When we went short Torrid at $23 in September, we said that the bankers and PE sponsors were selling the Street a false bill of goods and that the market was egregiously over-valuing this name while looking directly through some existential risks to Torrid’s business. All of our concerns started to manifest in the third quarter numbers. Recall that 13 weeks ago this name squeezed by 32% on the day of the print – which is what initially got us interested in shorting the name. That squeeze should never have happened. While this quarter beat by two pennies on the EPS line ($0.25 vs est. of $0.23) it was all margin (up 700bps) – which is unsustainable, particularly given the increased level of promotions we’re seeing out of Torrid. More notable was the revenue miss, and the weak top line guide for 4Q. This was actually a special model a decade ago (when Sycamore bought it for ~$50mm as part of Hot Topic) when no one served the plus-sized consumer. But now EVERYONE is selling plus sizes – with the two biggest threats this year and next being Old Navy and Shein. The question after this implosion (the stock is down about 25% after hours to about $12) is how much lower it can go. We’ll have to see where the Street’s estimates shake out after this event to see how much of a variance our model is suggesting. But as of now, the Street is looking for 8% growth next year on the top line – while we think sales will be DOWN 5-10%. In addition, we question who in the world will step up and support this stock in this market when the lockup expires on December 27th, and Sycamore is sitting on ~75% of shares outstanding. We’ve said all along that they would end up selling closer to $12. On a lower earnings base and a deflating multiple as the bull case being pitched by the bankers is proving to be punk, we could be looking at a single digit stock come closer to lockup expiry. We’ll be back with further thoughts after we see where the Street’s earnings go after this event. Stay tuned…
OUR INITIAL NOTE FROM SEPTEMBER
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.
