We’re going short Torrid Holdings (CURV) as we think the stock has better than 40% downside over the next 12-months. There’s nothing broken about this company, which specializes in serving the Plus size (size 10-30) women’s apparel market, but we think that the stock is egregiously mispriced at $23 based on the underlying earnings power of the company. This is a typical PE name where the sponsor and the underwriters (nearly all of whom have Buy ratings) are selling the buy-side a false set of goods, and are looking through some existential risks to the business.
- First off, consider that Sycamore bought Hot Topic in 2013 for $600mm and purchased it almost entirely for the crown jewel Hot Topic asset. Torrid was the icing on the cake -- it was a bonus. On July 1, Torrid went public as a stand-alone business – in the hottest and most profitable apparel environment we’ve seen in decades -- and is trading at a $2.5bn valuation.
- The bull case is around the plus size market having an $85bn TAM, and that at $1.3bn in sales, CURV only has 1.5% share. We call foul on that one. We think the real TAM is closer to $20bn – far less than the story management and Sycamore are pitching. If the market was so big, why did it take the company 20-years to get to $1bn in revenue? Real growth brands in the soft goods space make it there in 5-years.
- The reality is that nearly every apparel brand goes up to size 20 these days. In fact, Old Navy, which does ~$8bn in sales over 1,200 stores, in undergoing one of the biggest initiatives in the company’s history by offering every SKU up to size 28. Just last month, it ended its ‘test’ of having a plus size section in ~75 stores, and is integrating large sizes into its full assortment of product across its entire fleet. CURV management dismisses ON as a threat, but we think otherwise. The core customer is already shopping Old Navy for her family, and would likely rather buy product for herself there than going into a Torrid. It’s a massive risk that can’t be ignored.
- Torrid is overstored. It currently operates a fleet of 608 stores – though half of the business is done online, as the core customer is far more comfortable buying online instead of going into a store. The company is pitching a square footage growth story to the Street – by adding 25 stores per year – when in fact, it should be shrinking its fleet to somewhere closer to 400 units. Torrid was a unique idea when few retailers served the plus sized customer. Now in a world of inclusivity, EVERYONE sells large sizes. CURV’s competitive moat is shrinking, and so should its store base.
- The Street is looking for top line growth of 8% next year on top of the ~30% growth it’s seeing this year vs both 2020 and 2019. Given the bump that CURV has gotten from stimulus this year – sales could very well be down next year. We have the top line flat in our model with a 200bp decline in gross margins. That gets us to EPS of $0.85 vs the Street at $1.20.
- Valuation is peak on peak. The name is currently trading at 11x EBITDA on this year’s numbers, and 14x on our model next year. That’s when other mall-based apparel retailers are selling at trough multiples – with the group between 4x-7x. There’s absolutely nothing about CURV that deserves a premium.
- There’s a LOT of stock that still has to come to market. Sycamore still owns 75% of the shares outstanding, or about 82 million shares. Our sense is that there are multiple sales over the coming months – even if the stock falls well below $20, which we fully expect to be the case.
In the end, this is an overstored retailer that is benefitting from a once-in-a-generation burst in apparel spending at unsustainable gross margins, which came public because the private equity sponsor saw a unique window to sell an asset at inflated prices. Over 12 months, the stock is likely to trade at a far lower multiple on numbers below the overly-bullish consensus -- as a lot more supply comes to market. We see downside to $12-$14 from the current price of $23.17.
