compared to $5.9 million for the three months ended August 1, 2020. The increase
was primarily due to the write-off of $5.2 million of unamortized deferred
financing costs and OID when we repaid the Amended Term Loan Credit Agreement,
and the $2.1 million prepayment penalty.
Benefit from Income Taxes
The benefit from income taxes for the three months ended July 31, 2021 increased
by $88.6 million to $91.5 million, from $2.9 million for the three months ended
August 1, 2020. Our effective tax rate was 173.5% for the three months ended
July 31, 2021 and (21.3)% for the three months ended August 1, 2020. The
unconventional effective tax rate for the three months ended July 31, 2021 is
primarily due to the increase in the amount of non-deductible items associated
with share-based compensation, relative to loss before provision for income
taxes for the three months ended July 31, 2021. The increase in the amount of
non-deductible items associated with share-based compensation during the three
months ended July 31, 2021 was driven by a $111.4 million remeasurement
adjustment related to the increase in the value of the incentive units as
indicated by the Torrid Holding LLC equity value as of June 30, 2021, following
the pricing of our IPO.
Six-Months Ended July 31, 2021 Compared to Six-Months Ended August 1, 2020
The following table summarizes our consolidated results of operations for the
periods indicated (dollars in thousands):
                                                                                    Six Months Ended
                                                                            % of Net                                        % of Net
                                                 August 1, 2020               Sales               July 31, 2021               Sales
Net sales                                      $       405,703                   100.0  %       $      658,617                   100.0  %
Cost of goods sold                                     284,780                    70.2  %              363,965                    55.3  %
Gross profit                                           120,923                    29.8  %              294,652                    44.7  %
Selling, general and administrative expenses            57,351                    14.1  %              288,954                    43.9  %
Marketing expenses                                      23,855                     5.9  %               20,253                     3.0  %
Income (loss) from operations                           39,717                     9.8  %              (14,555)                   (2.2) %
Interest expense                                        11,979                     3.0  %               17,286                     2.6  %
Interest income, net of other (income) expense              83                     0.0  %                  (60)                    0.0  %
Income (loss) before benefit from income taxes          27,655                     6.8  %              (31,781)                   (4.8) %
Benefit from income taxes                               (1,391)                   (0.3) %              (83,493)                  (12.7) %
Net income                                     $        29,046                     7.1  %       $       51,712                     7.9  %








                                       35
--------------------------------------------------------------------------------

The following table presents a reconciliation of net income and Adjusted EBITDA for the periods presented (in thousands of dollars):

                                                             Six Months Ended
                                                    August 1, 2020       July 31, 2021
Net income                                         $        29,046      $       51,712
Interest expense                                            11,979              17,286
Interest income, net of other expense (income)                  83          

(60)

Benefit from income taxes                                   (1,391)         

(83,493)

Depreciation and amortization(A)                            16,685          

17 143

Share-based compensation(B)                                (32,705)         

154 788

Non-cash deductions and charges(C)                           1,331                  70
Other expenses(D)                                            1,019               4,781
Adjusted EBITDA                                    $        26,047      $      162,227





(A)Depreciation and amortization excludes amortization of debt issuance costs
and original issue discount that are reflected in interest expense.
(B)Prior to the consummation of our IPO on July 6, 2021, share-based
compensation was determined based on the revaluation of our liability-classified
incentive units.
(C)Non-cash deductions and charges includes losses on property and equipment
disposals and the net impact of non-cash rent expense.
(D)Other expenses represent non-routine expenses, including IPO-related
transaction fees and the reimbursement of certain management expenses, primarily
for travel, incurred by Sycamore on our behalf, which are not considered to be
part of our core business.
Net Sales
Net sales increased $252.9 million, or 62.3%, to $658.6 million for the six
months ended July 31, 2021, from $405.7 million for the six months ended
August 1, 2020. This increase was primarily driven by an increase in orders
placed and an increase in average order value relative to the six months ended
August 1, 2020, which were impacted by disruption caused by the COVID-19
pandemic. The increase in net sales was also as a result of temporary store
closures due to the COVID-19 pandemic during the six months ended August 1,
2020. The total number of stores we operate increased by 2 stores, or 0.3%, to
608 stores as of July 31, 2021, from 606 stores as of August 1, 2020.
Gross Profit
Gross profit for the six months ended July 31, 2021 increased $173.7 million, or
143.7%, to $294.7 million, from $120.9 million for the six months ended July 31,
2021. This increase was primarily due to higher net sales volumes that drove a
$174.9 million increase in merchandise margin. Gross profit as a percentage of
net sales increased 14.9% to 44.7% for the six months ended July 31, 2021 from
29.8% for the six months ended August 1, 2020. This increase was primarily
driven by higher merchandise margin rate, lower distribution costs and leverage
of our store occupancy costs, store depreciation expense and merchandising
payroll costs as a result of higher net sales volume. The higher merchandise
margin rate was primarily driven by decreased promotional activity and lower
inventory reserve levels and leverage of e-Commerce shipping costs as a result
of higher net sales from the reopening of stores.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended July 31,
2021 increased $231.6 million, or 403.8%, to $289.0 million, from $57.4 million
for the six months ended August 1, 2020. The increase was primarily due to a
$187.5 million increase in share-based compensation expense, increased store
payroll costs of $19.0 million, increased performance bonuses of $17.5 million,
increased other store operating costs of $5.2 million and $2.9 million increase
in headquarters general and administrative expenses. Selling, general and
administrative expenses as a percentage of net sales increased by 29.8% to 43.9%
for the six months ended July 31, 2021 from 14.1% for the six months ended
August 1, 2020. This increase was driven by increased share-based compensation
and performance bonuses, partially offset by leverage of store payroll costs and
headquarters general and administrative expenses and other store operating costs
as a result of higher net sales volume.
                                       36
--------------------------------------------------------------------------------

Marketing Expenses
Marketing expenses for the six months ended July 31, 2021 decreased $3.6
million, or 15.1%, to $20.3 million, from $23.9 million for the six months ended
August 1, 2020. This decrease was primarily due to decreased spending on direct
mail program, partially offset by increased store and brand marketing. Marketing
expenses as a percentage of net sales decreased by 2.9% to 3.0% during the six
months ended July 31, 2021 from 5.9% during the six months ended August 1, 2020.
This decrease was driven by decreased spending on direct mail program, and
leverage of digital and brand marketing spend as a result of higher net sales
volume.
Interest Expense
Interest expense was $17.3 million for the six months ended July 31, 2021,
compared to $12.0 million for the six months ended August 1, 2020. The increase
was primarily due to the write-off of $5.2 million of unamortized deferred
financing costs and OID when we repaid the Amended Term Loan Credit Agreement,
and the $2.1 million prepayment penalty.
Benefit from Income Taxes
The benefit from income taxes for the six months ended August 1, 2020 increased
by $82.1 million to $83.5 million, from $1.4 million for the six months ended
August 1, 2020. Our effective tax rate was 262.7% for the six months ended
July 31, 2021 and (5.0)% for the six months ended August 1, 2020. The
unconventional effective tax rate for the six months ended July 31, 2021 is
primarily due to the increase in the amount of non-deductible items associated
with share-based compensation, relative to loss before provision for income
taxes for the six months ended July 31, 2021. The increase in the amount of
non-deductible items associated with share-based compensation during the six
months ended July 31, 2021 was driven by a $111.4 million remeasurement
adjustment related to the increase in the value of the incentive units as
indicated by the Torrid Holding LLC equity value as of June 30, 2021, following
the pricing of our IPO.
Liquidity and Capital Resources
General
Our business relies on cash flows from operations as our primary source of
liquidity. We do, however, have access to additional liquidity, if needed,
through borrowings under our Existing ABL Facility, as amended. Our primary cash
needs are for merchandise inventories, payroll, rent for our stores,
headquarters and distribution center, capital expenditures associated with
opening new stores and updating existing stores, logistics and information
technology. We also need cash to fund our interest and principal payments on the
New Term Loan Credit Agreement. Additional future liquidity needs will include
funding the costs of operating as a public company. The most significant
components of our working capital are cash and cash equivalents, merchandise
inventories, prepaid expenses and other current assets, accounts payable and
accrued and other current liabilities. We believe that cash generated from
operations and the availability of borrowings under our Existing ABL Facility,
as amended, or other financing arrangements will be sufficient to meet working
capital requirements and anticipated capital expenditures for at least the next
12 months. There can be no assurance, however, that our business will generate
sufficient cash flows from operations or that future borrowings will be
available under our Existing ABL Facility, as amended, or otherwise to enable us
to service our indebtedness, or to make capital expenditures in the future. Our
future operating performance and our ability to service or extend our
indebtedness will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond our control.
Cash Flow Analysis
A summary of operating, investing and financing activities are shown in the
following table (dollars in thousands):
                                                       Six Months Ended
                                              August 1, 2020       July 31, 

2021

Net cash flow generated by operating activities $ 61,440 $ 106,478
Net cash used in investing activities

                 (8,166)             

(5,891)

Net cash used in financing activities                 (3,900)           (172,954)



                                       37
--------------------------------------------------------------------------------

Net Cash Provided By Operating Activities
Operating activities consist primarily of net income adjusted for non-cash
items, including depreciation and amortization and share-based compensation, the
effect of working capital changes, taxes paid and lease incentives received from
landlords.
Net cash provided by operating activities during the six months ended July 31,
2021 was $106.5 million compared to $61.4 million during the six months ended
August 1, 2020. The increase in cash provided by operating activities during the
six months ended July 31, 2021 was primarily as a result of the add back of
$154.8 million of share-based compensation expense to net cash provided by
operating activities as a non-cash adjustment, compared to the six months ended
August 1, 2020 in which $32.7 million of share-based compensation expense was
deducted from net cash provided by operating activities. The increase in
share-based compensation expense during the six months ended July 31, 2021, was
due to an increase in Torrid Holding LLC's equity value combined with
share-based compensation pursuant to the 2021 LTIP adopted on June 22, 2021. The
increase in cash provided by operating activities during the six months ended
July 31, 2021 as compared to the six months ended August 1, 2020 was also as a
result of an increase in net income and a reduction in inventory purchases
during the six months ended July 31, 2021 as compared to the six months ended
August 1, 2020. The increase in cash provided by operating activities was
partially offset by increases in prepaid income taxes and income taxes
receivable due to the increase in the amount of non-deductible items associated
with share-based compensation relative to income before benefit from income
taxes for the six months ended July 31, 2021, and decreases in accounts payable
and operating lease liabilities.
Net Cash Used In Investing Activities
Typical investing activities consist primarily of capital expenditures for
growth (new store openings, relocations and major remodels), store maintenance
(minor store remodels and investments in store fixtures), and infrastructure to
support the business related primarily to information technology, our
headquarters facility and our West Jefferson, Ohio distribution center.
Net cash flows used in investing activities during the six months ended July 31,
2021 was $5.9 million compared to $8.2 million during the six months ended
August 1, 2020. The decrease in cash used in investing activities was primarily
as a result of a decrease in purchases of property and equipment related to
investments in our West Jefferson, Ohio distribution center.
Net Cash Used In Financing Activities
Financing activities consist primarily of borrowings and repayments related to
our Existing ABL Facility, as amended, borrowings and repayments related to the
Amended Term Loan Credit Agreement and New Term Loan Credit Agreement and fees
and expenses paid in connection with entry into our Existing ABL Facility, as
amended, and New Term Loan Credit Agreement and from the repayment and
termination of the Amended Term Loan Credit Agreement.
Net cash used financing activities during the six months ended July 31, 2021 was
$173.0 million compared to $3.9 million during the six months ended August 1,
2020. The increase in net cash used in financing activities is primarily as a
result of the following activities during the six months ended July 31, 2021:
(i) $300.0 million distribution to Torrid Holding LLC, (ii) principal payments
on the Amended Term Loan Credit agreement of $210.7 million, (iii) $2.1 million
prepayment penalty related to the Amended Term Loan Credit Agreement and (iv)
$0.7 million of deferred financing costs related to the 3rd Amendment to the
Existing ABL Facility, as amended, partially offset by proceeds from the New
Term Loan Credit Agreement of $340.5 million, net of OID and deferred financing
costs.
Debt Financing Arrangements
As of July 31, 2021, we had $340.7 million of outstanding indebtedness, net of
unamortized original issue discount and debt financing costs, consisting of term
loans under the New Term Loan Credit Agreement. On June 14, 2021, we entered
into a term loan credit agreement which provided for a new $350.0 million senior
secured seven-year term loan facility in an initial aggregate amount of $350.0
million and used borrowings thereunder to, among other things, repay and
terminate the Amended Term Loan Credit Agreement. Please refer to "Note 12-Debt
Financing Arrangements" for further discussion regarding our indebtedness.

Critical Accounting Policies and Significant Estimates
Our discussion of results of operations and financial condition is based upon
the condensed consolidated financial statements included elsewhere in this Form
10-Q, which have been prepared in accordance with GAAP. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and certain assumptions about future events that affect the
classification and amounts reported in our condensed consolidated financial
statements and accompanying
                                       38
--------------------------------------------------------------------------------

notes, including revenue and expenses, assets and liabilities, and the
disclosure of contingent assets and liabilities. These estimates and assumptions
are based on our historical results as well as management's judgment. Although
management believes the judgment applied in preparing estimates is reasonable
based on circumstances and information known at the time, actual results could
vary materially from estimates based on assumptions used in the preparation of
our condensed consolidated financial statements.
The most significant accounting estimates involve a high degree of judgment or
complexity. Management believes the estimates and judgments most critical to the
preparation of our condensed consolidated financial statements and to the
understanding of our reported financial results include those made in connection
with revenue recognition, including accounting for gift card breakage, estimated
merchandise returns and loyalty program expenses; estimating the value of
inventory; determining operating lease liabilities; and estimating share-based
compensation expense. Management evaluates its policies and assumptions on an
ongoing basis. Our significant accounting policies related to these accounts in
the preparation of our condensed consolidated financial statements are described
below (see Note 2 to our audited consolidated financial statements included in
our Registration Statement on Form S-1/A filed with the SEC on June 30, 2021 for
additional information regarding our critical accounting policies).
Revenue Recognition
Under ASU 2014-09, Revenue from Contracts with Customers, and related amendments
("ASC 606"), we recognize revenue when our performance obligations under the
terms of a contract or an implied arrangement with a customer are satisfied,
which is when the merchandise is transferred to the customer and the customer
obtains control of it. The amount of revenue we recognize reflects the total
consideration we expect to receive for the merchandise, which is the transaction
price. For arrangements that contain multiple performance obligations, we
allocate the transaction price to each performance obligation on a relative
stand-alone selling price basis.
At our retail store locations, we satisfy our performance obligation and
recognize revenue at the point in time when a customer takes possession of the
merchandise and tenders payment at the point-of-sale register. For e-Commerce
sales shipped to a customer from our distribution center, or from a retail store
location (ship from store), we satisfy our performance obligation and recognize
revenue upon shipment, which is the point in time we believe the customer
obtains control of the merchandise after payment has been tendered. Income we
receive from customers for shipping and handling is recognized as a component of
revenue upon shipment of merchandise to the customer. We satisfy our performance
obligation and recognize revenue from e-Commerce sales shipped to a retail store
location from our distribution center, or fulfilled from merchandise already
located at a retail store location (buy-online-pickup-in-store), at the point in
time when the customer retrieves the merchandise from within the retail store
location or at a retail store curbside.
We are required to estimate certain amounts included in a contract or an implied
arrangement with a customer which add variability to the transaction price.
Under certain conditions, we are obligated to accept customer returns for most
of our merchandise. Sales returns reduce the revenue we expect to receive for
merchandise and therefore add variability to the transaction price. Based on
historical return pattern experience, we reasonably estimate the amount of
merchandise expected to be returned and exclude it from revenue. We record a
reserve for merchandise returns at the time revenue is recognized based on prior
returns experience and expected future returns in accordance with our return
policy and discretionary returns practices. We monitor our returns experience
and resulting reserves on an ongoing basis and we believe our estimates are
reasonable. We do not believe there is a reasonable likelihood that there will
be a material change in the assumptions used to calculate the allowance for
sales returns. However, if actual sales returns are significantly different than
the estimated allowance, our results of operations could be materially affected.
We satisfy our performance obligation and recognize revenue from gift cards and
store merchandise credits at the point in time when the customer presents the
gift cards and store merchandise credits for redemption. Gift card breakage is
income recognized due to the non-redemption of a portion of gift cards sold by
us for which a liability was recorded in prior periods. We recognize estimated
gift card breakage over time as a component of net sales in proportion to the
pattern of rights exercised by the customer as reflected in actual gift card
redemption patterns over the period. Based upon historical experience, we
estimate the value of outstanding gift cards that will ultimately not be
redeemed (breakage) nor escheated under statutory unclaimed property laws. This
amount is recognized as revenue over the time pattern established by our
historical gift card redemption experience. We monitor our gift card redemption
experience and associated accounting on an ongoing basis. Our historical
experience has not varied significantly from amounts historically recorded and
we believe our assumptions are reasonable. While customer redemption patterns
result in estimated gift card breakage, changes in our customers' behavior could
impact the amount that ultimately is unused and could affect the amount
recognized as a component of net sales.
                                       39
--------------------------------------------------------------------------------

If a customer earns loyalty program points in connection with the sales
transactions described above, then we have a remaining performance obligation
and cannot recognize all the revenue. A portion of the revenue is allocated to
the loyalty program points earned during the transaction. We satisfy our
performance obligation and recognize revenue allocated to these loyalty program
points and the resulting awards at the point in time when the awards are
redeemed for merchandise, when we determine that they will not be redeemed, or
when the awards and points expire. Under our loyalty program, customers
accumulate points based on purchase activity and qualifying non-purchase
activity. Upon reaching a certain point level, customers can earn awards that
may only be redeemed for merchandise. Unredeemed points typically expire after
13 months without additional purchase activity and qualifying non-purchase
activity. Unredeemed awards typically expire 45 days after issuance. We use
historical redemption rates to estimate the value of future award redemptions
and we recognize the estimated value of these future awards as a reduction of
revenue in the condensed consolidated statements of operations and comprehensive
income in the period the points are earned by the customer.
Inventory
Inventory consists of finished goods merchandise held for sale to our customers.
Inventory is valued at the lower of moving average cost or net realizable value.
In the normal course of business, we record inventory reserves based on past and
projected sales performance, as well as the inventory on hand. We make certain
assumptions regarding net realizable value in order to assess whether our
inventory is recorded properly at the lower of cost or net realizable value.
These assumptions are based on both historical average selling price experience,
current selling price information and estimated future selling price
information. The carrying value of inventory is reduced to estimated net
realizable value when factors indicate that merchandise will not be sold on
terms sufficient to recover its cost.
We monitor inventory levels, sales trends and sales forecasts to estimate and
record reserves for excess, slow-moving and obsolete inventory. Accordingly,
estimates of future sales prices requires management judgment based on
historical experience, assessment of current conditions and assumptions about
future transactions. In addition, we conduct physical inventory counts to
determine and record actual shrinkage. Estimates for shrinkage are recorded
between physical counts, based on actual shrinkage experience. Actual shrinkage
can vary from these estimates. We believe our assumptions are reasonable, and we
monitor actual results to adjust estimates and inventory balances on an ongoing
basis.
Leases
We consider an agreement to be or contain a lease if it conveys us with the
right to control the use of an identified asset for a period of time in exchange
for consideration. Based on these criteria, we have operating lease agreements
for our retail stores, distribution center and headquarter office space; and
vehicles and equipment; under primarily non-cancelable leases with terms ranging
from approximately two to seventeen years.
Certain of our operating lease agreements contain one or more options to extend
the leases at our sole discretion. However, the periods covered by the options
to extend the leases of our retail stores, vehicles and equipment are not
recognized as part of the associated ROU assets and lease liabilities, as we are
not reasonably certain to exercise the options. The periods covered by the
options to extend the leases of our distribution center and headquarter office
space are recognized as part of the associated ROU assets and lease liabilities,
as we are reasonably certain to exercise the options. Some of our operating
lease agreements contain options to terminate the lease under certain
conditions.
The retail space leases provide for rents based upon the greater of the minimum
annual rental amounts or a percentage of annual store net sales volume. Certain
leases provide for increasing minimum annual rental amounts. We consider rents
based upon a percentage of annual store net sales volume, and other rent-related
payments that generally vary because of changes in facts and circumstances
(other than due to the passage of time), to be variable lease payments. Variable
lease payments associated with retail space leases are recognized as occupancy
costs within cost of goods sold in the condensed consolidated statements of
operations and comprehensive income in the period in which the obligation for
those payments is incurred. We generally consider all other lease payments to be
fixed in nature and the sum of all the discounted remaining fixed payments in
the lease terms make up the lease liabilities in our condensed consolidated
balance sheet (if the lease terms are longer than 12 months).
We discount the fixed lease payments that make up the lease liabilities using an
incremental borrowing rate ("IBR"), as the rates implicit in our leases are not
readily determinable. The IBR is the rate of interest that we would have to pay
to borrow on a collateralized basis over a similar term an amount equal to the
lease payments in a similar economic environment. The determination of the
incremental borrowing rate incorporates various assumptions including the
financial scale, leverage
                                       40
--------------------------------------------------------------------------------

and coverage measures that indicate our financial flexibility and long-term
viability. These measures utilize credit ratings that are assigned scores which,
when weighted based on certain quantitative factors, indicate overall credit
score. An IBR for each lease term is determined based on the credit score. All
scores, credit ratings and corresponding IBRs are highly subjective.
We choose not to separate nonlease components (such as common area maintenance
charges and heating, ventilation and air conditioning charges), from lease
components (such as fixed minimum rent payments), and instead account for each
separate lease component and the nonlease components associated with that lease
component as a single lease component. We do not apply ASU 2016-02, Leases, and
all related guidance ("ASC 842") requirements to leases that have lease terms of
12 months or less upon commencement, and instead recognize short-term lease
payments, if applicable, in the condensed consolidated statements of operations
and comprehensive income on a straight-line basis over the lease term.
In response to the COVID-19 pandemic, the FASB issued interpretive guidance in
April 2020, which provides entities the option to elect to account for lease
concessions as though the enforceable rights and obligations existed in the
original lease terms. We elected this option; accordingly, we do not remeasure
the lease liabilities or record a change to the ROU assets for any concessions
we receive for our retail store leases. Rather, deferred lease payments are
recorded to operating lease liabilities until paid and lease concessions are
recorded in the period they are negotiated or when the lower lease expense is
paid.
Share-Based Compensation
Prior to the IPO, Torrid Holding LLC issued 13,660,000 Class A, Class B,
Class C, Class D, Class E, Class F, Class G, Class H and Class J Torrid
incentive units, in the aggregate, net of forfeitures, to certain members of our
management. These incentive units were intended to constitute profits interests.
We recognized the impact of share-based compensation associated with incentive
units issued by Torrid Holding LLC in selling, general and administrative
expenses in the condensed consolidated statements of operations and
comprehensive income. The share-based compensation expense and related capital
contribution are reflected in our condensed consolidated financial statements as
these awards were deemed to be for our benefit. The intent of the incentive
units was to provide profit-sharing opportunities to management rather than
equity ownership in our then parent, Torrid Holding LLC. The incentive units did
not have any voting or distribution rights and contained a repurchase feature,
whereby upon termination, Torrid Holding LLC had the right to purchase from
former employees any or all of the vested incentive units at fair value. In
addition, although the fair value of the incentive units was determined through
an option pricing methodology that utilized the possible equity values of Torrid
Holding LLC, the settlement amounts and method of settlement of the incentive
units were at the discretion of the Board. Based on these aforementioned
features and characteristics, we determined that the incentive units were
in-substance liabilities accounted for as liability instruments in accordance
with ASC 710, Compensation. The incentive units were remeasured based on the
fair value of the awards at the end of each reporting period. We recorded the
expense associated with changes in the fair value of these incentive units as a
capital contribution from our former parent, Torrid Holding LLC, as our former
parent is the legal obligor for the incentive units.
The incentive units were valued utilizing a CCA methodology based on a
Black-Scholes OPM. Under the OPM, each class of incentive units was modeled as a
call option with a unique claim on the assets of Torrid Holding LLC. The
characteristics of each class of incentive units determined the uniqueness of
the claim on the assets of Torrid Holding LLC. The OPM used to value the
incentive units incorporated various assumptions, including the time to
liquidity event, equity volatility and risk-free interest rate of return. Equity
volatility was based on the historical volatilities of comparable publicly
traded companies for the time horizon equal to the time to the anticipated
liquidity event; and the risk-free interest rate was for a term corresponding to
the time to liquidity event. The assumptions underlying the valuation of the
incentive units represented our best estimates, which involved inherent
uncertainties and the application of our judgement. The most recent
remeasurement of the fair value of the incentive units utilizing the CCA
methodology was performed as of May 1, 2021.
Stock options are valued utilizing a Black-Scholes OPM. The OPM used to value
the stock options incorporates various assumptions, including dividend yield,
expected volatility, risk-free interest rate and expected term of the stock
options. The expected volatility is estimated based on the historical volatility
of a select peer group of similar publicly traded companies for a term that is
consistent with the expected term of the stock options. The risk-free interest
rates are based on the U.S. Treasury constant maturity interest rate whose term
is consistent with the expected term of the stock options. The expected term of
the stock options represents the estimated period of time until exercise and is
calculated using the simplified method.


                                       41

————————————————– ——————————-

© Edgar online, source Previews


Source link

Leave A Reply

Your email address will not be published.