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As filed with the Securities and Exchange Commission on June 23, 2021

No. 333-256871

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TORRID HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5600   84-3517567
(State or other jurisdiction of
incorporation or organization)
 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

18501 East San Jose Avenue

City of Industry, California 91748

(626) 667-1002

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Elizabeth Muñoz

Chief Executive Officer

Torrid Holdings Inc.

18501 East San Jose Avenue

City of Industry, California 91748

(626) 667-1002

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Joshua N. Korff

Michael Kim

Aslam A. Rawoof

Kirkland & Ellis LLP

601 Lexington Avenue

New York, New York 10022

(212) 446-4800

 

Michael Benjamin

Stelios G. Saffos

Latham & Watkins LLP

1271 Avenue of the Americas

New York, New York 10022

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒ (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act  ☒

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Amount to be
registered(1)
  Proposed
Maximum
Offering
Price
Per Unit(2)
  Proposed
Maximum
Aggregate
Offering Price(2)(3)
  Amount of
Registration Fee(4)

Common stock, $0.01 par value per share

 

9,200,000

 

$21.00

 

$193,200,000

  $21,079

 

 

(1)

Includes 1,200,000 shares of common stock that the underwriters have the option to purchase from the selling stockholders.

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3)

Includes the offering price of the 1,200,000 shares the underwriters have the option to purchase from the selling stockholders.

(4)

Includes $10,190 of fees previously paid.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. The prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated June 23, 2021

PROSPECTUS

8,000,000 Shares

 

LOGO

Torrid Holdings Inc.

Common Stock

 

 

This is the initial public offering of Torrid Holdings Inc. (“Torrid”). The selling stockholders identified in this prospectus are offering 8,000,000 shares. Torrid will not be selling any shares in this offering and will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $18.00 and $21.00. Torrid has applied to list the common stock on the New York Stock Exchange (“NYSE”) under the symbol “CURV.”

After the completion of this offering, affiliates of Sycamore Partners Management, L.P. (“Sycamore”) will continue to own a majority of the voting power of shares eligible to vote in the election of our directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. See “Management—Corporate Governance.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, will be subject to certain reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

 

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 21 of this prospectus.

 

 

 

      

Per Share

      

Total

 

Public offering price

       $                      $              

Underwriting discount

       $                      $              

Proceeds, before expenses, to the selling stockholders

       $                      $              

The underwriters may also exercise their option to purchase up to an additional 1,200,000 shares from the selling stockholders, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus. Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                 , 2021.

 

 

 

Morgan Stanley

       BofA Securities        Goldman Sachs & Co. LLC        Jefferies

Baird

  Cowen   William Blair
  Telsey Advisory Group  

 

The date of this prospectus is                 , 2021.


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We have not and the selling stockholders and the underwriters have not authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. The selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or the time of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: neither we nor the selling stockholders or the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.

 

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BASIS OF PRESENTATION

Our fiscal year ends on the Saturday nearest to January 31 and each fiscal year is generally comprised of four 13-week quarters (although in years with 53 weeks, the fourth quarter is comprised of 14 weeks). Fiscal years are identified in this prospectus according to the calendar year in which they begin. For example, references to “2020” or similar references refer to the fiscal year ended January 30, 2021 and references to “calendar year 2020” or similar references to refer to the calendar year ended December 31, 2020.

As used in this prospectus:

 

   

“active customer” means a customer who has completed at least one purchase transaction either in-store or online in the preceding twelve-month period;

 

   

“CAC,” or “customer acquisition cost,” means marketing expenses, including our marketing organization, digital and performance marketing, direct mail, store and brand marketing, public relations, and photography, partially offset by marketing and promotional funds received from a third party private label credit card partner, divided by the number of customers who placed their first order in the period during which these expenses were incurred;

 

   

“comparable sales” means for a given period 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. 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;

 

   

“contribution profit” means merchandise profit less distribution, shipping and fulfillment expenses, store occupancy, including maintenance, supplies and utilities, store payroll, and other operating expenses, such as credit card processing fees. We include store occupancy and store payroll costs in contribution profit as stores are an integral part of our unified commerce strategy and serve as a vehicle to both acquire and service customers on an ongoing basis;

 

   

“e-Commerce penetration” means net sales generated in the e-Commerce channel, including sales generated from our website, mobile app, and through the buy-online-pickup-in-store and ship from store offerings, divided by total net sales;

 

   

“LTV,” or “customer lifetime value,” means the cumulative contribution profit attributable to a particular customer cohort;

 

   

“Net Promoter Score,” or “NPS,” is a commonly used metric to measure consumer satisfaction and loyalty and indicates the percentage of consumers rating their likelihood to recommend a product or service to a friend. The percentage of “detractors,” or consumers who respond with a rating of 6 or less, is subtracted from the percentage of “promoters,” or consumers who respond with a 9 or 10, to yield NPS. We have calculated NPS for us and a set of 27 peers based on a survey of plus-size consumers we commissioned, using the same methodology for all companies. For purposes of the NPS, we define “peer average” NPS as the average NPS of us and the 27 peers, which include select department stores, mass-retailers, specialty retailers and direct to consumer brands;

 

   

“omni-channel customer” means a customer who has completed at least one purchase transaction in each of our store and e-Commerce channels in a twelve-month period; and

 

   

“store-level contribution” means a particular store’s net sales, less product costs and direct operating costs, including payroll, occupancy and other operating costs specifically associated with that store.

 

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Store-level contribution is an assessment of store-level profitability and a supplemental measure of the operating performance of our stores that is neither required by, nor presented in accordance with, accounting principles generally accepted in the United States (“GAAP”) and our calculations thereof may not be comparable to those reported by other companies. We present this measure as we believe it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry and we use it internally as a benchmark to compare our performance to that of our competitors. This measure has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

References to the membership of our customer loyalty program, Torrid Rewards (formerly Torrid Insider), refer to the total number of customers that have signed up for Torrid Rewards, and not unsubscribed, over the life of the program; there is no additional requirement for these customers to have been recently or repetitively active as customers of Torrid.

Certain figures in this prospectus have been subject to rounding adjustments. Therefore, figures shown as totals in certain tables may not sum due to rounding.

MARKET AND INDUSTRY DATA

We obtained the industry, market and competitive position data throughout this prospectus from our own internal estimates and research as well as from industry and general publications and research, studies and surveys conducted by third parties. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the definitions of our market and industry are appropriate, neither such research nor these definitions have been verified by any independent source.

TRADEMARKS AND TRADE NAMES

This prospectus includes our trademarks such as “Torrid” and “Torrid Curve” which are protected under applicable intellectual property laws and are the property of Torrid Holdings Inc. or its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights, of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.

NON-GAAP FINANCIAL MEASURES

Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow 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 less (benefit) for income taxes, depreciation and amortization (“EBITDA”), and share-based compensation, non-cash deductions and charges, other expenses and the duplicative and start-up costs associated with the West Jefferson, Ohio, distribution center. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of our total net sales. Free Cash Flow represents net cash provided by operating activities less capital expenditures. We believe Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow facilitate operating performance comparisons from period to period by isolating the effects of certain items that vary from period to

 

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period without any correlation to ongoing operating performance. We also use Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow as three 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, Adjusted EBITDA margin and Free Cash Flow 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, Adjusted EBITDA margin and Free Cash Flow 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.

For a reconciliation of net income to Adjusted EBITDA, see “Prospectus Summary—Summary Consolidated Historical Financial and Other Data.”

For a reconciliation of net cash provided by operating activities to Free Cash Flow, see “Selected Historical Financial and Other Data.”

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider in making your investment decision. You should read the following summary together with the entire prospectus, including the more detailed information regarding our Company, the common stock being sold in this offering and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, our consolidated financial statements and the related notes thereto included elsewhere in this prospectus and the matters discussed in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus before deciding to invest in our common stock. Some of the statements in this prospectus constitute forward-looking statements. See “Forward-Looking Statements.”

Except where the context otherwise requires or where otherwise indicated, the terms “Torrid,” “we,” “us,” “our,” “our Company” and “our business” refer, prior to the Reorganization (as defined below), to Torrid Parent Inc. together with its consolidated subsidiaries, and after the Reorganization, to Torrid Holdings Inc. together with its consolidated subsidiaries.

Company Overview

 

LOGO

Our Mission

Torrid is on a mission to be the best direct-to-consumer apparel and intimates brand in North America by providing an unparalleled fit and experience that empowers curvy women to love the way they look and feel.

Who We Are

Torrid is the largest direct-to-consumer brand of women’s plus-size apparel and intimates in North America by net sales. We grew our net sales by 8% CAGR between 2017 and 2020, making us among the fastest growing direct-to-consumer brands in the plus-size apparel and intimates market. We served 3.2 million active customers and generated net sales of $974 million in 2020. Our proprietary product offering delivers a superior fit for the curvy woman that makes her love the way she looks and feels. We offer our customer high quality products across a broad assortment that includes 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 good for any occasion, including weekend, casual, work and dressy, all at accessible price points. We specifically design for stylish plus-size women and are maniacally focused on fit because fit is the highest priority for them, according to a consumer study we commissioned. Based on the same study, plus-size consumers consistently rank our fit as #1 among our peers, which contributes to our leading net promoter score (“NPS”) of 55, nearly two times the peer average score of 30. Our consistent fit contributed to a return rate of only 9% for e-Commerce purchases in 2020, whereas return rates for e-Commerce purchases generally can be as high as 30%, according to Optoro’s research. 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 afterthought, have not.

We are the category-leading brand, by net sales, in the $85 billion U.S. women’s plus-size apparel and intimates market, which serves 90 million plus-size women, defined as wearing sizes 10 and up. We design for a



 

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25 to 40 year old curvy woman, who leads a social and active lifestyle and wants to wear clothes that make her look and feel good. While 58% of our 2020 customers are under 40 years old and our average customer is a size 18, our products and style appeal to women of all ages and across the range of plus-sizes. Our target market is large, growing and underserved across both online and in-store channels. The average plus-size woman has historically struggled to find stylish products that fit well and 78% of plus-size women reported that they would spend more on clothing if they had more options available in their size. Through our differentiated product, unified go-to-market strategy, strong connection with our customer and data-driven merchandising approach, we believe we are uniquely positioned to unlock this untapped spend potential by providing her an experience that has not previously been available to her.

We execute a customer-first unified commerce strategy that is channel-agnostic, allowing our customer to experience our brand and unparalleled proprietary fit wherever and whenever she wants. We market directly to consumers via our e-Commerce platform and our physical footprint of 608 stores as of May 1, 2021. E-Commerce sales represented 42% and 48% of net sales in 2018 and 2019, respectively, having grown by 28% in 2018 and 28% in 2019. In 2020, e-Commerce sales represented 70% of net sales as e-Commerce sales grew by 38% and store sales declined as a result of temporary store closures and a slowdown in store traffic associated with the global COVID-19 pandemic. For the twelve months ended May 1, 2021, e-Commerce sales represented 69% of net sales. Our broad digital ecosystem—from our engaging e-Commerce website and mobile app to social media channels and our Torrid Rewards loyalty program—allows us to better connect, engage, track and service customers. This ecosystem also provides robust quantitative and qualitative customer data that we use to inform all aspects of our operations, from product development, to merchandising and marketing. Our stores are designed to create an inclusive and welcoming environment where our customers can discover and engage with our brand, experience our fit and connect with a community of like-minded women. Our stores also serve as an effective and profitable source of new customer acquisition with a payback period of less than two years. The integration of e-Commerce and stores is fundamental to our customer-centric strategy as those two channels complement and drive traffic to one another. We have a history of converting single-channel customers into highly valuable omni-channel customers. In 2020, on average, omni-channel customers made 7.8 purchases and spent approximately 3.2 times more than single-channel customers. Our consistent product fit and the unified experience between our stores and e-Commerce platform creates a powerful flywheel effect that results in low customer acquisition cost, high repeat purchasing behavior and high customer lifetime value.

We form long-standing relationships with our customers, who are empowered by their Torrid experience and develop what we believe to be a deep, emotional connection with our brand. We were able to attribute approximately 98% of our net sales in 2020 to individual customers through our extensive customer and sales data resulting from our loyalty program and highly engaged customer base. Our customers’ repeat purchasing behavior is evidenced by our strong net sales retention. In 2020, we retained 82% of net sales from the prior year’s identifiable customers. While the net sales retention was down from 96% in 2019 due to temporary store closures resulting from the COVID-19 pandemic, we expect net sales retention to recover in future periods. The rich database of information provided by our loyalty program gives us deep insight into the plus-size consumer’s purchasing behavior and allows us to market to our customers more effectively. Our stores and efficient marketing spend enable low CAC that, combined with our high repeat purchase behavior, generates an attractive ratio of customer LTV to CAC. For example, the 5-year LTV of our 2015 customer cohort was approximately 7.4 times the cost of acquiring those customers, which is a testament to our ability to efficiently acquire new customers.

We employ a data-driven approach to design, merchandising and inventory planning and allocation to deliver high quality products that combine the fit, style and attitude that our customer wants. As a fit-first company, we do not rely on being fashion leaders and instead provide a curated assortment of Basic, Core and New products. We internally design and develop the vast majority of our products, a model we describe as vertical sourcing, which gives us control to deliver consistent fit, quality and cost across our products. We


 

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leverage our robust customer data to inform purchasing decisions and have the flexibility to respond quickly to the latest sales trends and incorporate customer feedback to deliver the product our customer wants. Further, we utilize a read-and-react testing approach with shallow initial buys to iterate our New product offering, thus minimizing fashion and inventory risk. Our merchandising strategy has enabled us to generate approximately 80% of our net sales from products sold at regular price, which we define as products sold at initial ticket price or with a standard marketing promotion (e.g., “Buy One Get One 50% Off”). We believe our data-driven approach will continue to drive market growth and market share gains with our rapidly growing and underserved customer base.

Response to the COVID-19 Pandemic

Commencing in December 2019, the novel strain of coronavirus, COVID-19, spread rapidly throughout the world. The global crisis resulting from the spread of COVID-19 has disrupted, and continues to significantly disrupt, local, regional and global economies and businesses in the United States and internationally. Because apparel retail stores were generally deemed “non-essential” by most federal, state, provincial and local government authorities in North America, our stores had to remain closed or operate on reduced hours; we estimate that in 2020, our stores were open, on a same-store-basis, 47% fewer operating hours than in 2019. COVID-19 has accelerated the secular shift towards e-Commerce as consumers increasingly shopped online amid the temporary store closures, and we believe we were well positioned to serve our customers through our robust e-Commerce platform and accelerated investments in omni-channel offerings such as curbside pickup, buy-online-pickup-in-store (“BOPIS”) and ship from store. In response to the COVID-19 pandemic, Torrid proactively implemented various initiatives with a focus on ensuring the health and safety of employees and customers, minimizing the financial impact of COVID-19 and continuing to build the foundation for future growth and profitability. The initiatives implemented include, but are not limited to:

 

   

Accelerated investments in omni-channel offerings and rolled out BOPIS across all U.S. stores in June 2020, and curbside pickup and ship from store in select stores in August 2020;

 

   

Made targeted investments and changes to our process to improve the speed and flexibility of our supply chain including shortening our development cycle by two weeks;

 

   

Leveraged data analytics and insights to tailor marketing and promotional strategies in response to consumer behavior changes related to the ongoing COVID-19 pandemic, allowing us to reduce our CAC by 7% in 2020 from 2019;

 

   

Utilized new technologies to communicate with stores in real time and facilitate virtual store visits for District and Regional Managers;

 

   

Managed expenses by reducing headcount and general and administrative expenses;

 

   

Extended and improved payment terms with vendors and negotiated rent relief, including variable rent leases, for a significant portion of stores; and

 

   

Deferred non-essential capital expenditures and new store opening plans.

Our Financial Performance

We believe our fit-focused product strategy, direct-to-consumer model and passionate team have resulted in high growth and a leading market position over the last several years. We have grown comparable sales for 35 of the last 37 quarters; the only two quarters of decline were in 2020 as a result of the disruption caused by COVID-19. In early 2020, as COVID-19 disrupted our customers’ lives, Torrid’s business demonstrated resiliency beyond our initial expectations. By May 2020, net sales growth began to rebound even as store traffic remained challenged, as consumers increasingly shifted their spending to online channels. Financial performance


 

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in 2020 demonstrates the strong inherent demand for our differentiated product and the resiliency of our business model. Since 2018, we have recorded the following financial results:

 

   

Total active customers grew 11% year-over-year from 3.0 million in 2018 to 3.4 million in 2019. In 2020, total active customers declined by 5% to 3.2 million, as a number of customers held off on making purchases in 2020. Total active customers grew 6% year-over-year from 3.2 million as of May 2, 2020 to 3.4 million as of May 1, 2021;

 

   

Net sales grew 14% year-over-year from $909 million in 2018 to $1,037 million in 2019. In 2020, net sales declined 6% year-over-year to $974 million as significant declines in store-based sales were partially offset by increases in e-Commerce sales. Nevertheless, we estimate Torrid was able to gain market share in women’s plus size apparel and intimates in 2020. Net sales grew 108% from $156 million for the three months ended May 2, 2020 to $326 million for the three months ended May 1, 2021;

 

   

Net income declined 52% year-over-year from $87 million in 2018 to $42 million in 2019. In 2020, net income declined 41% year-over-year to $25 million. Net income grew 5% from $12 million for the three months ended May 2, 2020 to $13 million for the three months ended May 1, 2021; and

 

   

Adjusted EBITDA grew 36% year-over-year from $97 million in 2018 to $132 million in 2019, representing a margin increase of 200bps from 11% to 13% during the same time period. In 2020, Adjusted EBITDA declined 24% year-over-year to $101 million driven by temporarily lower gross profit margin and fixed cost deleverage as a result of the challenges presented by COVID-19. Adjusted EBITDA grew from $(8) million for the three months ended May 2, 2020 to $76 million for the three months ended May 1, 2021. For a reconciliation of net income to Adjusted EBITDA, see “Prospectus Summary—Summary Consolidated Historical Financial and Other Data.”

 

LOGO

 

(1)

Net Sales for the Twelve Months Ended May 1, 2021 calculated as Net Sales of $325.7 million for the three months ended May 1, 2021, plus Net Sales of $973.5 million for 2020, less Net Sales of $156.5 million for the three months ended May 2, 2020.

(2)

Net Income for the Twelve Months Ended May 1, 2021 calculated as Net Income of $12.9 million for the three months ended May 1, 2021, plus Net Income of $24.5 million for 2020, less Net Income of $12.3 million for the three months ended May 2, 2020.

(3)

Adjusted EBITDA for the Twelve Months Ended May 1, 2021 calculated as Adjusted EBITDA of $75.7 million for the three months ended May 1, 2021, plus Adjusted EBITDA of $100.8 million for 2020, less Adjusted EBITDA of $(8.2) million for the three months ended May 2, 2020.


 

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As of May 1, 2021, we had $202.0 million of outstanding indebtedness, net of unamortized original issue discount and debt financing costs, consisting of term loans under the Original Term Loan Credit Agreement (as defined herein). 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 (the “New Term Loan Credit Agreement”) and used borrowings thereunder to, among other things, repay and terminate the Original Term Loan Credit Agreement. For a description of our debt service obligations, including mandatory repayments, under the New Term Loan Credit Agreement, see “Description of Certain Indebtedness—New Term Loan Credit Agreement.”

Our Industry

We believe we are uniquely positioned to capture outsized share in the highly attractive and growing women’s plus-size apparel industry.

Large and Rapidly Growing Addressable Market Comprised of 90 Million Plus-Size U.S. Women

The market for women’s plus-size apparel and intimates is large and growing. As of December 31, 2019, more than two-thirds of all U.S. women, or 90 million, were plus-size. According to a third-party study we commissioned, the women’s plus-size apparel and intimates market was approximately $85 billion in calendar year 2019, compared to the women’s straight size market of approximately $96 billion for the same period, and is expected to grow at a 3%-5% CAGR, more than twice the rate of the overall U.S. women’s apparel and intimates market. Further, the number of women in this size range is growing fastest among women under 45 as well as women with higher incomes, according to U.S. government agencies. Based on our 3.4 million active customers as of May 1, 2021, we believe Torrid is less than 4% penetrated among U.S. plus-size women and has a significant opportunity to expand share in this growing market.

Plus Size Women Are Significantly Underserved with Untapped Spend Potential

Plus-size women are underserved with apparel and accessories offerings that are characterized by poor fit, plain styling and limited selection. 69% of plus-size women report that it is difficult to find clothing as stylish and attractive as those available to non-plus-size women. For most apparel brands, plus-size is an afterthought as they do not invest time and resources to optimize fit on real plus-size models but rather simply rely upon “grading-up” existing non-plus-size offerings through extended sizing, which leads to poor, inconsistent quality and fit. Most of the existing dedicated plus-size brands target an older consumer or lack the product design and technical capabilities to deliver the fit she wants. We estimate there is currently only one dedicated women’s plus-size apparel store for every 51 women’s specialty apparel stores. As a result, there were approximately 78,000 plus-size women for each dedicated women’s plus-size apparel store, as compared to approximately 700 women for every other women’s specialty apparel store. We believe our superior fit, brand experience and our unified commerce strategy position us well to cater to this underserved market.

Due to the lack of options, the plus-size woman underspends on apparel and intimates annually compared to her non-plus-size peers and 78% of plus-size women reported that they would spend more on clothing if they had more options available in their size. We estimate this underspend to be $19 billion, implying a 22% embedded wallet growth opportunity beyond the $85 billion calendar year 2019 women’s plus-size apparel and intimates market, for a total addressable market size of $104 billion. We believe Torrid has a significant opportunity to unlock this additional, untapped spend potential and increase overall market share by better serving plus-size customers.

Significant Growth in Digital and Omni-Channel Shopping

The majority of all apparel purchases in the United States occur in stores. However, consumers have increasingly been shopping for apparel online, a behavior that has meaningfully accelerated during the pandemic.


 

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We believe this consumer behavior will continue for the next several years. According to Torrid’s estimates based on eMarketer’s Apparel & Footwear 2021 data:

 

   

U.S. online apparel sales were $125 billion in calendar year 2019 and are expected to reach $270 billion in calendar year 2024, growing at a CAGR of 17%; and

 

   

Online penetration in apparel has increased from 20% to 26% in the United States from the end of calendar year 2016 through calendar year 2019. U.S. online penetration in apparel is expected to reach 38% in 2021 and 51% in 2024.

Additionally, digital channels play an important role in consumers’ offline purchase decisions. Specifically, when asked about their shopping behaviors prior to making a purchase in a physical retail store, 39% of digital consumers visited a brand’s website, 36% read customer reviews and 33% attempted to price match the product online, according to BigCommerce’s 2018 Omnichannel Buying Report that is based on a global survey of nearly 3,000 digital consumers. We believe retailers that employ an omni-channel strategy offering both a high-quality experiential brick-and-mortar footprint and a compelling online store supported by a strong digital presence and omni-channel offerings such as curbside pickup, BOPIS and ship from store have a competitive advantage in serving potential customers. We believe our unified commerce strategy, which includes 70% of net sales from e-Commerce in 2020 and robust omni-channel functionality, positions Torrid well to succeed in this evolving environment.

Cultural Tailwinds Driving Torrid’s Market

We believe Torrid stands to benefit from thriving cultural movements involving female empowerment, body positivity and socially-influenced purchasing. Growing celebration of femininity, inclusivity and self-identity, along with the emergence of plus-size celebrities and influencers, inspires young curvy customers to demand more flattering and stylish clothing they are proud to wear. At the same time, younger generations are embracing social media platforms, including Instagram, which act as vehicles for community building and discovery. This seamless, constant exchange of community-based inspiration encourages consumers to purchase better-fitting and youthful clothing that allows for unapologetic self-expression. We believe these cultural shifts will continue to support the growth of the women’s plus-size apparel market.

The Torrid Approach

To achieve our mission of being the best direct-to-consumer plus-size apparel and intimates brand, we have created a proprietary fit that empowers our customers and drives loyalty. In turn, our loyal customers provide us with a rich set of data that allows us to improve our product and experience, thus creating a virtuous cycle that reinforces our leading position in plus-size apparel and intimates.


 

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A FIT-ENABLED VIRTUOUS CYCLE

LOGO

FIT TO PERFECTION

 

   

We provide a fit she knew she wanted but never had access to;

 

   

We accomplish this by fitting every single article of clothing we produce on a real woman, tailoring for her special needs, not simply “grading up” non-plus-size apparel;

 

   

We utilize a proprietary sizing process that is constantly updated through data and our continuous customer feedback loop, until we fit to perfection; and

 

   

We deliver unparalleled technical fit combined with unapologetic attitude and style.


 

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LOGO

Competitive Strengths

We attribute our continued success to the following competitive strengths:

First at Fit. Our capability to deliver the best fit for the curvy woman is unrivaled in the industry and hard to replicate. We have a maniacal focus on fit across our entire organization, which is rooted in our recognition of the importance of fit to our customer. Our team of highly skilled designers, artists and product engineers internally design and develop products that represented approximately 89% of our net sales in 2020. Unlike other brands, we do not rely on mannequins during the fit process, but rather fit all of our products on full-time plus-size fit models, our staff, and often our most loyal customers. We have developed our differentiated technical fit by building and continuously refining a database of fit specifications derived from testing, measuring and cataloging over 13,000 garments each year on our fit models. The discipline and rigor of our fit process differentiates our approach to technical design. We also utilize proprietary fabrics specifically engineered to enhance the fit for the plus-size woman. Our vertical sourcing model gives us control to deliver consistent fit, quality and cost, and allows us to incorporate customer feedback quickly and effectively. Our customers often


 

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start their Torrid journey in fit-critical categories such as denim and intimates that lead to increased loyalty and drive higher LTV over time. In intimates, we leverage our design and engineering expertise to develop highly technical bra features, such as our patent-pending back smoothing technology and recently introduced wire free bra that require significant investment and are not easy to replicate by competitors. We believe our differentiated ability to deliver consistent fit and quality combined with style and comfort represents a significant competitive advantage.

Differentiated, Leading Brand for the Plus-Size Woman. Torrid is the largest direct-to-consumer brand of women’s plus-size apparel and intimates in North America by net sales. We grew our net sales by 8% CAGR between 2017 and 2020, making us among the fastest growing direct-to-consumer brands in the plus-size apparel and intimates market. We believe many of our customers form a deep emotional connection with our brand, as their discovery of Torrid is often the first time they have felt truly understood and well-served by an apparel company. The Torrid brand represents a distinctive combination of high quality, stylish and well-fitting products combined with a brand experience that makes the plus-size woman feel confident and empowered. Our customers engage with us across multiple channels including online, in-store, through community events, surveys and on social media, with many becoming our biggest brand advocates. Our brand satisfaction is among the highest for apparel brands, as illustrated by our leading NPS of 55, nearly two times the peer average score of 30. We believe this significant brand value will facilitate sustainable net sales growth and market share gains over time.

A Deep Connection to Our Loyal and Passionate Customer. We form long-standing relationships with our customers, who are empowered by their Torrid experience and reward us with their loyalty. In 2020, 2.9 million out of our approximately 3.2 million active customers were members of our loyalty program, accounting for 95% of net sales. Members of the top two tiers of our loyalty program, Torrid VIP and Loyalist, are our most loyal customers who purchase from us more often and spend significantly more than the average customer, accounting for an outsized share of net sales. In 2020, Torrid VIP and Loyalist members accounted for 16% of active customers and 41% of net sales. On average, they purchased more than 9 times per year and spent approximately $750 during the same period. Our customers’ repeat purchasing behavior is evidenced by our strong net sales retention. In 2020, we retained 82% of net sales from the prior year’s identifiable customers, despite the challenges presented by the COVID-19 pandemic. While the net sales retention was down from 96% in 2019 due to the COVID-19 pandemic, we expect net sales retention to recover in future periods. As a result of our strong customer loyalty and net sales retention, we generate high customer LTV, which we intend to leverage to help drive future growth.

Dynamic Direct-to-Consumer Business Model. Our unified commerce platform provides our customer with an inspiring shopping experience whenever and wherever she chooses to shop with us. We market directly to consumers via our e-Commerce platform, which accounted for 70% of sales in 2020, and our physical footprint of 608 stores as of May 1, 2021. Our broad digital ecosystem—from our engaging e-Commerce website and mobile app to social media channels and our Torrid Rewards loyalty program—allows us to better connect, engage, track and service customers. This ecosystem also provides robust quantitative and qualitative customer data that we use to inform all aspects of our operations, from product development, to merchandising and marketing. E-Commerce sales represented 42% and 48% of net sales in 2018 and 2019, respectively, having grown by 28% in 2018 and 28% in 2019. In 2020, e-Commerce sales represented 70% of net sales as e-Commerce sales grew by 38% and store sales declined as a result of temporary store closures and a slowdown in store traffic associated with the global COVID-19 pandemic. For the twelve months ended May 1, 2021, e-Commerce sales represented 69% of net sales. Our stores are designed to deliver an immersive brand and fit discovery experience further supported by personal connection with store associates who act as brand ambassadors. Our stores also act as a low cost source of new customer acquisition, requiring a small upfront investment that is quickly paid back. Our e-Commerce platform and store base complement and drive traffic to one another. Once she discovers her size in store, she increasingly shops online with us as she knows she can rely


 

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on the consistency of our fit. Our consistent product fit and the unified experience between our stores and e-Commerce platform creates a powerful flywheel effect that results in low CAC, high repeat purchasing behavior and high customer LTV.

Data-Driven, Low-Risk Merchandising Model. We employ a data-driven approach to design, merchandising and inventory planning and allocation to deliver high quality products that combine the fit, style and attitude that our customer wants. We have excellent visibility into our customer’s preferences through her purchase history and our outsized share of her apparel wallet. We leverage this robust customer data along with market trends to inform all purchasing decisions. Through our vertical sourcing model, we have the flexibility to respond quickly to the latest sales trends and make adjustments to our current offering based on customer feedback to deliver product our customer wants. We focus on fit, not fashion, and do not rely on being a fashion leader. We have a low-risk assortment that is anchored by our recurring, fit-focused offering of Basics and Core styles, which together represented approximately 86% of net sales in 2020. New product, which represents new or emerging styles, accounted for the remaining approximately 14% of net sales in 2020. We utilize a read-and-react testing approach with shallow initial buys and data-driven repurchasing decisions to iterate our New product offering, thus minimizing fashion and inventory risk.

Proven, Experienced Management Team and Mission-Driven Culture. We have created a company culture focused on attracting, training, retaining and developing talent that does not settle for the low expectations historically associated with the women’s plus-size apparel market. Approximately 93% of our employees identify as female. Our organization is comprised primarily of women who are also customers and align with our goal to empower curvy women to love the way they look and feel. In addition, they embody our philosophy and dedication to our product and serve as brand ambassadors on a daily basis. Our team is led by our Chief Executive Officer, Liz Muñoz, who is a direct-to-consumer brand veteran and joined the Company in January 2010 after having served as the President of Lucky Brand. Liz has a strong background in product fit and design, having spent years fitting clothing, and later leading the design and merchandising efforts at both Lucky Brand and Torrid. We employ a highly talented team of 446 corporate employees, comprised of skilled and experienced apparel and direct-to-consumer executives, combined with artists, designers, merchants, product engineers and data analysts.

Growth Strategies

We believe we have a significant opportunity to increase market share in the massive and growing plus size apparel and intimates markets. We intend to continue driving growth in our business through the following strategies:

Grow Torrid Curve

We plan to accelerate growth of Torrid Curve®, our line of bras and other intimates, activewear, loungewear and sleepwear tailored specifically to a plus-size customer, through targeted investments in marketing and product innovation. The same discipline and rigor of our fit process for apparel is applied when designing and developing our Torrid Curve products. In intimates, we leverage our design and engineering expertise to develop highly technical bra features, such as our patent-pending back smoothing technology and recently introduced wire free bra that require significant investment and are not easily replicated by competitors. Our deep connection with our customer has guided our product development pipeline so that we build products she needs and wants. For example, the idea for our back smoothing technology came from direct feedback from customers who expressed their desire for a solution to address her specific needs. We leverage this community to test our new products and perfect their development before launch. According to our estimates, the intimates market is growing at a rate of 8% which is 3 percentage points higher than the growth of the women’s plus-size apparel market, according to Statista. Our customers’ sizes are often not sold by leading intimates brands and we believe


 

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existing product options fail to combine functionality with appealing design. Intimates is a fast-growing category with significant incremental penetration opportunity both within our existing Torrid customer base and with new customers. Bras help attract customers to our brand; bras are, behind tops, the second most frequent item in a new customer’s first purchase. For 2019 and 2020, on average, customers who have bought Torrid Curve products spent 3x more than someone who did not and their retention rates were 1.5x higher. We believe Torrid Curve will be a meaningful driver of our growth in the future.

Attract New Customers to Torrid

We believe there is a clear path to further increasing brand awareness and acquiring new customers through an integrated digital marketing and strategic store expansion strategy.

 

   

Increase Brand Awareness and Accelerate Customer Acquisition Across Channels. We intend to grow our brand awareness among plus-size women from approximately 31% as of April 2021, by making incremental investments in our marketing spend, which was only approximately 5.3% of net sales in 2020. We believe we can do so profitably given our high ratio of LTV to CAC. We expect to further drive brand awareness, engagement and conversion through targeted investments in performance and brand marketing, including paid search, retargeting, social media campaigns, plus-size community-based events, in-store experiences and product collaborations.

 

   

Grow With Disciplined Store Expansion. We believe the plus-size woman is dramatically underserved in her choice of apparel and intimates offerings and as a result we plan to capitalize on the opportunity to selectively grow our store footprint. Based on our proven, profitable store model, we intend to continue to capture this underpenetrated market with a disciplined roll-out of new stores that drive both in-store and e-Commerce sales. Our stores generate a high level of positive contribution and act as a low cost source of new customer acquisition, requiring a small upfront investment of capital expenditures and pre-opening expenses that is quickly paid back as a result of our customers’ high repeat purchasing behavior across channels. We target payback periods of less than two years, in line with our historical openings.

Deepen Customer Relationships to Increase Wallet Share

We intend to continue to leverage the strength of our customer relationships and data, which allowed us to attribute approximately 98% of net sales in 2020 to individual customers. This robust customer data allows us to better engage with customers, increase retention and drive spend per customer.

 

   

Expand Assortment Based on Trusted Fit. We intend to leverage data and our customer’s trust in our proprietary fit and style to enhance core entry points, such as denim and intimates, and broaden and deepen our offering in nascent categories, including activewear, workwear, special occasion and footwear.

 

   

Leverage Our Data. We plan to further deepen customer relationships with personalization, customization and clienteling across channels in ways that we are not currently doing today. Leveraging loyalty program data, we seek to tailor our marketing messages, promotions and product recommendations to her preferences, which we believe will further drive conversion online and in stores and increase our share of her wallet.

 

   

Grow Loyalty Program Engagement. As of May 1, 2021, 90% of our active customers are members of our loyalty program and we intend to continuously find new ways to engage her and bring her back to our site, such as increased personalization, dedicated loyalty member events, and opportunities for accelerated tier migration, which we believe will deepen her loyalty and continue to drive recurring purchasing behavior.


 

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Enhance Customer Experience. We believe near-term initiatives, both online and in-store, will greatly enhance the ease of transaction and overall experience for customers. We are upgrading the functionality and features of our mobile app to deliver enhanced personalization such as size recommendations and complementary items, to expedite purchase decisions and increase order value. Further, we have accelerated our investments in and will continue to invest in omni-channel offerings such as curbside pickup, BOPIS and ship from store to drive both customer acquisition and retention.

 

   

Implement New Technology. We have continued to enhance e-Commerce functionality with tools for product recommendations, enhanced payment options (e.g., buy now pay later), and improved returns process to drive conversion and increase order value. We also believe there is opportunity to further leverage artificial intelligence and machine-learning tools to drive better customer segmentation, leading to more efficient customer acquisition and retention marketing.

Expand Operating Margins by Leveraging Completed Investments in Data and Multidisciplinary Teams

We have created a highly scalable foundation for growth through significant infrastructure investments. We will continue to strategically invest in our business while driving operational excellence and leveraging our fixed cost base to grow profitability.

 

   

Leverage Data to Improve Pricing and Promotion Strategy. In addition to our robust merchandising team, we plan to continue to leverage data across the organization in various ways, allowing us to optimize pricing and promotional activity, including personalized promotions, to drive increased purchases and higher merchandise margins.

 

   

Enhance Supply Chain Flexibility. We have developed internal processes that we refer to as our “speed model,” including pre-positioning fabrics with our third-party factory partners to accelerate product replenishment cycles, improve inventory turnover and drive higher margin sales.

 

   

Leverage Cost Base. We believe our scalable infrastructure and team will yield increasing operational leverage as our sales continue to grow relative to our cost base.

Recent Developments

New Senior Credit Facilities and Special Cash Distribution

On June 14, 2021, we entered into (i) the New Term Loan Credit Agreement and (ii) an amendment to the existing senior secured five-year revolving credit facility to, among other things, (A) increase the facility amount to $150.0 million and (B) extend the maturity to five years from the effective date (the “Amended ABL Facility” and, together with the New Term Loan Credit Agreement, the “New Senior Credit Facilities”). We used borrowings under the New Term Loan Credit Agreement to (i) repay and terminate the Original Term Loan Credit Agreement, (ii) partially fund a special cash distribution in an aggregate amount of $300.0 million (the “Special Cash Distribution”) to the direct and indirect holders of our equity interests, consisting of funds managed by Sycamore and members of our former and current management and (iii) pay transaction expenses. The Special Cash Distribution was funded with $131.7 million of borrowings under the New Term Loan Credit Agreement and $168.3 million of our existing cash and cash equivalents. We intend to use the Amended ABL Facility to finance the working capital needs and other general corporate purposes of the Company. For a description of the New Senior Credit Facilities see “Description of Certain Indebtedness.”


 

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Summary of Risk Factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition or results of operations. You should carefully consider these risks, including the risks discussed in the section entitled “Risk Factors,” before investing in our common stock. Risks relating to our business include, among others:

 

   

our operations and financial performance have been affected by, and may continue to be affected by, the COVID-19 pandemic;

 

   

our business is sensitive to consumer spending and general economic conditions, and an economic slowdown could adversely affect our financial performance;

 

   

our business is dependent upon our ability to identify and respond to changes in customer preferences and other related factors;

 

   

our business depends in part on a strong brand image;

 

   

damage to our reputation arising from our use of social media, email and text messages;

 

   

our reliance on third parties to drive traffic to our website;

 

   

we could face increased competition from other brands that could adversely affect our ability to generate higher net sales and margins, as well as our ability to obtain access to digital marketing channels or favorable store locations;

 

   

our ability to attract customers to our physical stores that are located in shopping centers depends on the success of these shopping centers;

 

   

if we are unable to successfully adapt to consumer shopping preferences and develop and maintain a relevant and reliable omni-channel experience for our customers, our financial performance and brand image could be adversely affected;

 

   

risks related to our dependence on third parties for manufacturing and other services;

 

   

the potential of the interruption of the flow of merchandise from international manufacturers to disrupt our supply chain, including as a result of the imposition of additional duties, tariffs and other charges on imports and exports;

 

   

we could fail to effectively utilize information systems and implement new technologies, experience unauthorized disclosure of sensitive or confidential information, whether through a breach of our computer system or otherwise, or fail to comply with federal and state laws and regulations and industry standards relating to privacy, data protection, advertising and consumer protection;

 

   

changes in tax laws or regulations or in our operations may impact our effective tax rate;

 

   

government or consumer concerns about product safety;

 

   

our ability to protect our trademarks and other intellectual property rights;

 

   

the effects of our indebtedness and lease obligations on our financial flexibility and competitive position;

 

   

our ability to design, implement and maintain effective internal controls; and

 

   

our status as a “controlled company” and ability to rely on exemptions from certain corporate governance requirements.


 

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Our Principal Stockholder

Sycamore Partners Management, L.P. is a private equity firm based in New York specializing in retail, distribution, and consumer investments. The firm has approximately $10.0 billion in aggregate committed capital. Sycamore’s strategy is to partner with management teams to improve the operating profitability and strategic value of their businesses. Sycamore’s investment portfolio includes Azamara, Belk, CommerceHub, Express, Hot Topic, LOFT / Ann Taylor, Lane Bryant, MGF Sourcing, NBG Home, Pure Fishing, Staples, Inc., Staples United States Retail, Staples Canada, Talbots, The Limited and Torrid.

Following this offering, Sycamore will control approximately 78.5% of the voting power of our outstanding common stock (or 77.6% if the underwriters exercise their option to purchase additional shares from the selling stockholders). As a result, Sycamore will control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws and the approval of any merger or sale of all or substantially all of our assets. Because Sycamore will hold more than 50% of the voting power of our outstanding common stock, we will be a “controlled company” under the corporate governance rules for NYSE-listed companies. We will therefore be permitted to, and we intend to, elect not to comply with certain corporate governance requirements. See “Management—Corporate Governance—Board Composition; Director Independence; Controlled Company Exemption.”

Implications of Being An Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), enacted in April 2012. As an “emerging growth company,” we may take advantage of specified reduced reporting and other requirements that are otherwise applicable to public companies. These provisions include, among other things:

 

   

exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting;

 

   

exemption from new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies;

 

   

exemption from compliance with any requirement that may be adopted by the Public Company Accounting Oversight Board or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

   

an exemption from the requirement to seek non-binding advisory votes on executive compensation and golden parachute arrangements; and

 

   

reduced disclosure about executive compensation arrangements.

We may take advantage of these provisions until the end of the fiscal year following the fifth anniversary of our initial public offering (“IPO”) or such earlier time that we are no longer an “emerging growth company.” We will cease to be an “emerging growth company” upon the earliest of: (i) the last day of the fiscal year (A) in which we had more than $1.07 billion in “total annual gross revenues,” (B) we are deemed to be a “large accelerated filer” under the rules of the SEC, or (C) following the fifth anniversary of the date of the completion of this offering; and (ii) the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of these reduced burdens. For example, we have taken advantage of the reduced reporting requirement with respect to disclosure regarding our executive compensation arrangements and expect to take advantage of the exemption from auditor attestation on the effectiveness of our internal control over financial reporting. For as long as we take advantage of the reduced reporting obligations, the information that we provide stockholders may be different from information provided


 

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by other public companies. We are irrevocably electing to “opt out” of the extended transition period relating to the exemption from new or revised financial accounting standards and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-”emerging growth companies.”

Reorganization

Prior to the completion of this offering, (i) our direct parent, Torrid Holding LLC, will contribute to Torrid all outstanding shares of stock of Torrid Parent Inc., the current parent company of our operating subsidiaries, and (ii) Torrid will assume the obligations of Torrid Holding LLC under the related party promissory notes due to Torrid, which will result in the legal cancellation of such notes but will have no impact on our capitalization (together, the “Reorganization”).

Corporate Information

Torrid Holdings Inc., the issuer of the common stock in this offering, is a Delaware corporation. Our corporate headquarters is located at 18501 East San Jose Avenue, City of Industry, California 91748. Our telephone number is (626) 667-1002. Our website address is www.torrid.com. The information contained in or connected to our website is not deemed to be part of this prospectus.


 

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The Offering

 

Issuer in this offering

  

Torrid Holdings Inc.

Common stock offered by the selling stockholders

  

8,000,000 shares.

  

9,200,000 shares if the underwriters exercise their option to purchase additional shares in full.

Common stock to be outstanding immediately after this offering

  


110,000,000 shares.

Use of proceeds

  

We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

Controlled company

  

Upon completion of this offering, Sycamore will continue to beneficially own more than 50% of our outstanding common stock. As a result, we are eligible to, and we intend to, avail ourselves of the “controlled company” exemptions under the rules of the NYSE, including exemptions from certain of the corporate governance listing requirements. See “Management—Corporate Governance—Board Composition; Director Independence; Controlled Company Exemption.”

Voting rights

  

Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of our stockholders.

Dividend policy

  

We currently expect to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and therefore we do not anticipate paying any cash dividends in the foreseeable future. Our ability to pay dividends on our common stock is limited by the New Term Loan Credit Agreement and the credit agreement governing the Amended ABL Facility, and may be further restricted by the terms of any of our future indebtedness. See “Dividend Policy.”

Risk factors

  

Investing in our common stock involves a high degree of risk. See “Risk Factors” elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Proposed symbol for listing and trading on NYSE

  

“CURV.”

Unless otherwise indicated, all information in this prospectus relating to the number of shares of our common stock to be outstanding immediately after this offering:

 

   

excludes 8,550,000 shares of common stock reserved for future grants under the LTIP (as defined herein), which we plan to adopt in connection with this offering, as well as any shares of common stock that become available pursuant to provisions in the LTIP that automatically increase the share reserve under the LTIP. See “Executive Compensation—Long-Term Incentive Awards—Long-Term Incentive Plan”;


 

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excludes 3,650,000 additional shares of common stock reserved for future issuance under the ESPP (as defined herein), as well as any shares of common stock that become available pursuant to provisions in the ESPP that automatically increase the share reserve under the ESPP. see “Executive Compensation—Long-Term Incentive Awards—Employee Stock Purchase Plan”;

 

   

gives effect to a 110,000-for-1 split of Torrid Holdings Inc.’s common stock, which was effected on June 22, 2021 (the “Stock Split”); and

 

   

assumes (1) no exercise by the underwriters of their option to purchase up to 1,200,000 additional shares from the selling stockholders, (2) an assumed initial public offering price of $19.50 per share, the midpoint of the initial public offering price range indicated on the cover of this prospectus, and (3) the completion of the Reorganization.


 

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Summary Consolidated Historical Financial and Other Data

The following tables present our summary consolidated financial and other data as of and for the periods indicated. We have derived the summary consolidated statements of operations and cash flows data for the fiscal years ended February 2, 2019, February 1, 2020 and January 30, 2021 from our audited consolidated financial statements for such periods included elsewhere in this prospectus. Our summary consolidated balance sheet data as of February 1, 2020 and January 30, 2021 have been derived from our audited consolidated financial statements for such periods included elsewhere in this prospectus.

We have derived the summary consolidated statements of operations and cash flows data for the three months ended May 2, 2020 and May 1, 2021 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our summary consolidated balance sheet data as of May 1, 2021 has been derived from our unaudited condensed consolidated financial statements for such period included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the information set forth herein. Interim financial results are not necessarily indicative of results for the full year or any future reporting period.

The summary consolidated historical financial and other data presented below should be read in conjunction with our consolidated financial statements and the related notes thereto, included elsewhere in this prospectus, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our summary consolidated historical financial and other data may not be indicative of our future performance.

 

     Fiscal Year Ended     Three Months Ended  
     February 2,
2019
    February 1,
2020
    January 30,
2021
    May 2, 2020      May 1, 2021  
     (dollars in thousands, except where noted)  

Statements of Operations Data:

           

Net sales

   $ 909,147     $ 1,036,984     $ 973,514     $ 156,477      $ 325,747  

Cost of goods sold

     586,121       640,909       643,215       115,535        180,815  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     323,026       396,075       330,299       40,942        144,932  

Selling, general and administrative expenses

     170,530       253,378       222,093       6,858        109,913  

Marketing expenses

     48,774       65,704       51,382       14,036        9,525  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations(1)

     103,722       76,993       56,824       20,048        25,494  

Interest expense

     1,053       16,493       21,338       6,094        4,624  

Interest income, net of other (income) expense

     (85     (202     (42     133        (109
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income before provision for income taxes

     102,754       60,702       35,528       13,821        20,979  

Provision for income taxes

     16,042       18,833       10,991       1,552        8,054  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $ 86,712     $ 41,869     $ 24,537     $ 12,269      $ 12,925  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net Earnings Per Share(2):

           

Basic and diluted

   $ 87     $ 42     $ 25     $ 12      $ 13  

Weighted Average Number of Shares(2):

           

Basic and diluted (#)

     1,000       1,000       1,000       1,000        1,000  

 

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     Fiscal Year Ended     Three Months Ended  
     February 2,
2019
    February 1,
2020
    January 30,
2021
    May 2, 2020     May 1, 2021  
     (dollars in thousands, except where noted)  

Statement of Cash Flows Data:

          

Operating activities

   $ 115,092     $ 99,090     $ 151,821     $ 7,192     $ 73,834  

Investing activities

     (40,507     (56,120     (11,570     (6,076     (2,786

Financing activities

     (72,841     (23,335     (45,925     48,050       (3,250

Other Financial and Operating Data:

          

Adjusted EBITDA(3)

   $ 96,985     $ 131,999     $ 100,802     $ (8,198   $ 75,711  

Adjusted EBITDA margin(3)

     11     13     10     (5 %)      23

Comparable sales

     10     13     (7 %)      (38 %)      108

Active customers (# in millions)

     3.0       3.4       3.2       3.2       3.4  

Store count (#)

     577       607       608       607       608  

 

     As of  
     February 1,
2020
     January 30,
2021
     May 1,
2021
 
     (dollars in thousands)  

Balance Sheet Data:

        

Cash and cash equivalents

   $ 28,804      $ 122,953      $ 190,782  

Total current assets

     164,013        242,143        319,974  

Total current liabilities

     186,583        261,109        285,739  

Total long-term debt

     240,393        193,406        190,530  

Total liabilities and stockholder’s deficit

     635,988        648,209        711,117  

 

(1)

The results of operations were impacted by share-based compensation expense related to revaluing our liability-classified incentive units.

(2)

Represents net earnings per share, basic and diluted, and weighted-average number of outstanding shares of Torrid Parent Inc. Does not give effect to the Reorganization.

(3)

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 expenses less interest (income), net of other (income) expense, plus provision less (benefit) for income taxes, depreciation and amortization (also known as “EBITDA”), and share-based compensation, non-cash deductions and charges, other expenses and the duplicative and start-up costs associated with the West Jefferson, Ohio, distribution center. 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. These measures have limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP.


 

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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.

The following table provides a reconciliation of net income to Adjusted EBITDA for the periods presented:

 

     Fiscal Year Ended     Three Months Ended  
     February 2,
2019
    February 1,
2020
    January 30,
2021
    May 2,
2020
    May 1,
2021
 
     (dollars in thousands)  

Net income

   $ 86,712     $ 41,869     $ 24,537     $ 12,269     $ 12,925  

Interest expense

     1,053       16,493       21,338       6,094       4,624  

Interest income, net of other (income) expense

     (85     (202     (42     133       (109

Provision for income taxes

     16,042       18,833       10,991       1,552       8,054  

Depreciation and amortization(A)

     26,845       30,208       33,072       8,375       8,569  

Share-based compensation(B)

     (38,308     11,993       7,791       (38,515     39,779  

Non-cash deductions and charges(C)

     2,466       4,435       1,984       896       35  

Other expenses(D)

     89       2,510       1,131       998       1,834  

Ohio Distribution Center costs(E)

     2,171       5,860                    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 96,985     $ 131,999     $ 100,802     $ (8,198   $ 75,711  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(A)

Depreciation and amortization excludes amortization of debt issuance costs and original issue discount that are reflected in interest expense and other, net.

(B)

Share-based compensation is determined based on the revaluation of our liability-classified incentive units.

(C)

Non-cash deductions and charges includes (i) losses on property and equipment disposals, (ii) non-cash asset impairment charges in 2018 and (iii) the net impact of non-cash rent expense.

(D)

Other expenses represent non-routine expenses, including (i) IPO-related transaction fees and (ii) certain expenses related to store closures in 2018; 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.

(E)

Represents the duplicative and start-up costs associated with the West Jefferson, Ohio distribution center leased in 2018. This isolates the effect of incurring costs related to the West Jefferson, Ohio distribution center, which was not yet fully operational in 2019, while also incurring distribution and e-Commerce fulfillment costs charged to us by Hot Topic Inc. (“Hot Topic”) under the various service agreements.


 

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RISK FACTORS

This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flow and prospects could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.

Risks Related to Our Business

Our operations and financial performance has been affected by, and may continue to be affected by, the COVID-19 pandemic.

The spread of COVID-19 has disrupted, and continues to significantly disrupt, local, regional, and global economies and businesses in the countries in which we operate, as well as adversely affected workforces, customers, consumer sentiment, economies and financial markets, and has impacted our financial results. We have had to close stores, limit store hours, limit the number of people in store and follow strict sanitation and social distancing measures to comply with government restrictions. We also temporarily closed our headquarters, required our employees and contractors to work remotely, and implemented travel restrictions. The operations of our suppliers, manufactures and customers have likewise been altered.

Since apparel retail stores were generally deemed “non-essential” by most federal, state, provincial and local government authorities in North America, all of our stores had to remain closed for 58 days in 2020, with more than 50% of the fleet closed for 81 days. Additionally, all of our stores were affected by capacity restrictions and reduced hours of operation for the balance of 2020. Stores in more restrictive states, such as California, experienced extended periods of complete closure and opened only for curbside services for most of the third and fourth fiscal quarters. Even when our stores opened, we experienced reduced customer traffic and net sales volume due to changes in consumer behavior as individuals decreased discretionary retail spending and practiced social distancing and other behavioral changes mandated by governmental authorities or independently undertaken out of an abundance of caution. In many of the states in which we operate, the COVID-19 pandemic has resulted in an acute economic downturn and significantly increased unemployment. A sustained decline in the sales and operating results of our omni-channel sales as a result of the ongoing COVID-19 pandemic, the acute economic downturn resulting therefrom or continued weak economic conditions could, in turn, materially and adversely affect the profitability of our operations.

The COVID-19 outbreak has the potential to cause a disruption in our supply chain and may adversely impact economic conditions in North America, Europe, China and elsewhere. These and other disruptions, as well as poor economic conditions generally, may lead to a decline in the sales and operating results of our omni-channel sales. In addition, the continuation of the global outbreak of coronavirus may adversely affect the economies and financial markets of many countries and could result in a sustained reduction in the demand for our products. A decline in the sales and operating results of our products could in turn materially and adversely affect our ability to pursue our growth strategy. Each of these results would reduce our future sales and profit margins, which in turn could materially and adversely affect our business and results of operations.

Further, since many of our personnel are working remotely as a result of the COVID-19 pandemic, it is possible that this could have a negative impact on the execution of our business plans and operations. If a natural disaster, power outage, connectivity issue, or other event occurred that impacted our employees ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The increase in remote working may also result in consumer privacy, IT security and fraud concerns as well as increase our exposure to potential wage and hour issues.

The extent to which the COVID-19 pandemic impacts us will depend on future developments, including the duration, spread and severity of the pandemic, the extent of additional outbreaks, the effectiveness or duration of

 

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measures, including vaccination efforts, intended to contain or mitigate the spread of COVID-19 or prevent future outbreaks, and the effect of these developments on overall demand in the retail sector, all of which are highly uncertain and difficult to accurately predict.

To the extent the COVID-19 pandemic adversely affects our business, financial condition, results of operations, cash flows and prospects, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in the agreements that govern our indebtedness.

Our business is sensitive to consumer spending and general economic conditions, and an economic slowdown could adversely affect our financial performance.

Consumer purchases of discretionary items, including our products, generally decline during recessionary periods and other periods where disposable income is adversely affected. Our performance is subject to factors that affect domestic and worldwide economic conditions, particularly those that affect our target demographic. These factors may include unemployment rates, levels of consumer and student debt, the availability of consumer credit, healthcare costs, reductions in net worth, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, the value of the United States dollar versus foreign currencies and other macroeconomic factors, such as the economic disruption caused by the COVID-19 pandemic. Deterioration in economic conditions or increasing unemployment levels may reduce the level of consumer spending and inhibit consumers’ use of credit, which may adversely affect our net sales and profits. In recessionary periods, we may have to increase the number of promotional sales or otherwise dispose of inventory for which we have previously paid to manufacture, which could adversely affect our profitability in those periods. Weakened economic conditions and a slowdown in the economy could also adversely affect shopping center traffic and new shopping center development, which could materially adversely affect us, even though we are a destination for our customers.

In addition, a weakened economic environment or recessionary period may exacerbate some of the risks noted below, including consumer demand, strain on available resources, store growth, decreases in mall traffic, brand reputation, our ability to develop and maintain a reliable omni-channel customer experience, our ability to execute our growth initiatives, interruption of the production and flow of merchandise from key vendors, foreign exchange rate fluctuations and leasing substantial amounts of space. The same risks could be exacerbated individually or collectively.

Our business is dependent upon our ability to identify and respond to changes in customer preferences and other related factors. Our inability to identify or respond to these new trends may lead to inventory markdowns and write-offs, which could adversely affect our business and our brand image.

Our target market of 25 to 40 year old plus-size women has stylistic preferences that cannot be predicted with certainty and are subject to change. Our success depends in large part upon our ability to effectively identify and respond to changing product trends and consumer demands among this segment, and to translate market trends into appropriate, salable product offerings. Our failure to identify and react appropriately to new and changing product trends or tastes, to accurately forecast demand for certain product offerings or an overall decrease in the demand for plus-size products could lead to, among other things, excess or insufficient amounts of inventory, markdowns and write-offs, which could materially adversely affect our business and our brand image. Because our success depends significantly on our brand image among our target segment, damage to our brand image as a result of our failure to identify and respond to changing product trends could have a material negative impact on our business. Additionally, as a direct-to-consumer brand focusing on young, plus-size women, we may not effectively identify product trends that appeal to our target segment or successfully adapt product trends prevailing in the market more broadly to this target segment. While we believe we have a flexible supply chain, we often enter into agreements for the manufacture and purchase of merchandise well ahead of the

 

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season in which that merchandise will be sold. Therefore we are vulnerable to changes in consumer preference and demand between the time we design and order our merchandise and the season in which this merchandise will be sold. Inventory levels for certain merchandise styles may exceed planned levels, leading to higher markdowns to sell through excess inventory and, therefore, lower than planned margins. Conversely, if we underestimate consumer demand for our merchandise, or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which may negatively impact customer relationships, diminish brand loyalty and result in lost sales.

There can be no assurance that our new product offerings will have the same level of acceptance as our product offerings in the past or that we will be able to adequately and timely respond to the preferences of our customers. The failure of our product offerings to appeal to our customers could have a material adverse effect on our business, results of operations and financial condition.

Our business depends in part on a strong brand image, and if we are not able to maintain and enhance our brand, particularly among our target segment and in new markets where we have limited brand recognition, we may be unable to attract sufficient numbers of customers to our stores or sell sufficient quantities of our products.

Our ability to maintain our reputation is critical to our brand image. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure to maintain high ethical, social and environmental standards for all of our operations and activities, including those of our third-party manufacturers (if they do not, for instance, adhere to our vendor code of conduct), or adverse publicity regarding our responses to these concerns could also jeopardize our reputation. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these reasons could have a material adverse effect on our business, financial condition and results of operations, as well as require additional resources to rebuild our reputation.

We could face increased competition from other brands or retailers that could adversely affect our ability to generate higher net sales and margins, as well as our ability to obtain favorable store locations.

We face substantial competition in the plus-size women’s apparel industry from both specialty and general retailers, including department stores, mass merchants, regional retail chains, web-based stores and other direct retailers that engage in the retail sale of apparel, accessories, footwear and other similar product categories. We compete with these businesses for customers, vendors, digital marketing channels, suitable store locations and personnel. We compete on the basis of a combination of factors, including among others, our knowledge of and focus on our target segment, price, breadth, quality, fit and style of merchandise offered, in-store experience, level of customer service, ability to identify and offer new and emerging product trends and brand image.

Many of our competitors have greater financial, marketing and other resources available. In many cases, our competitors sell their products in stores that are located in the same shopping centers as our stores. In addition to competing for sales, we compete for favorable site locations and lease terms in malls, strip centers, lifestyle centers and outlet centers and our competitors may be able to secure more favorable locations than we can as a result of their relationships with, or appeal to, landlords. Our competitors may also sell substantially similar products at reduced prices online or through outlet locations or discount stores, increasing the competitive pricing pressure for those products.

We also compete with other retailers for personnel. The competition for retail talent is increasing, and we may not be able to secure the talent we need to operate our stores without increasing wages. We cannot assure you that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on us.

 

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We rely on third parties to drive traffic to our website, and these providers may change their algorithms or pricing in ways that could negatively impact our business, operations, financial condition and prospects.

We rely in part on digital advertising, including search engine marketing, to promote awareness of our online marketplace, grow our business, attract new customers and increase engagement with existing customers. In particular, we rely on search engines, such as Google, and the major mobile app stores as important marketing channels. Search engine companies change their search algorithms periodically, and our ranking in searches may be adversely impacted by those changes. Search engine companies or app stores may also determine that we are not in compliance with their guidelines and penalize us as a result. If search engines change their algorithms, terms of service, display or the featuring of search results, determine we are out of compliance with their terms of service or if competition increases for advertisements, we may be unable to cost-effectively attract customers. Our relationships with our marketing vendors are not long term in nature and do not require any specific performance commitments. In addition, many of our online advertising vendors provide advertising services to other companies, including companies with whom we may compete. As competition for online advertising has increased, the cost for some of these services has also increased. Our marketing initiatives may become increasingly expensive and generating a return on those initiatives may be difficult. Even if we successfully increase revenue as a result of our paid marketing efforts, such increase may not offset the additional marketing expenses we incur.

Our ability to attract customers to our physical stores that are located in shopping centers depends on the success of these shopping centers, and any decrease in customer traffic in these shopping centers could cause our net sales and profitability to be less than expected.

Our stores are primarily located in shopping centers, and some of these shopping centers have been experiencing declines in customer traffic, including as a result of the COVID-19 pandemic. While we believe we are a destination for our customers, our sales at these stores are impacted by the volume of customer traffic in those shopping centers and the surrounding area. In centers that may experience declining customer traffic, certain of our expenses are contractually fixed and our ability to reduce these expenses if we were to experience sales declines is limited in the near term. To mitigate this potential risk, we have negotiated termination provisions in a majority of our store leases that allow us to terminate the lease if store sales fall below certain thresholds or if certain co-tenancy requirements are not met. However, these provisions may not be adequate to protect our results of operations if our sales were to decline.

Our stores benefit from the ability of a shopping center’s other tenants, particularly anchor stores, such as department stores, to generate consumer traffic in the vicinity of our stores and maintain the overall popularity of the shopping center as a shopping destination. Our net sales volume and traffic generally may be adversely affected by, among other things, a decrease in popularity of the shopping centers in which our stores are located, the closing of anchor stores important to our business, a decline in the popularity of other stores in the shopping centers in which our stores are located, changing economic conditions and/or demographic patterns (including any increases in purchases of merchandise online as opposed to in-store), or a deterioration in the financial condition of shopping center operators or developers which could, for example, limit their ability to finance tenant improvements for us and other retailers. A reduction in customer traffic as a result of these or any other factors, or our inability to obtain or maintain favorable store locations within shopping centers could have a material adverse effect on us.

If we are unable to successfully adapt to consumer shopping preferences and develop and maintain a relevant and reliable omni-channel experience for our customers, our financial performance and brand image could be adversely affected.

We are continuing to grow our omni-channel business model. While we interact with many of our customers largely through our stores, our customers are increasingly using computers, tablets and smartphones to make

 

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purchases online and to help them in making purchasing decisions when in our stores. Our customers also engage with us online through our social media channels, including Facebook, Instagram, Pinterest and Twitter, by providing feedback and public commentary about all aspects of our business. Omni-channel retailing is rapidly evolving and our success depends on our ability to anticipate and implement innovations in customer experience and logistics in order to appeal to customers who increasingly rely on multiple channels to meet their shopping needs. If for any reason we are unable to implement our omni-channel initiatives or provide a convenient and consistent experience for our customers across all channels that provides the products they want, when and where they want them, then our financial performance and brand image could be adversely affected.

Our growth strategy is dependent on a number of factors, any of which could strain our resources or delay or prevent the successful penetration into new markets.

Our growth strategy is dependent on a number of factors, including growing our number of active customers and the spend per customer. Additional factors required for the successful implementation of our growth strategy include, but are not limited to, opening new stores and remodeling existing ones, continuing to operate an effective e-Commerce platform and implementing initiatives to improve our existing operations, obtaining desirable store locations, negotiating acceptable leases, completing projects on budget, supplying proper levels of merchandise and successfully hiring and training store managers and sales associates. In order to optimize profitability for new stores, we must secure desirable retail lease space when opening stores in new and existing markets. We must choose store sites, execute favorable real estate transactions on terms that are acceptable to us, hire competent personnel and effectively open and operate these new stores. We historically have received landlord allowances for store build outs, which offset certain capital expenditures we must make to open a new store. If landlord allowances cease to be available to us in the future or are decreased, opening new stores would require increased capital outlays, which could adversely affect our ability to continue opening new stores.

While we believe the opportunity exists to open a substantial number of stores without competing with our existing units, to the extent we open new stores in markets where we have existing stores, our existing stores in those markets may experience reduced net sales. Moving or expanding store locations and operating stores in new markets present competitive, merchandising and regulatory challenges we do not have experience in or know how to face. Our planned growth will also require additional infrastructure for the development, maintenance and monitoring of those stores. In addition, if our current management systems and information systems are insufficient to support this expansion, our ability to open new stores and to manage our existing stores would be adversely affected. If we fail to continue to improve our infrastructure, we may be unable to implement our growth strategy or maintain current levels of operating performance in our existing stores.

Our growth plans will place increased demands on our financial, operational, managerial and administrative resources. These increased demands may cause us to operate our business less efficiently, which in turn could cause deterioration in the performance of our existing stores.

Executing our growth plans and achieving our objectives is dependent upon our ability to successfully execute against such plans and objectives. There can be no guarantee that these plans or objectives will result in improved operating results or an increase in the value of the business.

We have, and will continue to have, significant lease obligations. We are subject to risks associated with leasing substantial amounts of space, including future increases in occupancy costs and the need to generate cash flow to meet our lease obligations.

We have, and will continue to have, significant lease obligations. We lease all of our store locations and our corporate headquarters. We typically occupy our stores under operating leases with initial terms of up to ten years. In the future, we may not be able to negotiate favorable lease terms. Our inability to do so may cause our occupancy costs to be higher in future years or may force us to close stores in desirable locations.

 

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A majority of our leases have early termination clauses, which permit the lease to be terminated by us if certain sales levels are not met in specific periods or if the center does not meet specified occupancy standards. In addition to future minimum lease payments, some of our store leases provide for additional rental payments based on a percentage of net sales, or “percentage rent,” if sales at the respective stores exceed specified levels, as well as the payment of common area maintenance charges, real property insurance and real estate taxes. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions. As we expand our footprint, our lease expense and our cash outlays for rent under the lease terms will increase.

We depend on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating activities to fund these expenses, we may not be able to service our lease expenses, which could materially harm our business. Furthermore, the significant cash flow required to satisfy our obligations under the leases increases our vulnerability to adverse changes in general economic, industry, and competitive conditions, and could limit our ability to fund working capital, incur indebtedness, and make capital expenditures or other investments in our business.

If an existing or future store is not generating positive contribution, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. Our inability to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close could materially adversely affect us.

Our failure to find store employees that reflect our brand image and embody our culture could adversely affect our business.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of store employees, including store managers, who understand and appreciate our corporate culture and customers, and are able to adequately and effectively represent this culture and establish credibility with our customers. The store employee turnover rate in the retail industry is generally high. Excessive store employee turnover will result in higher employee costs associated with finding, hiring and training new store employees. If we are unable to hire and retain store personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers and knowledge of the merchandise we offer, our ability to open new stores may be impaired, the performance of our existing and new stores could be materially adversely affected and our brand image may be negatively impacted. Competition for such qualified individuals could require us to pay higher wages to attract a sufficient number of employees.

Additionally, our labor costs are subject to many external factors, including unemployment levels, prevailing wage rates, minimum wage laws, potential collective bargaining arrangements, health insurance costs and other insurance costs and changes in employment and labor legislation or other workplace regulation (including changes in entitlement programs such as health insurance and paid leave programs). Such increase in labor costs may adversely impact our profitability, or if we fail to pay such higher wages we could suffer increased employee turnover.

While we have not historically experienced significant sales seasonality, we may require temporary personnel to adequately staff our stores, with heightened dependence during busy periods such as the holiday season and when multiple new stores are opening. There can be no assurance that we will receive adequate assistance from our temporary personnel, or that there will be sufficient sources of suitable temporary personnel to meet our demand. Any such failure to meet our staffing needs or any material increases in employee turnover rates could have a material adverse effect on our business or results of operations.

 

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We rely on third parties to provide us with certain key services for our business. If any of these third parties fails to perform their obligations to us or declines to provide services to us in the future, we may suffer a disruption to our business. Furthermore, we may be unable to provide these services or implement substitute arrangements on a timely basis on terms favorable to us.

We receive certain key services from a range of different third parties, including merchandise vendors, landlords, suppliers and logistics partners. For example, we rely on third-parties to provide certain inbound and outbound transportation and delivery services, distribution services, customs and brokerage services and real estate management services. In connection with our sourcing activities, we rely on vendors to help us source products. If any of these third parties fails to perform their obligations to us or declines to provide services to us in the future, we may suffer a disruption to our business or increased costs. Furthermore, we may be unable to provide these services or implement substitute arrangements on a timely and cost-effective basis on terms favorable to us.

Failure to effectively utilize information systems and implement new technologies could disrupt our business or reduce our sales or profitability.

We rely extensively on various information systems, including data centers, hardware and software and applications to manage many aspects of our business, including to process and record transactions in our stores, to enable effective communication systems, to track inventory flow, to manage logistics and to generate performance and financial reports. These various systems are substantially operated by our services provider and we rely on them for efficient and consistent operations of these systems. We are dependent on the integrity, security and consistent operations of these systems and related back-up systems. Our computer systems and the third-party systems we rely on are also subject to damage or interruption from a number of causes, including power outages; computer and telecommunications failures; computer viruses, malware, phishing or distributed denial-of-service attacks; security breaches; cyber-attacks; catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes; acts of war or terrorism and design or usage errors by our associates or contractors. Compromises, interruptions or shutdowns of our systems, including those managed by third parties, whether intentional or inadvertent, could lead to delays in our business operations and, if significant or extreme, affect our results of operations.

From time to time, our systems require modifications and updates, including by adding new hardware, software and applications; maintaining, updating or replacing legacy programs; and integrating new service providers, and adding enhanced or new functionality. Although we are actively selecting systems and vendors and implementing procedures to enable us to maintain the integrity of our systems when we modify them, there are inherent risks associated with modifying or replacing systems, and with new or changed relationships, including accurately capturing and maintaining data, realizing the expected benefit of the change and managing the potential disruption of the operation of the systems as the changes are implemented. Potential issues associated with implementation of these technology initiatives could reduce the efficiency of our operations in the short term. In addition, any interruption in the operation of our websites, particularly our e-Commerce site, could cause us to suffer reputational harm or to lose sales if customers are unable to access our site or purchase merchandise from us during such interruption. The efficient operation and successful growth of our business depends upon our information systems. The failure of our information systems and the third party systems we rely on to perform as designed, or our failure to implement and operate them effectively, could disrupt our business or subject us to liability and thereby harm our profitability.

Unauthorized disclosure of sensitive or confidential information, whether through a breach of our computer system or otherwise, could severely hurt our business.

Some aspects of our business, like that of most direct-to-consumer businesses, involves the receipt, storage and transmission of customers’ personal information, consumer preferences and payment card information, including in relation to our private label credit card, as well as confidential information about our associates, our

 

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suppliers and our Company, some of which is entrusted to third-party service providers and vendors. We increasingly rely on commercially available systems, software, tools (including encryption technology) and monitoring to provide security and oversight for processing, transmission, storage and the protection of confidential information. Despite the security measures we have in place, our facilities and systems, and those of third parties with which we do business, may be vulnerable to security breaches, acts of vandalism and theft, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events.

Electronic security attacks designed to gain access to sensitive information by breaching mission critical systems of large organizations are constantly evolving, and high profile electronic security breaches leading to unauthorized release of confidential information have occurred recently at a number of major U.S. companies. Attempts by computer hackers or other unauthorized third parties to penetrate or otherwise gain access to our computer systems or the systems of third parties with which we do business through fraud or other means of deceit, if successful, may result in the misappropriation of personal information, payment card or check information or confidential business information. Such incidents have been attempted or have occurred in the past, and may occur in the future. Hardware, software or applications we utilize may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. In addition, our associates, contractors or third parties with which we do business or to which we outsource business operations may attempt to circumvent our security measures in order to misappropriate such information, and may purposefully or inadvertently cause a breach involving such information. Despite advances in security hardware, software, and encryption technologies, the methods and tools used to obtain unauthorized access, disable or degrade service, or sabotage systems are constantly changing and evolving, and may be difficult to anticipate or detect for long periods of time. We are implementing and updating, our processes and procedures to protect against unauthorized access to or use of secured data and to prevent data loss. However, the ever- evolving threats mean we and our third-party service providers and vendors must continually evaluate and adapt our respective systems, procedures, controls and processes, and there is no guarantee that they will be adequate to safeguard against all data security breaches or misuses of data.

An electronic security breach in our systems (or in the systems of third parties with which we do business) that results in the unauthorized release of individually identifiable customer or other sensitive data could nonetheless occur and have a material adverse effect on our reputation and lead to financial losses from remedial actions, loss of business or potential liability, including possible punitive damages. In addition, as the regulatory environment relating to retailers and other companies’ obligation to protect such sensitive data becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could result in additional costs, and a material failure on our part to comply could subject us to fines or other regulatory sanctions and potentially to lawsuits. Further, we could be required to expend significant capital and other resources to address any data security incident or breach, which may not be covered or fully covered by our insurance and which may involve payments for investigations, forensic analyses, legal advice, public relations advice, system repair or replacement, or other services.

Use of social media, emails and text messages may adversely impact our reputation or subject us to fines or other penalties.

We use social media, emails, push notifications and text messages as part of our omni-channel approach to marketing. As laws and regulations evolve to govern the use of these channels, the failure by us, our employees or third parties acting at our direction to comply with applicable laws and regulations in the use of these channels could adversely affect our reputation or subject us to fines or other penalties. In addition, our employees or third parties acting at our direction may knowingly or inadvertently make use of social media in ways that could lead to the loss or infringement of intellectual property, as well as the public disclosure of proprietary, confidential or sensitive personal information of our business, employees, consumers or others. Information concerning us or our brands, whether accurate or not, may be posted on social media platforms at any time, including by social media influencers, and may have an adverse impact on our brand, reputation or business. The harm may be immediate without affording us an opportunity for redress or correction and could have a material adverse effect on our reputation, business, operating results, financial condition and prospects.

 

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We may recognize impairments on long-lived assets.

Our long-lived assets, primarily stores and intangible assets, are subject to periodic testing for impairment. Store assets are reviewed using factors including, but not limited to, our future operating plans and projected future cash flows. Failure to achieve our future operating plans or generate sufficient levels of cash flow at our stores could result in impairment charges on long-lived assets, which could have a material adverse effect on our financial condition or results of operations.

Risks Related to the Manufacturing, Processing, and Supply of Our Products

We do not own or operate any manufacturing facilities and therefore depend upon third parties for the manufacture of all of our merchandise. The inability of a manufacturer to ship goods on time and to our specifications, or to operate in compliance with our guidelines or any other applicable laws, could negatively impact our business.

We do not own or operate any manufacturing facilities. As a result, we are dependent upon our timely receipt of quality merchandise from third-party manufacturers. If our manufacturers do not ship orders to us in a timely manner or meet our quality standards, it could cause delays in responding to consumer demands or inventory shortages and negatively affect consumer confidence in the quality and value of our brand or negatively impact our competitive position. Any of these factors could have a material adverse effect on our financial condition or results of operations. Furthermore, we are susceptible to increases in sourcing costs, which we may not be able to pass on to customers, and changes in payment terms from manufacturers, which could adversely affect our financial condition and results of operations.

We maintain compliance guidelines for our vendors that dictate various standards, including product quality, manufacturing practices, labor compliance and legal compliance. If any of our manufacturers fail to comply with applicable laws or these guidelines, or engage in any socially unacceptable business practices, such as poor working conditions, child labor, disregard for environmental standards or otherwise, our brand reputation could be negatively impacted and our results of operations could in turn be materially adversely affected.

The raw materials used to manufacture our products and our transportation and labor costs are subject to availability constraints and price volatility, including as a result of climate change related governmental actions, which could result in increased costs.

The raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high demand for cotton, high demand for petroleum-based synthetic and other fabrics, weather conditions, supply conditions, government regulations, economic climate and other unpredictable factors. In addition, our transportation and labor costs are subject to price volatility caused by many of these same factors. Increases in the demand for, or the price of, raw materials used to manufacture our merchandise or increases in transportation or labor costs could each have a material adverse effect on our cost of sales or our ability to meet our customers’ needs. We may not be able to pass all or a material portion of such increased costs on to our customers, which could negatively impact our profitability. Higher gasoline prices may also affect the willingness of consumers to drive to our stores or the shopping centers where they are located, and thereby adversely affect customer traffic. Continued rises in energy or other commodity costs could adversely affect consumer spending and demand for our products and increase our operating costs, either of which could have a material adverse effect on our financial condition and results of operations.

We are also subject to risks associated with new governmental mandates, standards or regulations intended to reduce greenhouse gas emissions or projected climate change impacts, which have resulted in, and are likely to continue resulting in, increased costs for us and our suppliers. Governmental requirements directed at regulating greenhouse gas emissions could cause us to incur expenses that we cannot recover or that will require us to increase the price of products we sell to the point that it impacts demand for those products.

 

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The interruption of the flow of merchandise from international manufacturers could disrupt our supply chain, including as a result of the imposition of additional duties, tariffs and other charges on imports and exports.

We purchase the majority of our merchandise outside of the United States through arrangements with various vendors. In 2020, approximately 96% of our product receipts were sourced internationally, primarily from Asia. Political, social or economic instability in these regions, or in other regions where our products are made, could cause disruptions in trade, including exports to the United States. Actions in various countries, particularly China and the United States, have created uncertainty with respect to tariff impacts on the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. Other events that could also cause disruptions to our supply chain include:

 

   

the imposition of additional trade law provisions or regulations;

 

   

the imposition of additional duties, tariffs and other charges on imports and exports, including as a result of the escalating trade war between China and the United States;

 

   

quotas imposed by bilateral textile agreements;

 

   

foreign currency fluctuations;

 

   

natural disasters;

 

   

public health issues and epidemic diseases, their effects (including any disruptions they may cause) or the perception of their effects, such as the ongoing novel coronavirus outbreak originating in China;

 

   

theft;

 

   

restrictions on the transfer of funds;

 

   

the financial instability or bankruptcy of manufacturers; and

 

   

significant labor disputes, such as dock strikes.

We cannot predict whether the countries in which our merchandise is manufactured, or may be manufactured in the future, will be subject to new or additional trade restrictions imposed by the United States or other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including new or increased tariffs or quotas, border taxes, embargoes, safeguards and customs restrictions against apparel items, as well as labor strikes and work stoppages or boycotts, could increase the cost or reduce or delay the supply of apparel available to us and adversely affect our business, financial condition or results of operations. See also “—We source a significant amount of our product receipts from China, which exposes us to risks inherent in doing business there” and “—Changes in tax laws or regulations or in our operations may impact our effective tax rate and may adversely affect our business, financial condition and results of operations.”

We source a significant amount of our product receipts from China, which exposes us to risks inherent in doing business there.

In 2020, we sourced 49% of our products from manufacturing partners in China. Additionally, our manufacturing partners outside of China may source their own raw materials from third parties in other countries, including China. With the rapid development of the Chinese economy, the cost of labor has increased and may continue to increase in the future. Furthermore, pursuant to Chinese labor laws, employers in China are subject to various requirements when signing labor contracts, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. Our results of operations will be materially and adversely affected if the labor costs of our third-party suppliers and manufacturers increase significantly. In addition, we and our manufacturers and suppliers may not be able to find a sufficient number of qualified workers due to the intensely competitive and fluid market for skilled labor in China.

 

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Sourcing our product receipts from China exposes us to political, legal and economic risks. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to source product receipts from China may be adversely affected by changes in U.S. and Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, currency controls, network security, employee benefits, hygiene supervision and other matters. In addition, we may not obtain or retain the requisite legal permits to continue to source our product receipts from China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. In addition, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation, tariffs and duties in China. Furthermore, the third parties we rely on in China may disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal distribution and sale of counterfeit versions of our products. Also, outbreaks of epidemic, pandemic, or contagious diseases, such as the ongoing COVID-19 outbreak originating in China, may adversely impact our ability to source products from China, including fabrics, or to source them in a timely manner. Such impacts on our sourcing could result from, among other things, disruptions from the temporary closure of third-party supplier and manufacturer facilities, restrictions on the export or shipment of our products or significant cutback of ocean container delivery from China. If any of these events occur, our business, financial condition and results of operations could be materially and adversely affected. See also “—The interruption of the flow of merchandise from international manufacturers could disrupt our supply chain, including as a result of the imposition of additional duties, tariffs and other charges on imports and exports” and “—Changes in tax laws or regulations or in our operations may impact our effective tax rate and may adversely affect our business, financial condition and results of operations.”

If the distribution facilities servicing our business were to encounter difficulties or if they were to shut down for any reason, we could face shortages of inventory in our stores, delayed shipments to our e-Commerce customers and harm to our reputation. Any of these issues, as well as loss of the use of our corporate offices due to natural disasters, public health issues or otherwise could have a material adverse effect on our business operations.

We operate and are continuing to invest in our own distribution facility in West Jefferson, Ohio. In addition, our omni-channel business model is serviced in part by a distribution facility that is operated by Hot Topic, in City of Industry, California. As of August 2019, we transitioned our e-Commerce fulfillment operations to our facility in West Jefferson, Ohio and as of October 2020, we transitioned our retail fulfillment that was serviced out of Hot Topic’s facility in La Vergne, Tennessee to our facility in West Jefferson, Ohio. We continue to use Hot Topic’s distribution facility located in City of Industry, California, to support a significant portion of our business. The success of our stores depends on their timely receipt of merchandise. The efficient flow of our merchandise requires that our distribution facilities be operated effectively and have adequate capacity to support our current level of operations and any anticipated increased levels that may follow from the growth of our business.

If we encounter difficulties associated with our distribution facilities, including operational difficulties in connection with fully transitioning to our facility in West Jefferson, Ohio, or in our relationship with the third party operating our facilities or our facilities were to shut down for any reason, including as a result of fire or other natural disaster, public health issues (including COVID-19) or work stoppage, we could face shortages of inventory, resulting in “out of stock” conditions in our stores, incur significantly higher costs and longer lead times associated with distributing our products to both our stores and e-Commerce customers and experience dissatisfaction from our customers. Any of these outcomes could have a material adverse effect on our business and harm our reputation.

In addition to our distribution facilities, our corporate offices are also vulnerable to damage from natural disasters, fire, public health issues and other unexpected events which could cause us to experience significant disruption in our business, resulting in lost sales and productivity, and causing us to incur significant costs to repair, any of which could have a material adverse effect on our business.

 

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We rely upon independent third-party transportation providers for substantially all of our product shipments and are subject to increased shipping costs as well as the potential inability of our third-party transportation providers to deliver on a timely basis.

We currently rely upon independent third-party transportation providers for substantially all of our product shipments, including shipments to our distribution centers, to and from all of our stores and to our customers. Our utilization of these delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, and employee strikes and inclement weather which may impact a shipping company’s ability to provide delivery services that adequately meet our shipping needs. If we change the shipping companies we use, we could face logistical difficulties that could adversely affect deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those received from our current independent third-party transportation providers which, in turn, would increase our costs.

Risks Related to Government Regulation and Litigation

Failure to comply with federal and state laws and regulations and industry standards relating to privacy, data protection, advertising and consumer protection, or the expansion of current or the enactment of new laws, regulations or industry standards relating to privacy, data protection, advertising and consumer protection, could adversely affect our business, financial condition, and results of operations.

We rely on a variety of marketing and advertising techniques, including email communications, affiliate partnerships, social media interactions, influencer partnerships, digital marketing, direct mailers and public relations initiatives, and we are subject to various laws, regulations and industry standards that govern such marketing and advertising practices. A variety of federal and state laws and regulations and certain industry standards govern the collection, use, retention, sharing and security of consumer data, particularly in the context of digital marketing which we rely upon to attract new customers.

Laws, regulations and industry standards (including, for example, the Payment Card Industry Data Security Standard, or PCI-DSS) relating to privacy, data protection, marketing and advertising, and consumer protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As a result, our practices may not have complied or may not comply in the future with all such laws, regulations, standards, requirements and obligations. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any federal or state privacy or consumer protection-related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities, customers, suppliers or others or other liabilities or may require us to change our operations and/or cease using certain data sets. Any such claims, proceedings or actions could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings or actions, distract our management, increase our costs of doing business, result in a loss of customers, suppliers or vendors and result in the imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.

Federal and state governmental authorities continue to evaluate the privacy implications inherent in the use of third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. The U.S. government has enacted, has considered or is considering legislation or regulations that could significantly restrict the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or

 

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the use of data gathered with such tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could if widely adopted result in the use of third-party cookies and other methods of online tracking becoming significantly less effective. The regulation of the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms and, consequently, materially and adversely affect our business, financial condition, and results of operations.

In addition, various federal and state legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection, consumer protection, and advertising. For example, in 2020, the California Consumer Privacy Act (“CCPA”), came into force provides new data privacy rights for California consumers and new operational requirements for covered companies. Specifically, the CCPA mandates that covered companies provide new disclosures to California consumers and afford such consumers new data privacy rights that include, among other things, the right to request a copy from a covered company of the personal information collected about them, the right to request deletion of such personal information, and the right to request to opt-out of certain sales of such personal information. The California Attorney General can enforce the CCPA, including seeking an injunction and civil penalties for violations. The CCPA also provides a private right of action for certain data breaches that is expected to increase data breach litigation. Additionally, a new privacy law, the California Privacy Rights Act (“CPRA”), was approved by California voters in the November 3, 2020 election. The CPRA, which takes effect on January 1, 2023 and significantly modifies the CCPA, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. Some observers have noted the CCPA and CPRA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could also increase our potential liability and adversely affect our business. For example, the CCPA has encouraged “copycat” laws and in other states across the country, such as in Virginia, New Hampshire, Illinois and Nebraska. This legislation may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment in resources to compliance programs, and could impact strategies and availability of previously useful data and could result in increased compliance costs and/or changes in business practices and policies. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination and security of data.

Foreign privacy laws are also undergoing a period of rapid change, have become more stringent in recent years and may increase the costs and complexity of offering our products and services in new geographies. In Canada, where we operate, the Personal Information Protection and Electronic Documents Act, or PIPEDA, and various provincial laws require that companies give detailed privacy notices to consumers; obtain consent to use personal information, with limited exceptions; allow individuals to access and correct their personal information; and report certain data breaches. In addition, Canada’s Anti-Spam Legislation, or CASL, prohibits email marketing without the recipient’s consent, with limited exceptions. Failure to comply with PIPEDA, CASL or provincial privacy or data protection laws could result in significant fines and penalties or possible damage awards.

In addition, the data protection landscape in the European Union (“EU”) and European Economic Area (“EEA”) is continually evolving, resulting in possible significant operational costs for internal compliance and risks to our business. The EU adopted the General Data Protection Regulation (“GDPR”), which became effective in May 2018, and contains numerous requirements and changes from previously existing EU laws, including extended data subjects’ rights for individuals, consent requirements for certain marketing activities and heavier documentation requirements for data protection compliance programs by companies.

Among other requirements, the GDPR regulates the transfer of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United

 

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States. Recent legal developments in Europe have created complexity and uncertainty regarding such transfers. For instance, on July 16, 2020, the Court of Justice of the European Union (the “CJEU”) invalidated the EU-U.S. Privacy Shield Framework (the “Privacy Shield”) under which personal data could be transferred from the EEA to U.S. entities who had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism and potential alternative to the Privacy Shield), it made clear that reliance on such clauses alone may not necessarily be sufficient in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, including, in particular, applicable surveillance laws and rights of individuals, and additional measures and/or contractual provisions may need to be put in place; however, the nature of these additional measures is currently uncertain. The CJEU went on to state that if a competent supervisory authority believes that the standard contractual clauses cannot be complied with in the destination country and that the required level of protection cannot be secured by other means, such supervisory authority is under an obligation to suspend or prohibit that transfer.

Failure to comply with the GDPR could result in investigations and enforcement by regulators, penalties for noncompliance (including possible fines of up to the greater of €20 million and 4% of our global annual turnover for the preceding financial year for the most serious violations), as well as public exposure as a result of negative press coverage. Failure to comply with the GDPR can also result in claims for compensation for financial or non-financial damages under Article 82 of the GDPR and cease and desist claims brought to court by individuals (i.e. customers or website visitors), litigation financiers or plaintiff organizations bundling claims of affected individuals for purposes of mass litigation, consumer protection organizations acting against “unfair competition” and/or competitors.

In addition to the GDPR, the European Commission has another draft regulation in the approval process that focuses on a person’s right to conduct a private life. The proposed legislation, known as the Regulation of Privacy and Electronic Communications (“ePrivacy Regulation”), would replace the current ePrivacy Directive. While the text of the ePrivacy Regulation is still under development, a recent European court decision and regulators’ recent guidance are driving increased attention to cookies and tracking technologies. Regulators started initiatives to enforce the strict approach in recent guidance, which could lead to substantial costs, require significant systems changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, increase costs and subject us to additional liabilities. Regulation of cookies and similar technologies may lead to broader restrictions on our marketing and personalization activities and may negatively impact our efforts to interact with our customers.

Further, in March 2017, the United Kingdom (“U.K.”) formally notified the European Council of its intention to leave the EU pursuant to Article 50 of the Treaty on European Union (“Brexit”). The U.K. ceased to be an EU Member State on January 31, 2020, but enacted a Data Protection Act substantially implementing the GDPR, effective in May 2018, which was further amended to align more substantially with the GDPR following Brexit. It is unclear how U.K. data protection laws or regulations will develop in the medium to longer term and how data transfers to and from the U.K. will be regulated. Some countries also are considering or have enacted legislation requiring local storage and processing of data that could increase the cost and complexity of delivering our services. Beginning in 2021 when the transitional period following Brexit expires, we will be required to comply with both the GDPR and the U.K. GDPR, with each regime having the ability to fine up to the greater of €20 million (in the case of the GDPR) or £17 million (in the case of the U.K. GDPR) and 4% of total annual revenue. The relationship between the U.K. and the E.U. in relation to certain aspects of data protection law remains unclear, including, for example, how data transfers between E.U. member states and the U.K. will be treated following the end of the transitional period. These changes could lead to additional costs and increase our overall risk exposure.

Further, we are subject to the Payment Card Industry, or PCI, Data Security Standard, which is a multifaceted security standard that is designed to protect credit card account data as mandated by payment card

 

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industry entities. We rely on vendors to handle PCI matters and to ensure PCI compliance. Despite our compliance efforts, we may become subject to claims that we have violated the PCI Data Security Standard, based on past, present, and future business practices, which could have an adverse impact on our business and reputation.

Each of these privacy, security, and data protection laws and regulations, and any other such changes or new laws or regulations, could impose significant limitations, require changes to our business, or restrict our use or storage of personal information, which may increase our compliance expenses and make our business more costly or less efficient to conduct. In addition, any such changes could compromise our ability to develop an adequate marketing strategy and pursue our growth strategy effectively, which, in turn, could adversely affect our business, financial condition, and results of operations. Finally, any actual or perceived failure to comply with these laws could result in a costly investigation or litigation resulting in potentially significant liability and a material and adverse impact on our reputation and business.

We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business.

We accept payments using a variety of methods, including cash, checks, credit and debit cards, and gift cards, and we may offer new payment options over time. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. These requirements may change over time or be reinterpreted, making compliance more difficult or costly.

For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. As a result, our business and operating results could be adversely affected.

There are claims made against us from time to time that can result in litigation or regulatory proceedings which could distract management from our business activities and result in significant liability.

We face the risk of litigation and other claims against us. Litigation and other claims may arise in the ordinary course of our business and include commercial disputes, employment related claims, including wage and hour claims, intellectual property disputes, such as trademark, copyright and patent infringement disputes, consumer protection and privacy matters, product-related allegations, and premises liability claims. In addition, we could face a wide variety of employee claims against us, including general discrimination, privacy, labor and employment, ERISA and disability claims.

Any claims could result in litigation against us and could also result in regulatory proceedings being brought against us by various federal and state agencies that regulate our business, including the United States Equal Employment Opportunity Commission, the Federal Trade Commission or the Consumer Product Safety Commission. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and could require significant management time. Litigation and other claims and regulatory

 

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proceedings against us could result in unexpected expenses, legal liability and injunctions against us or restrictions placed upon us, which could disrupt our operations, preclude us from selling products, or otherwise have a material adverse effect on our operations, financial results and our reputation.

In addition, we may be subject to liability if we infringe the trademarks or other intellectual property rights of third parties. If we were to be found liable for any such infringement, we could be required to pay substantial damages and could be subject to injunctions preventing further infringement. Such infringement claims could subject us to boycotts by our customers and harm to our brand image. In addition, any payments we are required to make and any injunctions we are required to comply with as a result of such infringement actions could adversely affect our financial results.

Changes in laws, including employment laws and laws related to our merchandise, could make conducting our business more expensive or otherwise change the way we do business.

We are subject to numerous laws and regulations, including labor and employment, product safety, customs, truth-in-advertising, consumer protection, privacy and zoning and occupancy laws and ordinances, intellectual property laws and other laws that regulate retailers generally and/or govern the import and export of goods, advertising and promotions, the sale of merchandise, product content and the operation of stores and warehouse facilities. If these regulations were to change or were violated by our management, employees, vendors, buying agents or trading companies, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations.

In addition to increased regulatory compliance requirements, changes in laws could make ordinary conduct of our business more expensive or require us to change the way we do business. For example, changes in federal and state minimum wage laws could raise the wage requirements for certain of our employees, which would likely cause us to reexamine our entire wage structure for stores. Other laws related to employee benefits and treatment of employees, including laws related to limitations on employee hours, work scheduling, supervisory status, leaves of absence, mandated health benefits or overtime pay, could also negatively impact us, such as by increasing compensation and benefits costs for overtime and medical expenses.

Moreover, changes in product safety or other consumer protection laws, environmental laws and other regulations could lead to increased compliance costs to us for certain merchandise, or additional labor costs associated with readying merchandise for sale. It is often difficult for us to plan and prepare for potential changes to applicable laws and future compliance costs related to such changes could be material to us. See “—Failure to comply with federal and state laws and regulations and industry standards relating to privacy, data protection, advertising and consumer protection, or the expansion of current or the enactment of new laws, regulations or industry standards relating to privacy, data protection, advertising and consumer protection, could adversely affect our business, financial condition, and results of operations.”

Changes in tax laws or regulations or in our operations may impact our effective tax rate and may adversely affect our business, financial condition and results of operations.

Changes in tax laws or regulations in any of the jurisdictions in which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in an unfavorable change in our effective tax rate, which could adversely affect our business, financial condition and operating results. The “Coronavirus Aid, Relief, and Economic Security Act,” or the CARES Act, was signed into law in March 2020 in response to the COVID-19 pandemic. The CARES Act resulted in significant changes to the U.S. federal corporate tax law and provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax

 

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depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. Additionally, several state and foreign jurisdictions have enacted additional legislation to conform with federal changes. In December 2020, the “Consolidated Appropriations Act,” or the CAA, was enacted in further response to the COVID-19 pandemic. The CAA revises certain tax measures enacted under the CARES Act, such as the deductibility of certain meal and entertainment expense paid or incurred in 2021 and 2022, and employment retention credit claims. We have considered the applicable tax law changes in our tax provision for 2020 and continue to evaluate the impact of these tax law changes on future periods.

Additionally, recent political developments have introduced greater uncertainty with respect to tax and trade policies, tariffs and government regulations affecting trade between the U.S. and other countries. We source the majority of our merchandise from manufacturers located outside of the U.S., including a significant amount from Asia. China and the United States have each previously imposed tariffs on exports from the other in an escalating trade war. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term. Further major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity. See also “—The interruption of the flow of merchandise from international manufacturers could disrupt our supply chain, including as a result of the imposition of additional duties, tariffs and other charges on imports and exports” and “—We source a significant amount of our product receipts from China, which exposes us to risks inherent in doing business there.”

The recent presidential and congressional elections in the United States could also result in significant changes in, and uncertainty with respect to, tax legislation, regulation and government policy directly affecting us and our business. For example, the United States government may enact significant changes to the taxation of business entities including, among others, a permanent increase in the corporate income tax rate, an increase in the tax rate applicable to the global intangible low-taxed income and elimination of certain exemptions, and the imposition of minimum taxes or surtaxes on certain types of income. The likelihood of these changes being enacted or implemented is unclear. We are currently unable to predict whether such changes will occur and, if so, the ultimate impact on us or our business. To the extent that such changes have a negative impact on us or our business, these changes may materially and adversely impact our business, financial condition and results of operations.

Government or consumer concerns about product safety could result in regulatory actions, recalls or changes to laws, which could harm our reputation, increase costs or reduce sales.

We are subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities, and our products could be subject to involuntary recalls and other actions by these authorities. We purchase merchandise from suppliers domestically as well as outside the United States. One or more of our suppliers might not adhere to product safety requirements or our quality control standards, and we might not identify the deficiency before such merchandise is received by our customers. Issues of product safety could result in a recall of products we sell. Additionally, regulatory authorities, including the Consumer Product Safety Commission, have undertaken reviews of product safety and are in the process of enacting or are considering various proposals for more stringent laws and regulations. In particular, the Consumer Product Safety Improvement Act of 2008, which imposes significant requirements on the sale of consumer products and enhanced penalties for noncompliance. Such regulations contain provisions which have uncertain applicability to products we sell, and such lack of certainty may inhibit our willingness to carry products or cause us to carry product we otherwise would not. These regulations could result in delays in getting products to our stores, lost sales, the rejection of our products by consumers, damage to our reputation or material increases in our costs, and may have a material adverse effect on our business. Moreover, individuals and organization may assert legal claims for our non-compliance with consumer product rules and regulations, and we may be subject to lawsuits relating to these claims. There is a risk that these claims or liabilities may exceed or fall outside the scope of indemnities provided by third parties or outside the coverages of our insurance policies.

 

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We may be unable to protect our trademarks or other intellectual property rights, which could harm our business.

We rely on certain trademark registrations and common law trademark rights to protect the distinctiveness of our brand. However, there can be no assurance that the actions we have taken to establish and protect our trademarks will be adequate to prevent imitation of our trademarks by others or to prevent others from claiming that sales of our products infringe, dilute or otherwise violate third party trademarks or other proprietary rights that could block sales of our products.

The laws of certain foreign countries may not protect the use of unregistered trademarks to the same extent as do the laws of the United States. As a result, international protection of our brand image may be limited and our right to use our trademarks outside the United States could be impaired. Other persons or entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for apparel and/or accessories in foreign countries in which our vendors source our merchandise. There may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries of which we are not aware. Accordingly, it may be possible for others to prevent the manufacture of our branded goods in certain foreign countries or the sale or exportation of our branded goods from certain foreign countries to the United States. If we were unable to reach a licensing arrangement with these parties, our vendors may be unable to manufacture our products in those countries. Our inability to register our trademarks or purchase or license the right to use the relevant trademarks or logos in these jurisdictions could limit our ability to obtain supplies from less costly markets or penetrate new markets in jurisdictions outside the United States.

Litigation may be necessary to protect and enforce our trademarks and other intellectual property rights, or to defend against claims by third parties alleging that we infringe, dilute or otherwise violate third party trademarks or other intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, and whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property rights, could subject us to significant liabilities, require us to seek licenses on unfavorable terms, if available at all, prevent us from manufacturing or selling certain products, limit our ability to market or sell to our customers using certain methods or technologies and/or require us to redesign or re-label our products or rename our brand, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Risks Related to Our Indebtedness

Our indebtedness and lease obligations could adversely affect our financial flexibility and our competitive position.

As of May 1, 2021, we had $202.0 million of outstanding indebtedness, net of unamortized original issue discount and debt financing costs, consisting of term loans under the Original Term Loan Credit Agreement. On June 14, 2021, we entered into the New Term Loan Credit Agreement in an initial aggregate amount of $350.0 million and used borrowings thereunder to, among other things, repay and terminate the Original Term Loan Credit Agreement. Our New Term Loan Credit Agreement has a maturity date of June 14, 2028. For a description of our debt service obligations, including mandatory repayments, under the New Term Loan Credit Agreement, see “Description of Certain Indebtedness—New Term Loan Credit Agreement.” Our level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. We also have, and will continue to have, significant lease obligations. As of May 1, 2021, the estimated annual future occupancy payments, for lease terms that include periods covered by options to extend some of our leases, for 2021 was $334.3 million. Our indebtedness and lease obligations could have other important consequences to you and significant effects on our business. For example, it could:

 

   

increase our vulnerability to adverse changes in general economic, industry and competitive conditions;

 

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require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness and leases, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

restrict us from exploiting business opportunities;

 

   

make it more difficult to satisfy our financial obligations, including payments on our indebtedness;

 

   

place us at a disadvantage compared to our competitors that have less debt and lease obligations; and

 

   

limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.

In addition, the New Term Loan Credit Agreement and the agreement governing the Amended ABL Facility contain, and the agreements evidencing or governing any other future indebtedness may contain, restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness.

Our indebtedness may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.

The New Term Loan Credit Agreement and the agreement governing the Amended ABL Facility contain, and the agreements evidencing or governing any other future indebtedness, may contain, financial restrictions on us and our restricted subsidiaries, including restrictions on our or our restricted subsidiaries’ ability to, among other things:

 

   

place liens on our or our restricted subsidiaries’ assets;

 

   

make investments other than permitted investments;

 

   

incur additional indebtedness;

 

   

prepay or redeem certain indebtedness;

 

   

merge, consolidate or dissolve;

 

   

sell assets;

 

   

engage in transactions with affiliates;

 

   

change the nature of our business;

 

   

change our or our subsidiaries’ fiscal year or organizational documents; and

 

   

make restricted payments (including certain equity issuances).

In addition, we are required to maintain compliance with various financial ratios in the agreement governing the Amended ABL Facility.

A failure by us or our subsidiaries to comply with the covenants under the New Term Loan Credit Agreement or the agreement governing the Amended ABL Facility or to maintain the required financial ratios contained in the agreement governing the Amended ABL Facility could result in an event of default under such indebtedness, which could adversely affect our ability to respond to changes in our business and manage our operations. Additionally, a default by us under the New Term Loan Credit Agreement, the agreement governing the Amended ABL Facility or an agreement governing any other future indebtedness may trigger cross-defaults under the New Term Loan Credit Agreement, the agreement governing the Amended ABL Facility or any other future agreements governing our indebtedness. Upon the occurrence of an event of default or cross-default under any of the present or future agreements governing our indebtedness, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the agreements. If any of our

 

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indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay this indebtedness in full, which could have a material adverse effect on our ability to continue to operate as a going concern. See “Description of Certain Indebtedness.”

Risks Related to this Offering and Ownership of Our Common Stock

Following the offering, we will be classified as a “controlled company” and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements. In addition, Sycamore’s interests may conflict with our interests and the interests of other stockholders.

After the closing of this offering, Sycamore will continue to control a majority of our common stock. As a result, we will be a “controlled company” within the meaning of the applicable stock exchange corporate governance standards. Under the rules of the NYSE, a company of which more than 50% of the outstanding voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain stock exchange corporate governance requirements, including:

 

   

the requirement that a majority of our board of directors consists of independent directors;

 

   

the requirement that nominating and corporate governance matters be decided solely by independent directors; and

 

   

the requirement that employee and officer compensation matters be decided solely by independent directors.

Following this offering, we intend to utilize these exemptions. As a result, we may not have a majority of independent directors and our nominating and corporate governance and compensation functions may not be decided solely by independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the stock exchange corporate governance requirements.

The interests of Sycamore and its affiliates, which include Hot Topic, could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of ownership held by Sycamore could delay, defer or prevent a change of control of our Company or impede a merger, takeover or other business combination which may otherwise be favorable for us and our other stockholders. Additionally, Sycamore is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete, directly or indirectly with us. Sycamore may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Sycamore continues to directly or indirectly own a significant amount of our common stock, even if such amount is less than a majority thereof, Sycamore will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions.

An active public market for our common stock may not develop following this offering, which could limit your ability to sell your shares of our common stock at an attractive price, or at all.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our Company will lead to the development of an active trading market in our common stock or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

We are an “emerging growth company” under the JOBS Act, and any decision on our part to comply with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we currently intend to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to

 

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have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), reduced disclosure obligations regarding executive compensation in our registration statements, periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will cease to be an emerging growth company upon the earliest of: (i) the last day of the fiscal year (a) in which we had more than $1.07 billion in “total annual gross revenues,” (b) we are deemed to be a “large accelerated filer” under the rules of the SEC, or (c) following the fifth anniversary of the date of the completion of this offering; and (ii) the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period. We cannot predict if investors will find our common stock less attractive if we choose to rely on exemptions from certain disclosure requirements. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

In addition, as our business grows, we may cease to satisfy the conditions of an “emerging growth company.” Under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

We are currently evaluating and monitoring developments with respect to these new rules, and we cannot assure you that we will be able to take advantage of all of the benefits from the JOBS Act.

Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

 

   

quarterly variations in our operating results compared to market expectations;

 

   

changes in preferences of our customers;

 

   

announcements of new products, significant price reductions or other strategic actions by us or our competitors;

 

   

public reactions to our press releases, public announcements and/or filings with the SEC;

 

   

speculation in the press or investment community;

 

   

size of the public float;

 

   

stock price performance and valuations of our competitors;

 

   

fluctuations in stock market prices and volumes;

 

   

default on our indebtedness or foreclosure of our properties;

 

   

actions by competitors or other shopping center tenants;

 

   

changes in senior management or key personnel;

 

   

actions by our stockholders;

 

   

changes in financial estimates by securities analysts or our failure to meet any such estimates;

 

   

negative earnings or other announcements by us or other retail apparel companies;

 

   

downgrades in our credit ratings or the credit ratings of our competitors;

 

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issuances (or sales by our stockholders) of capital stock;

 

   

general market conditions;

 

   

global economic, legal and regulatory factors unrelated to our performance; and

 

   

the realization of any of the risks described in this section, or other risks that may materialize in the future.

Numerous factors affect our business and cause variations in our operating results and affect our net sales and comparable store sales, including consumer preferences, buying trends and overall economic trends; our ability to identify and respond effectively to product trends and customer preferences; changes in the population of our target segment; actions by competitors and other shopping center tenants; changes in our merchandise mix; pricing; the timing of our releases of new merchandise and promotional events; the level of customer service that we provide in our stores; changes in sales mix among sales channels; our ability to source and distribute products effectively; inventory shrinkage; weather conditions, particularly during the holiday season; and the number of stores we open, close and convert in any period.

The initial public offering price of our common stock will be determined by negotiations between us and the underwriters based upon a number of factors and may not be indicative of prices that will prevail following the consummation of this offering. Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the initial public offering price. As a result, you may suffer a loss on your investment.

In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many retail companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have                  shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended (the “Securities Act”), except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

We, each of our officers and directors, Sycamore and certain other security holders have agreed, subject to certain exceptions, with the underwriters not to dispose of or hedge any of the shares of common stock or securities convertible into or exchangeable for, or that represent the right to receive, shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Morgan Stanley & Co. LLC, BofA Securities, Inc. and Goldman Sachs & Co. LLC. See “Underwriting.” When the lock-up period expires, we and those of our beneficial owners who are subject to a lock-up agreement will be able to sell our shares in the public market. In addition, Morgan Stanley & Co. LLC, BofA Securities, Inc. and Goldman Sachs & Co. LLC may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements at any time and for any reason. See “Underwriting” and “Shares Eligible For Future Sale.” Sales of a substantial number of such shares upon expiration of the lock-up agreements, the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your shares of common stock at a time and price that you deem appropriate.

 

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All of our shares of common stock outstanding as of the date of this prospectus may be sold in the public market by existing stockholders 180 days after the date of this prospectus, subject to applicable limitations imposed under federal securities laws. See “Shares Eligible For Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering.

In the future, we may also issue our securities if we need to raise capital in connection with a capital raise or acquisitions. The amount of shares of our common stock issued in connection with a capital raise or acquisition could constitute a material portion of our then-outstanding shares of our common stock. You may experience immediate dilution upon such future equity issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our stock option and incentive plans.

Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to the consummation of this offering will contain provisions that may make the merger or acquisition of our Company more difficult without the approval of our board of directors. Among other things, these provisions:

 

   

would allow us to authorize the issuance of undesignated preferred stock in connection with a stockholder rights plan or otherwise, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

   

prohibit stockholder action by written consent from and after the date on which Sycamore, Sycamore Partners Torrid, L.L.C. and each of their respective affiliates (the “Sycamore Investors”) cease to beneficially own at least 50% of the total voting power of all then outstanding shares of our common stock (the “Trigger Event”) unless such action is recommended by all directors then in office;

 

   

provide that our board of directors is expressly authorized to make, alter, or repeal our bylaws and that from and after the Trigger Event our stockholders may only amend our bylaws with the approval of 75% or more of all of the outstanding shares of our capital stock entitled to vote; and

 

   

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our Company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

We do not expect to pay any cash dividends for the foreseeable future.

The continued operation and expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Additionally, our operating subsidiaries are currently restricted from paying cash dividends by the agreements governing their indebtedness, and we expect these restrictions to continue in the future. Accordingly, if you purchase shares in this offering, realization of a gain on

 

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your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

If we are unable to design, implement and maintain effective internal controls in accordance with Section 404 of Sarbanes-Oxley, we may not be able to report our financial results in a timely and reliable manner, which could have a material adverse effect on our business and stock price. We have identified material weaknesses in our internal control over financial reporting.

As a public company, we will have significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to establish or maintain appropriate internal controls over financial reporting, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our operating results. In addition, we will be required upon completion of the offering to comply with the SEC’s rules implementing Sections 302 and 404 of Sarbanes-Oxley, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting starting with the first fiscal year after the completion of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of Sarbanes-Oxley.

In connection with the audits of our consolidated financial statements as of and for the years ended January 30, 2016, January 28, 2017 and February 3, 2018 we identified material weaknesses in our internal control over financial reporting. These material weaknesses resulted in a revision and restatement of previously issued annual and interim consolidated financial statements and could result in misstatements to our consolidated financial statements or disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis. The material weaknesses we identified were as follows: (1) we determined that we did not maintain a sufficient complement of resources with an appropriate level of accounting expertise, knowledge and training commensurate with the complexity of our financial accounting and financial reporting requirements to allow for appropriate monitoring of financial reporting matters and internal control over financial reporting; (2) we did not maintain effective controls over the period-end financial reporting process and preparation of financial statements; (3) we configured key accounting systems that allowed for journal entries to be created and posted by the same individual; and (4) we did not design and maintain controls related to the accuracy and presentation of our share-based compensation expense and the corresponding capital contribution from Torrid Holding LLC. As of February 2, 2019, the material weaknesses with respect to a sufficient complement of resources, controls over the financial reporting process, and configuration of key accounting systems had been remediated. We are in the process of designing and implementing measures to improve our internal control over share-based compensation and remediate the control deficiencies that led to this material weakness.

We cannot assure you that the measures we have taken to date, together with any measures we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weakness regarding share-based compensation or to avoid potential future material weaknesses. If we are unable to conclude that we have effective internal control over financial reporting or if our efforts are not successful to remediate the control deficiencies that led to our material weakness regarding share-based compensation or other material weaknesses or control deficiencies occur in the future, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements and investors may lose confidence in our financial reporting, which could have a material adverse effect on the trading price of our stock.

 

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Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with the Company or the Company’s directors, officers or other employees.

Our amended and restated certificate of incorporation will provide that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (1) derivative action or proceeding brought on behalf of our Company, (2) action asserting a claim of breach of a fiduciary duty owed by any director or officer of our Company to the Company or the Company’s stockholders, (3) action asserting a claim against the Company or any director or officer of the Company arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”) or our amended and restated certificate of incorporation or our amended and restated bylaws, or (4) action asserting a claim against us or any director or officer of the Company governed by the internal affairs doctrine. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. In addition, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our certificate of incorporation will provide that, unless we consent in writing to the selection of an alternate forum, the federal district courts of the United States will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. We note that there is uncertainty as to whether a court would enforce the choice of forum provision with respect to claims under the federal securities laws, and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder.

Any person or entity purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to the forum provisions in our amended and restated certificate of incorporation. This choice-of-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or the Company’s directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our amended and restated certificate of incorporation inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.

General Risk Factors

We depend on key members of our executive management team and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.

We depend on the leadership and experience of key members of our executive management team. The loss of the services of any of our executive management could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. In addition, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for experienced, successful personnel in the retail industry. Our inability to meet our staffing requirements in the future could impair our growth and harm our business.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research

 

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coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our Company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

We will incur increased costs as a result of becoming a public company, particularly after we are no longer an “emerging growth company.”

As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with complying with the requirements of Sarbanes-Oxley and related rules implemented by the SEC and. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

After we are no longer an “emerging growth company,” we expect to incur additional management time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed accelerated filers or large accelerated filers, including complying with the auditor attestation requirements of Section 404 of Sarbanes-Oxley. See “—We are an “emerging growth company” under the JOBS Act, and any decision on our part to comply with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.”

We are currently unable to estimate the costs we may incur as a result of becoming a public company or the timing of such costs with any degree of certainty.

War, terrorism and other catastrophes could negatively impact our customers, places where we do business and our expenses.

The continued threat of terrorism, heightened security and military action in response to this threat, any future acts of terrorism, and significant natural disasters, public health issues or other catastrophic events may cause disruptions and create uncertainties that affect our business. To the extent that such disruptions or uncertainties negatively impact commercial transportation and shipping, shopping patterns and/or shopping center traffic, or adversely affect consumer confidence or the economy in general, our business, operating results and financial condition could be materially and adversely affected. A significant natural disaster, public health issue or other catastrophic event affecting our facilities could materially affect our supply chain, our information system and other aspects of our operations.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning (including their negative counterparts or other various or comparable terminology) in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

   

successfully manage risks relating to the spread of COVID-19, including any adverse impacts on our supply chain, workforce, facilities, customer services and operations;

 

   

changes in consumer spending and general economic conditions;

 

   

our ability to identify and respond to new and changing product trends, customer preferences and other related factors;

 

   

our dependence on a strong brand image;

 

   

damage to our reputation arising from our use of social media, email and text messages;

 

   

increased competition from other brands and retailers;

 

   

our reliance on third parties to drive traffic to our website;

 

   

the success of the shopping centers in which our stores are located;

 

   

our ability to adapt to consumer shopping preferences and develop and maintain a relevant and reliable omni-channel experience for our customers;

 

   

our dependence upon independent third parties for the manufacture of all of our merchandise;

 

   

availability constraints and price volatility in the raw materials used to manufacture our products;

 

   

interruptions of the flow of our merchandise from international manufacturers causing disruptions in our supply chain;

 

   

our sourcing a significant amount of our products from China;

 

   

shortages of inventory, delayed shipments to our e-Commerce customers and harm to our reputation due to difficulties or shut-down of our distribution facilities (including as a result of COVID-19);

 

   

our reliance upon independent third-party transportation providers for substantially all of our product shipments;

 

   

our growth strategy;

 

   

our leasing substantial amounts of space;

 

   

our failure to find store employees that reflect our brand image and embody our culture;

 

   

our reliance on third-parties for the provision of certain services, including distribution and real estate management;

 

   

our dependence upon key executive management;

 

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our reliance on information systems;

 

   

system security risk issues that could disrupt our internal operations or information technology services;

 

   

unauthorized disclosure of sensitive or confidential information, whether through a breach of our computer system or otherwise;

 

   

our failure to comply with federal and state laws and regulations and industry standards relating to privacy, data protection, advertising and consumer protection;

 

   

payment-related risks that could increase our operating costs or subject us to potential liability;

 

   

claims made against us resulting in litigation;

 

   

changes in laws and regulations applicable to our business;

 

   

regulatory actions or recalls arising from issues with product safety;

 

   

our inability to protect our trademarks or other intellectual property rights;

 

   

our substantial indebtedness and lease obligations;

 

   

restrictions imposed by our indebtedness on our current and future operations;

 

   

changes in tax laws or regulations or in our operations that may impact our effective tax rate;

 

   

the possibility that we may recognize impairments on long-lived assets;

 

   

our failure to maintain adequate internal controls; and

 

   

the threat of war, terrorism or other catastrophes that could negatively impact our business.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders, including any shares sold by the selling stockholders in connection with the exercise of the underwriters’ option to purchase additional shares. The expenses of the offering, not including the underwriting discount, are estimated at approximately $6.0 million. As of May 1, 2021, $3.8 million of these expenses have been paid by us and $2.2 million of estimated expenses are payable by us. See “Principal and Selling Stockholders.”

 

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DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness, and therefore we do not anticipate paying any cash dividends in the foreseeable future. Additionally, because we are a holding company, our ability to pay dividends on our common stock is limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements governing our indebtedness. See “Description of Certain Indebtedness.” Any future determination to pay dividends will be at the discretion of our board of directors, subject to compliance with covenants in current and future agreements governing our indebtedness, and will depend upon our results of operations, financial condition, capital requirements and other factors that our board of directors deems relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of May 1, 2021 on:

 

   

an actual basis;

 

   

a pro forma basis to give effect to (i) the Reorganization and the Stock Split, (ii) cash proceeds, net of original issue discount received from the New Term Loan Credit Agreement of $346.5 million, (iii) the Special Cash Distribution of $168.3 million from cash on hand and $131.7 million of cash from borrowings under the New Term Loan Credit Agreement, (iv) repayment of the Original Term Loan Credit Agreement of $207.5 million and a $2.1 million prepayment penalty, with borrowings under the New Term Loan Credit Agreement, and (v) the payment of fees, expenses and premiums of $6.0 million in connection with the foregoing and $0.7 million in connection with the Amended ABL Facility, as if they had occurred on May 1, 2021; and

 

   

a pro forma as adjusted basis to further reflect the payment by us of estimated expenses of $2.2 million related to this offering which have not been paid as of May 1, 2021, described under “Use of Proceeds.”

You should read the following table in conjunction with the sections entitled “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of May 1, 2021  
     Actual     Pro Forma     Pro Forma
As Adjusted
 
    

(dollars in thousands)

(unaudited)

 

Cash and cash equivalents

   $ 190,782     $ 21,079     $ 18,907  
  

 

 

   

 

 

   

 

 

 

Long-term Debt:

      

Amended ABL Facility(1)

     —         —         —    

Original Term Loan Credit Agreement(2)

     202,036       —         —    

New Term Loan Credit Agreement(3)

     —         340,509       340,509  
  

 

 

   

 

 

   

 

 

 

Total long-term debt

     202,036       340,509       340,509  
  

 

 

   

 

 

   

 

 

 

Stockholder’s deficit:(4)

      

Common shares, $0.01 par value; 1,000 shares authorized, issued and outstanding (actual); 1,000,000,000 shares authorized, 110,000,000 shares issued and outstanding (pro forma and pro forma as adjusted)

     —         1,100       1,100  

Preferred stock, $0.01 par value; no shares authorized, issued and outstanding (actual); 5,000,000 shares authorized, no shares issued and outstanding (pro forma and pro forma as adjusted)

     —         —         —    

Additional paid-in capital

     50,105       —         —    

Accumulated deficit

     (60,561     (319,045     (321,217

Accumulated other comprehensive income

     203       203       203  
  

 

 

   

 

 

   

 

 

 

Total stockholder’s deficit

     (10,253     (317,742     (319,914
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 191,783     $ 22,767     $ 20,595  
  

 

 

   

 

 

   

 

 

 

 

(1)

The Original ABL Facility (as defined below) was amended on June 14, 2021 to, among other things, effect an increase in aggregate commitments (subject to a borrowing base) from $70.0 million to $150.0 million. As of May 1, 2021, availability under the Original ABL Facility was $65.5 million, which reflects no borrowings and $4.5 million of standby letters of credit issued and outstanding. As of June 23, 2021, availability under the Amended ABL Facility was $145.1 million, which reflects no borrowings and $4.9 million of standby letters of credit issued and outstanding. In connection with the Amended ABL Facility, we paid financing costs of approximately $0.7 million. Borrowings under the Amended ABL Facility are treated as short-term debt obligations.

 

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(2)

Represents the outstanding aggregate principal amount less the unamortized original issue discount and financing costs of approximately $5.4 million. On June 14, 2021, we repaid and terminated the Original Term Loan Credit Agreement with borrowings under the New Term Loan Credit Agreement.

(3)

Represents the outstanding aggregate principal amount less the unamortized original issue discount and financing costs of approximately $9.5 million.

(4)

The assumption by Torrid of the obligations of Torrid Holding LLC under the related party promissory notes due to Torrid will result in the legal cancellation of such notes, but will have no impact on our capitalization as the related party promissory notes, including the $300M Related Party Promissory Note Receivable (as defined herein) relating to the Special Cash Distribution, were reflected as a distribution for accounting purposes in the historical financial statements of Torrid Parent Inc. For more information, see “Certain Relationships and Related Party Transactions—Related Party Promissory Notes” and Note 11 to our audited consolidated financial statements included elsewhere in this prospectus.

The information set forth above excludes (i) 8,550,000 shares of common stock of Torrid Holdings Inc. reserved for future grants under the LTIP and (ii) 3,650,000 additional shares of common stock of Torrid Holdings Inc. reserved for future issuance under the ESPP, as well as, in each case, any shares of common stock that become available pursuant to the provisions of such plans. See “Executive Compensation—Long-Term Incentive Awards.”

 

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SELECTED HISTORICAL FINANCIAL AND OTHER DATA

The following tables present our selected historical financial and other data as of and for the periods indicated. We have derived the selected consolidated statements of operations data for the fiscal years ended February 2, 2019, February 1, 2020 and January 30, 2021 from our audited consolidated financial statements for such periods included elsewhere in this prospectus. We have derived the selected consolidated statements of operations data for the fiscal years ended January 30, 2016, January 28, 2017 and February 3, 2018 from our audited consolidated financial statements for such periods not included in this prospectus.

We have derived the selected consolidated statements of operations flows data for the three months ended May 2, 2020 and May 1, 2021 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the information set forth herein. Interim financial results are not necessarily indicative of results for the full year or any future reporting period.

The selected historical financial and other data presented below should be read in conjunction with our consolidated financial statements and the related notes thereto, included elsewhere in this prospectus, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our selected historical financial and other data may not be indicative of our future performance.

 

    Fiscal Year Ended     Three Months Ended  
    January 30,
2016
    January 28,
2017
    February 3,
2018
    February 2,
2019
    February 1,
2020
    January 30,
2021
    May 2,
2020
    May 1,
2021
 
    (dollars in thousands, except where noted)  

Statements of Operations Data:

               

Net sales

  $ 440,722     $ 640,172     $ 804,293     $ 909,147     $ 1,036,984     $ 973,514     $ 156,477     $ 325,747  

Cost of goods sold

    267,755       388,517       505,998       586,121       640,909       643,215       115,535       180,815  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    172,967       251,655       298,295       323,026       396,075       330,299       40,942       144,932  

Selling, general and administrative expenses

    128,010       221,505       233,238       169,832       253,378       222,093       6,858       109,913  

Impairment charges

    198,784       3,214       1,449       698       —         —         —         —    

Marketing expenses

    24,239       34,051       43,201       48,774       65,704       51,382       14,036       9,525  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations(1)

    (178,066     (7,115     20,407       103,722       76,993       56,824       20,048       25,494  

Interest expense

    343       482       650       1,053       16,493       21,338       6,094       4,624  

Interest income, net of other expense (income)

    117       (222     (288     (85     (202     (42     133       (109
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before provision for income taxes

    (178,526     (7,375     20,045       102,754       60,702       35,528       13,821       20,979  

(Benefit) provision for income taxes

    (14,742     21,722       19,210       16,042       18,833       10,991       1,552       8,054  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (163,784   $ (29,097   $ 835     $ 86,712     $ 41,869     $ 24,537     $ 12,269     $ 12,925  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial and Operating Data:

               

Adjusted EBITDA(2)

  $ 35,059     $ 86,004     $ 99,826     $ 96,985     $ 131,999     $ 100,802     $ (8,198   $ 75,711  

Adjusted EBITDA margin(2)

    8     13     12     11     13     10     (5 %)      23

Net cash provided by operating activities

    46,867       58,955       48,349       115,092       99,090       151,821       7,192       73,834  

Capital expenditures

    (40,551     (59,688     (54,118     (40,507     (26,333     (11,570     (6,076     (2,786
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow(2)

    6,316       (733     (5,769     74,585       72,757       140,251       1,116       71,048  

Comparable sales(3)

    33     25     12     10     13     (7 %)      (38 %)      108

Active customers (# in millions)

    1.5       2.0       2.5       3.0       3.4       3.2       3.2       3.4  

Store count (#)

    361       455       547       577       607       608       607       608  

 

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(1)

The results of operations were impacted by share-based compensation expense related to revaluing our liability-classified incentive units.

(2)

Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow 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 (loss) income plus interest expenses less interest (income), net of other (income) expense, plus (benefit) provision for income taxes, depreciation and amortization (also known as “EBITDA”), and share-based compensation, non-cash deductions and charges, other expenses, the duplicative and start-up costs associated with the West Jefferson, Ohio, distribution center, an adjustment for the Transition Services Agreement (as defined herein) and the elimination of Lovesick test concept EBITDA. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of our total net sales. Free Cash Flow represents net cash provided by operating activities less capital expenditures. We believe Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow 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, Adjusted EBITDA margin and Free Cash Flow as three 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, Adjusted EBITDA margin and Free Cash Flow 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. These measures have limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP.

  

Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow 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, Adjusted EBITDA margin and Free Cash Flow should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

(3)

The computation of comparable sales includes results from stores that were temporarily closed due to COVID-19 in 2020.

 

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The following table provides a reconciliation of net income to Adjusted EBITDA for the periods presented:

 

    Fiscal Year Ended     Three Months Ended  
    January 30,
2016
    January 28,
2017
    February 3,
2018
    February 2,
2019
    February 1,
2020
    January 30,
2021
    May 2,
2020
    May 1,
2021
 
    (dollars in thousands)  

Net (loss) income

  $ (163,784   $ (29,097   $ 835     $ 86,712     $ 41,869     $ 24,537     $ 12,269     $ 12,925  

Interest expense

    343       482       650       1,053       16,493       21,338       6,094       4,624  

Interest income, net of other expense (income)

    117       (222     (288     (85     (202     (42     133       (109

(Benefit) provision for income taxes

    (14,742     21,722       19,210       16,042       18,833       10,991       1,552       8,054  

Depreciation and amortization(A)

    13,691       16,801       22,002       26,845       30,208       33,072       8,375       8,569  

Share-based compensation(B)

    —         —         41,187       (38,308     11,993       7,791       (38,515     39,779  

Non-cash deductions and charges(C)

    201,136       70,790       4,844       2,466       4,435       1,984       896       35  

Other expenses(D)

    1,545       (95     10,105       89       2,510       1,131       998       1,834  

Ohio Distribution Center costs(E)

    —         —         —         2,171       5,860       —         —         —    

Adjustment for Transition Services Agreement (F)

    (4,307     —         —         —         —         —         —         —    

Lovesick test concept EBITDA(G)

    1,060       5,623       1,281       —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 35,059     $ 86,004     $ 99,826     $ 96,985     $ 131,999     $ 100,802     $ (8,198   $ 75,711  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)

Depreciation and amortization excludes amortization of debt issuance costs and original issue discount that are reflected in interest expense and other, net.

(B)

Share-based compensation is determined based on the revaluation of our liability-classified incentive units.

(C)

Non-cash deductions and charges includes (i) losses on property and equipment disposals, (ii) non-cash asset impairment charges in 2016 and 2018 and (iii) the net impact of non-cash rent expense.

(D)

Other expenses represent non-routine expenses, including (i) the reversal of legal settlement expense in 2016, (ii) IPO-related transaction fees and (iii) certain expenses related to store closures in 2018; 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.

(E)

Represents the duplicative and start-up costs associated with the West Jefferson, Ohio distribution center leased in 2018. This isolates the effect of incurring costs related to the West Jefferson, Ohio distribution center, which was not yet fully operational in 2019, while also incurring distribution and e-Commerce fulfillment costs charged to us by Hot Topic Inc. (“Hot Topic”) under the various service agreements.

(F)

Represents the impact of charges under the Transition Services Agreement that would have been paid to Hot Topic by Torrid had the Transition Services Agreement been in place during the entirety of 2014 and 2015.

(G)

Represents the elimination of EBITDA, adjusted for non-cash asset impairment charges and the net impact of non-cash rent expense, attributable to the Lovesick test concept, a young women’s plus-size retail concept that in January 2017 we decided to close.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 consolidated financial statements and the related notes thereto included elsewhere in this prospectus. 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 prospectus, particularly in the section entitled “Risk Factors.”

Overview

Torrid is the largest direct-to-consumer brand of women’s plus-size apparel and intimates in North America by net sales. We grew our net sales by 8% CAGR between 2017 and 2020, making us among the fastest growing direct-to-consumer brands in the plus-size apparel and intimates market. We served 3.2 million active customers and generated net sales of $974 million in 2020. 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 plus-size women and are maniacally focused on fit because fit is the highest priority for them, according to a consumer study we commissioned. Based on the same study, plus-size consumers consistently rank our fit as #1 among our peers, which contributes to our leading NPS of 55 versus the peer average score of 30. Our consistent fit contributed to a return rate of only 9% for e-Commerce purchases in 2020, whereas return rates for e-Commerce purchases generally can be as high as 30%, according to Optoro’s research. 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.

 

     Year Ended     Three Months Ended  
     (in thousands, except net sales per active customer, number of
stores and percentages)
 
     February 2,
2019
    February 1,
2020
    January 30,
2021
    May 2,
2020
    May 1,
2021
 

Active customers (as of end of period)(A)

     3,038       3,364       3,182       3,238       3,448  

Net sales per active customer(A)

   $ 299     $ 308     $ 306     $ 291     $ 331  

Comparable sales(B)

     10     13     (7 %)      (38 %)      108

Number of stores (as of end of period)

     577       607       608       607       608  

Adjusted EBITDA

   $ 96,985     $ 131,999     $ 100,802     $ (8,198   $ 75,711  

Adjusted EBITDA margin

     11     13     10     (5 %)      23

 

(A)

Active customers and net sales per active customer calculated on a preceding four quarters basis.

(B)

The computation of comparable sales includes results from stores that were temporarily closed due to COVID-19.

Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. See the section captioned “Prospectus Summary—Summary Consolidated Historical Financial and Other Data” for information regarding our use of Adjusted EBITDA and its reconciliation to net income.

 

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Active Customers. We define an active customer as a distinct, identifiable customer who has completed at least one purchase transaction either in-store or online in the preceding four quarters. We are able to identify the vast majority of our customers primarily through our robust loyalty program, which gives us access to extensive customer and sales data. We have improved our customer tracking capabilities and have grown the proportion of our net sales attributable to active customers over time. The proportion of net sales that we are able to attribute to active customers was 94% in 2018, 96% in 2019, 98% in 2020 and 97% for the three months ended May 1, 2021. As a result, historical year-over-year growth in active customers may factor in increases attributable to our improved capabilities. We view the number of active customers as a key indicator of our growth, the reach of our e-Commerce and stores platform, the value proposition and consumer awareness of our brand and our customers’ desire to purchase our products. The number of active customers has grown over time as we have acquired new customers and retained previously acquired customers. We expect to continue to drive growth in active customers with new customer acquisition and retention efforts.

Net Sales per Active Customer. We define net sales per active customer for any given period as the net sales in the preceding four quarters, divided by the total number of active customers at the end of that period. We view net sales per active customer as a key indicator of our customers’ purchasing patterns, including their initial and repeat purchase behavior and intend to closely monitor this metric going forward. We expect net sales per active customer to increase modestly over the long term as we invite our customer to spend more with us and capture a larger share of her total apparel spend. We anticipate that a portion of such increase may be offset by net sales from new customers, which tend to be lower on a per-customer basis in their initial purchase year than the annual spend per repeat active customer.

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.

Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. See the section captioned “Prospectus Summary—Summary Consolidated Historical Financial and Other Data” for information regarding our use of Adjusted EBITDA and its reconciliation to net income. We present these measures as we believe they are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry and we use them internally as benchmarks to compare our performance to that of our competitors. 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.

 

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Adjusted EBITDA has limitations as an analytical tool and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP. 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;

 

   

other expenses; and

 

   

duplicative Ohio distribution center costs.

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 in the section of this prospectus titled “Risk Factors.”

Customer Cohort Spend Over Time. We define a customer cohort as all of our customers who made their initial purchase in a given year, across all channels. We believe the evolution of spend among our customer cohorts demonstrates our increasing value proposition to our customers as they continue to shop with us over time. Our ability to deliver a life-changing customer experience has resulted in a net sales per active customer trajectory that is consistent across cohorts. Going forward, we intend to broaden our product assortment and improve our in-store and online experience to deepen our relationships with our customers and drive net sales per active customer.

For the 2015 cohort, which has the longest historical record, net sales per active customer was $262 in Year 1, defined as the first 12 months following and including their initial purchase. In their second year, the 2015 cohort’s net sales per active customer was $342, or 1.3 times the spending in their first year. This number continues to grow as the cohorts mature, as illustrated by the 2015 cohort’s net sales per active customer reaching $375 in Year 5, or 1.4 times the Year 1 value. This trend has been consistent throughout our history across cohorts. Even in 2020, when sales declined due to store closures related to COVID-19, each cohort’s net sales per active customer continued to expand. We expect our cohorts’ average net sales per active customer, as shown in the chart below, to continue to grow as our cohorts mature and we continue to deepen our relationships with them.

 

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LOGO

 

 

(1)

Existing customers, whom we define as identified customers who have purchased from us at least once before.

Efficiency of Customer Acquisition. To continue to grow our business profitably, we intend to acquire new customers and retain our repeat customers at a reasonable cost. We use a variety of brand and performance marketing channels to acquire new customers and leverage our store footprint of 608 stores as of May 1, 2021. 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.

 

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To measure the effectiveness of our marketing spend, we analyze customer acquisition cost (also known as CAC), and customer lifetime value (also known as LTV). We manage CAC methodically, continually using data and internal return on advertising spend targets to optimize our acquisition strategy. We measure how profitably we acquire new customers by comparing the LTV of a particular customer cohort with the CAC attributable to such cohort. To illustrate our successful customer acquisition strategy, we compare the LTV of the 2015 cohort to the CAC for those customers. While performance may vary across cohorts, we chose the 2015 cohort because it provides a broad amount of historical data. As illustrated in the chart below, this cohort generated a contribution profit in their first year significantly exceeding our acquisition cost, which demonstrates our ability to achieve rapid payback and profitability. Furthermore, the LTV of the 2015 cohort has increased over time driven by repeat purchases and rising contribution profit. As a result, the LTV of the 2015 customer cohort was approximately $239 after 5 years, 7.4 times the $32 cost of acquiring those customers, which is a testament to our ability to acquire customers efficiently and profitably.

 

LOGO

We have also provided the average LTV to CAC ratio for the 2015, 2016, 2017, 2018 and 2019 cohorts across one-year, two-year, three-year, four-year and five-year periods below to illustrate the effectiveness of our customer acquisition over time. We believe that the trend reflected by this chart is illustrative of the value of our customer base. As we increase our active customer base, however, we expect to spend more in marketing costs in aggregate to acquire new customers, and we may experience changes in customer retention or purchasing patterns, any of which could have a significant negative impact on our net sales and operating results.

Average LTV/CAC

(2015-2019 Cohorts) (1)

 

 

LOGO

 

(1)

Represents average LTV / CAC across 2015-2019 customer cohorts, weighted by number of customers acquired

 

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Our annual CAC increased from $32 in 2015 to $49 in 2019 as we increased our marketing investments, particularly in performance marketing as we continue to focus on driving higher brand awareness and conversion. Going forward, we expect CAC to fluctuate as we tailor and adjust our marketing strategy based on internal return on advertising spend targets. For example, as a result of consumer behavior changes related to the ongoing COVID-19 pandemic, our CAC declined 7% from $49 in 2019 to $46 in 2020. We expect to continue to generate a profit from our customer cohorts that significantly exceeds the acquisition cost within the first year of purchase and continues to grow over time as our customers engage in repeat purchases.

Customer 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. Repeat customers, whom we define as identified customers who have purchased from us at least once before accounted for approximately 72%, 78%, and 83% of net sales in 2018, 2019, and 2020, respectively, with repeat customers placing more orders annually than new customers. We believe these increasing metrics are reflective of our ability to engage and retain our customers through our compelling merchandise offering and shopping experience, as well as our differentiated marketing. Furthermore, we believe our overall net sales retention exceeds these figures, as we also retain a portion of sales to cash-pay and other unknown customers. The increasing share of our net sales from repeat customers reflects our customer loyalty and the net sales retention behavior we see in our cohorts. We calculate net sales retention on an annual basis as net sales attributable to the prior year’s identifiable customer cohorts, divided by the prior year’s total net sales attributable to identifiable customer cohorts. In 2020, we retained 82% of the prior year’s identifiable customers’ net sales. Our net sales retention is supported by the retention of substantially all sales from customer cohorts after the second year as our loyal customers make purchases more frequently and spend an increasing amount on our platform. While the net sales retention of the prior year’s identifiable customers’ net sales was down from 96% in 2019 due to the COVID-19 pandemic, we expect net sales retention to recover in future periods. We believe the trends reflected by these cohorts are illustrative of the value of our customer base; however, changes in customer retention and purchasing patterns could have a significant negative impact on our net sales and operating results.

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. As illustrated in the chart below, the share of net sales generated by omni-channel customers has increased from 51% in 2018 to 56% in 2019. While this percentage declined slightly to 53% in 2020 as a result of the temporary store closures caused by the COVID-19 pandemic, we expect the omni-channel penetration to recover in future periods.

Share of Net Sales Generated by Omni-Channel Customers

LOGO

 

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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.

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, engagement, and conversion through targeted investments in performance and brand marketing. Our aided brand awareness among U.S. plus-size women who purchased apparel in the past 12 months was 31% in April 2021 according to a third party survey we commissioned. 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.

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. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown.

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. We believe that we have an opportunity to continue to achieve significant growth due to our large addressable women’s plus-size apparel market, the untapped spend potential within this market, and the relatively low unaided awareness of our brand. 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/

 

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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 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 Original ABL Facility and Original Term Loan Credit Agreement. On June 14, 2021, we repaid and terminated the Original Term Loan Credit Agreement with borrowings under the New Term Loan Credit Agreement and amended our Original ABL Facility.

Provision for Income Taxes. Our provision for income taxes 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.

 

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Results of Operations

Three Months Ended May 1, 2021 Compared to Three Months Ended May 2, 2020

The following table summarizes our consolidated results of operations for the periods indicated (dollars in thousands):

 

     Three Months Ended  
     May 2, 2020      % of Net
Sales
    May 1, 2021     % of Net
Sales
 

Net sales

   $ 156,477        100.0   $ 325,747       100.0

Cost of goods sold

     115,535        73.8       180,815       55.5  
  

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     40,942        26.2       144,932       44.5  

Selling, general and administrative expenses

     6,858        4.4       109,913       33.8  

Marketing expenses

     14,036        9.0       9,525       2.9  
  

 

 

    

 

 

   

 

 

   

 

 

 

Income from operations

     20,048        12.8       25,494       7.8  

Interest expense

     6,094        3.9       4,624       1.4  

Interest income, net of other expense (income)

     133        0.1       (109     (0.0
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     13,821        8.8       20,979       6.4  

Provision for income taxes

     1,552        1.0       8,054       2.4  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 12,269        7.8   $ 12,925       4.0

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

 

     Three Months Ended  
     May 2, 2020     May 1, 2021  

Net income

   $ 12,269     $ 12,925  

Interest expense

     6,094       4,624  

Interest income, net of other expense (income)

     133       (109

Provision for income taxes

     1,552       8,054  

Depreciation and amortization(A)

     8,375       8,569  

Share-based compensation(B)

     (38,515     39,779  

Non-cash deductions and charges(C)

     896       35  

Other expenses(D)

     998       1,834  
  

 

 

   

 

 

 

Adjusted EBITDA

   $ (8,198   $ 75,711  
  

 

 

   

 

 

 

 

(A)

Depreciation and amortization excludes amortization of debt issuance costs and original issue discount that are reflected in interest expense.

(B)

Share-based compensation is 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 $169.3 million, or 108.2%, to $325.7 million for the three months ended May 1, 2021, from $156.5 million for the three months ended May 2, 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 May 2, 2020, which were impacted by disruption caused by the COVID-19 pandemic. The increase in net sales was also as a result of

 

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temporary store closures due to the COVID-19 pandemic during the three months ended May 2, 2020. Active customers increased 0.2 million, or 6.5%, to 3.4 million as of May 1, 2021, from 3.2 million as of May 2, 2020. Net sales per active customer increased by 14% from $291 as of May 2, 2020 to $331 as of May 1, 2021. The total number of stores we operate increased by 1 store, or 0.1%, to 608 stores as of May 1, 2021, from 607 stores as of May 2, 2020.

Gross Profit

Gross profit for the three months ended May 1, 2021 increased $104 million, or 254%, to $144.9 million, from $40.9 million for the three months ended May 2, 2020. This increase was primarily due to higher net sales volumes that drove a $103.0 million increase in merchandise margin. Gross profit as a percentage of net sales increased 18.3% to 44.5% for the three months ended May 1, 2021 from 26.2% for the three months ended May 2, 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 write downs of inventory, partially offset by e-Commerce shipping cost increases.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended May 1, 2021 increased $103.1 million, or 1,502.7%, to $109.9 million, from $6.9 million for the three months ended May 2, 2020. The increase was primarily due to a $78.3 million increase in share-based compensation expense, increased performance bonuses of $14.3 million, increased store payroll costs of $7.3 million and a $3.1 million increase in other store operating costs. Selling, general and administrative expenses as a percentage of net sales increased by 29.4% to 33.8% for the three months ended May 1, 2021 from 4.4% for the three months ended May 2, 2020. This increase was driven by increased share-based compensation and performance bonuses, partially offset by leverage of store and e-Commerce order fulfillment payroll costs headquarters general and administrative expenses and other store operating costs as a result of higher net sales volume.

Marketing Expenses

Marketing expenses for the three months ended May 1, 2021 decreased $4.5 million, or 32.1%, to $9.5 million, from $14.0 million for the three months ended May 2, 2020. This decrease was primarily due to decreased spending on photographic production, direct mail printing and short film production, partially offset by increased online marketing initiatives. Marketing expenses as a percentage of net sales decreased by 6.1% to 2.9% during the three months ended May 1, 2021 from 9.0% during the three months ended May 2, 2020. This decrease was driven by leverage of our marketing expenses as a result of higher net sales volume and decreased spending on photographic production and artwork, direct mail printing and short film production.

Interest Expense

Interest expense was $4.6 million for the three months ended May 1, 2021, compared to $6.1 million for the three months ended May 2, 2020. The decrease was primarily due a decrease in the total borrowings outstanding related to the Original Term Loan Credit Agreement as of May 1, 2021 compared to May 2, 2020, and to a lesser extent, a decrease in the variable interest rate related to the Original Term Loan Credit Agreement.

Provision for Income Taxes

The provision for income taxes for the three months ended May 1, 2021 increased by $6.5 million to $8.1 million, from $1.6 million for the three months ended May 2, 2020. Our effective tax rate was 38.4% for the three months ended May 1, 2021 and 11.2% for the three months ended May 2, 2020. The change in the effective tax rate for the three months ended May 1, 2021, as compared to the three months ended May 2, 2020 was primarily due to the increase in the amount of non-taxable items associated with share-based compensation relative to income before provision for income taxes for the three months ended May 1, 2021.

 

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2020 Compared to 2019

The following table summarizes our consolidated results of operations for the periods indicated (dollars in thousands):

 

     Fiscal Year Ended  
     February 1,
2020
    % of
Net Sales
    January 30,
2021
    % of
Net Sales
 

Net sales

   $ 1,036,984       100.0   $ 973,514       100.0

Cost of goods sold

     640,909       61.8       643,215       66.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     396,075       38.2       330,299       33.9  

Selling, general and administrative expenses

     253,378       24.5       222,093       22.8  

Marketing expenses

     65,704       6.3       51,382       5.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     76,993       7.4       56,824       5.8  

Interest expense

     16,493       1.6       21,338       2.2  

Interest income, net of other (income) expense

     (202     0.0       (42     0.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     60,702       5.8       35,528       3.6  

Provision for income taxes

     18,833       1.8       10,991       1.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 41,869       4.0   $ 24,537       2.5
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Fiscal Year Ended  
     February 1,
2020
    January 30,
2021
 

Net income

   $ 41,869     $ 24,537  

Interest expense

     16,493       21,338  

Interest income, net of other (income) expense

     (202     (42

Provision for income taxes

     18,833       10,991  

Depreciation and amortization(A)

     30,208       33,072  

Share-based compensation(B)

     11,993       7,791  

Non-cash deductions and charges(C)

     4,435       1,984  

Other expenses(D)

     2,510       1,131  

Ohio Distribution Center costs(E)

     5,860        
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 131,999     $ 100,802  
  

 

 

   

 

 

 

 

(A)

Depreciation and amortization excludes amortization of debt issuance costs and original issue discount that are reflected in interest expense.

(B)

Share-based compensation is 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.

(E)

Represents the duplicative and start-up costs associated with our West Jefferson, Ohio distribution center leased in 2018. This isolates the effect of incurring costs related to our West Jefferson, Ohio distribution center, which was not yet fully operational in 2019, while also incurring distribution and e-Commerce fulfillment costs charged to us by Hot Topic under the various services agreements.

 

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Net Sales

Net sales for 2020 decreased $63.5 million, or 6.1%, to $973.5 million, from $1,037.0 million for 2019. This decrease was primarily driven by a decline in orders placed and a decline in average order value as a result of the disruption caused by the COVID-19 pandemic. Active customers decreased 0.2 million, or 5.4%, to 3.2 million at the end of 2020, from 3.4 million at the end of 2019. Net sales per active customer decreased by 1% from $308 in 2019 to $306 in 2020. The total number of stores we operate increased by 1 store, or 0.1%, to 608 stores at the end of 2020, from 607 stores at the end of 2019.

Gross Profit

Gross profit for 2020 decreased $65.8 million, or 16.6%, to $330.3 million, from $396.1 million for 2019. This decrease was primarily due to lower net sales volumes that drove an $88.2 million decrease in merchandise margin. Gross profit as a percentage of net sales decreased 4.3% to 33.9% in 2020 from 38.2% in 2019. This decrease was driven by lower merchandise margin rate, partially offset by decreased store occupancy costs. The decrease in store occupancy costs was driven by negotiated rent concessions for certain store leases, including rent abatement during the period that those stores were closed due to COVID-19, as well as the transition to variable rent structures, many of which extend through 2021 and beyond. The lower merchandise margin rate was primarily driven by increases in promotional activity and e-Commerce shipping cost increases.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2020 decreased $31.3 million, or 12.3%, to $222.1 million, from $253.4 million for 2019. This decrease was primarily due to lower store payroll costs of $24.0 million as a result of temporary store closures due to the COVID-19 pandemic, a decrease of $4.2 million in share-based compensation expense and a decrease of $2.8 million in performance bonuses. Selling, general and administrative expenses as a percentage of net sales decreased by 1.7% to 22.8% in 2020 from 24.5% in 2019. This decrease was driven by decreased store payroll costs, share-based compensation and performance bonuses, partially offset by increases in other store operating costs and deleverage of our headquarters general and administrative expenses as a result of lower net sales volume.

Marketing Expenses

Marketing expenses for 2020 decreased $14.3 million, or 21.8%, to $51.4 million, from $65.7 million for 2019. This decrease was primarily due to decreased spending in response to the COVID-19 pandemic, including photographic production and direct mail printing, partially offset by increased online marketing initiatives. Marketing expenses as a percentage of net sales decreased by 1.0% to 5.3% in 2020 from 6.3% in 2019.

Interest Expense

Interest expense was $21.3 million for 2020, compared to $16.5 million for 2019. The increase was primarily due to the interest expense incurred in connection with borrowings of $260.0 million in June 2019 related to the Original Term Loan Credit Agreement.

Provision for Income Taxes

The provision for income taxes for 2020 decreased by $7.8 million to $11.0 million, from $18.8 million for 2019. Our effective tax rate remained substantially the same at 30.9% for 2020 as compared to 31.0% for 2019.

 

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2019 Compared to 2018

The following table summarizes our consolidated results of operations for the periods indicated (dollars in thousands):

 

     Fiscal Year Ended  
     February 2,
2019
    % of
Net Sales
    February 1,
2020
    % of
Net Sales
 

Net sales

   $ 909,147       100.0   $ 1,036,984       100.0

Cost of goods sold

     586,121       64.5       640,909       61.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     323,026       35.5       396,075       38.2  

Selling, general and administrative expenses

     170,530       18.7       253,378       24.5  

Marketing expenses

     48,774       5.4       65,704       6.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     103,722       11.4       76,993       7.4  

Interest expense

     1,053       0.1       16,493       1.6  

Interest income, net of other (income) expense

     (85     0.0       (202     0.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     102,754       11.3       60,702       5.8  

Provision for income taxes

     16,042       1.8       18,833       1.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 86,712       9.5   $ 41,869       4.0
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Fiscal Year Ended  
     February 2,
2019
    February 1,
2020
 

Net income

   $ 86,712     $ 41,869  

Interest expense

     1,053       16,493  

Interest income, net of other (income) expense

     (85     (202

Provision for income taxes

     16,042       18,833  

Depreciation and amortization(A)

     26,845       30,208  

Share-based compensation(B)

     (38,308     11,993  

Non-cash deductions and charges(C)

     2,466       4,435  

Other expenses(D)

     89       2,510  

Ohio Distribution Center costs(E)

     2,171       5,860  
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 96,985     $ 131,999  
  

 

 

   

 

 

 

 

(A)

Depreciation and amortization excludes amortization of debt issuance costs and original issue discount that are reflected in interest expense.

(B)

Share-based compensation is determined based on the revaluation of our liability-classified incentive units.

(C)

Non-cash deductions and charges includes (i) losses on property and equipment disposals, (ii) non-cash asset impairment charges in 2018 and (iii) the net impact of non-cash rent expense.

(D)

Other expenses represent non-routine expenses, including (i) IPO-related transaction fees and (ii) certain expenses related to store closures in 2018; 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.

(E)

Represents the duplicative and start-up costs associated with our West Jefferson, Ohio distribution center leased in 2018. This isolates the effect of incurring costs related to our West Jefferson, Ohio distribution center, which was not yet fully operational in 2019, while also incurring distribution and e-Commerce fulfillment costs charged to us by Hot Topic under the various services agreements.

 

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Net Sales

Net sales for 2019 increased $127.8 million, or 14.1%, to $1,037.0 million, from $909.1 million for 2018. This increase was primarily driven by growth in orders placed, and growth in average order value. Active customers increased 0.4 million, or 11%, to 3.4 million at the end of 2019, from 3.0 million at the end of 2018. Net sales per active customer increased by 3% from $299 in 2018 to $308 in 2019. Comparable sales increased 12.8%. The total number of stores we operate increased by 30 stores, or 5.2%, to 607 stores at the end of 2019, from 577 stores at the end of 2018.

Gross Profit

Gross profit for 2019 increased $73.0 million, or 22.6%, to $396.1 million, from $323.0 million for 2018. This increase was primarily due to higher net sales volumes that drove an $86.1 million increase in merchandise margin, partially offset by a $7.3 million increase in distribution center costs largely related to our West Jefferson, Ohio distribution center and a $4.6 million increase in store occupancy costs associated with new store openings. Gross profit as a percentage of net sales increased 2.7% to 38.2% in 2019 from 35.5% in 2018. This increase was driven by higher merchandise margin rate due to reduced promotional activity and leverage of our store occupancy costs, store depreciation expense and merchandising payroll costs as a result of higher net sales volume, partially offset by higher distribution center costs largely related to the duplicative costs associated with our West Jefferson, Ohio distribution center.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2019 increased $82.8 million, or 48.6%, to $253.4 million, from $170.5 million for 2018. This increase was primarily due to an increase in share-based compensation of $50.3 million, higher store and e-Commerce fulfillment payroll and other related operating costs of $13.6 million due to higher net sales volume and order fulfillment costs, an increase of $7.1 million in headquarters general and administrative costs and an increase of $10.4 million in performance bonuses. Selling, general and administrative expenses as a percentage of net sales increased by 5.8% to 24.5% in 2019 from 18.7% in 2018. This increase was driven by increased share-based compensation and performance bonuses, partially offset by leverage of our store and e-Commerce fulfillment payroll and other related operating as a result of higher net sales volume.

Marketing Expenses

Marketing expenses for 2019 increased $16.9 million, or 34.7%, to $65.7 million, from $48.8 million for 2018. This increase was primarily due to increased investments in (i) targeted online performance marketing such as comparison shopping engines and paid search/product listing advertising, (ii) social media advertising, (iii) photographic production and (iv) direct mail printing, designed to acquire, retain and remain connected to customers. Marketing expenses as a percentage of net sales increased by 0.9% to 6.3% in 2019 from 5.4% in 2018.

Interest Expense

Interest expense was $16.5 million for 2019, compared to $1.1 million for 2018. The increase was primarily due to the interest expense incurred in connection with borrowings of $260.0 million in June 2019 related to the Term Loan Credit Agreement (as defined below).

Provision for Income Taxes

The provision for income taxes for 2019 increased by $2.8 million to $18.8 million, from $16.0 million for 2018. Our effective tax rate was 31.0% for 2019 and 15.6% for 2018. The change in the effective tax rate for 2019 as compared to 2018 was primarily due to the increase in the amount of non-taxable items associated with share-based compensation relative to income before provision for income taxes for 2019.

 

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Quarterly Results of Operations

The following table sets forth certain unaudited financial and operating information for each fiscal quarter during 2019 and 2020. The quarterly information includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the information presented. This information should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

    Fiscal Year 2019     Fiscal Year 2020  
    First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 
    (dollars in thousands)  

Net sales

  $ 252,242     $ 257,394     $ 256,313     $ 271,035     $ 156,477     $ 249,226     $ 270,129     $ 297,682  

Gross profit

    102,518       102,509       98,107       92,941       40,942       79,981       95,528       113,848  

Income from operations(1)

    35,506       24,749       13,840       2,898       20,048       19,669       14,731       2,376  

Net income (loss)

    26,452       14,905       4,090       (3,578     12,269       16,777       4,251       (8,760

Other Operating Data:

               

Adjusted EBITDA(3)

  $ 41,797     $ 39,656     $ 32,511     $ 18,035     $ (8,198   $ 34,245     $ 30,768     $ 43,987  

Comparable sales(2)

    8     11     16     15     (38 %)      (2 %)      4     8

 

(1)

The results of operations were impacted by share-based compensation expense related to revaluing our liability-classified incentive units, as reflected in the table in footnote B immediately below.

(2)

The computation of comparable sales includes results from stores that were temporarily closed due to COVID-19.

(3)

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

 

     Fiscal Year 2019     Fiscal Year 2020  
     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 

Net income (loss)

   $ 26,452     $ 14,905     $ 4,090     $ (3,578   $ 12,269     $ 16,777     $ 4,251     $ (8,760

Interest expense

     259       3,747       6,330       6,157       6,094       5,885       4,666       4,693  

Interest income, net of other expense (income)

     95       (154     (84     (59     133       (50     (12     (113

Provision for income taxes

     8,700       6,251       3,504       378       1,552       (2,943     5,826       6,556  

Depreciation and amortization(A)

     6,510       7,275       8,322       8,101       8,375       8,310       8,477       7,910  

Share-based compensation(B)

    
(2,769

   
2,630
 
   
7,082
 
   
5,050
 
   
(38,515

   
5,810
 
   
7,124
 
    33,372  

Non-cash deductions and charges(C)

     676       940       1,243       1,576       896       435       424       229  

Other expenses (income)(D)

     (56     132       2,024       410       998       21       12       100  

Ohio Distribution Center costs(E)

     1,930       3,930                                      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA . . . . . .

   $ 41,797     $ 39,656     $ 32,511     $ 18,035     $ (8,198   $ 34,245     $ 30,768     $ 43,987  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (A)

Depreciation and amortization excludes amortization of debt issuance costs and original issue discount for all periods that are reflected in interest expense.

  (B)

Share-based compensation is 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.

  (E)

Represents the duplicative and start-up costs associated with our West Jefferson, Ohio distribution center leased in 2018. This isolates the effect of incurring costs related to our West Jefferson, Ohio distribution center, which was not yet fully operational in 2019, while also incurring distribution and e-Commerce fulfillment costs charged to us by Hot Topic under the various service agreements.

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 Amended ABL Facility. Our primary cash

 

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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 and pay Hot Topic for certain services provided to us pursuant to the Amendment to Amended and Restated Services Agreement (as defined in “Note 11—Related Party Transactions” contained in the consolidated financial statements and notes, included elsewhere in this prospectus). In addition, we used a portion of the proceeds from the Original Term Loan Credit Agreement to purchase certain information technology assets from Hot Topic in August 2019. The remaining proceeds were primarily used to purchase $213.2 million of senior participating preferred stock from Hot Topic’s parent, HT Intermediate Holdings Corp., during the second quarter of 2019. Subsequently during the same fiscal quarter, our parent issued a related party promissory note receivable to us in exchange for the $213.2 million investment in HT Intermediate Holdings Corp. senior participating preferred stock, including $1.4 million of accrued interest. 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 Amended ABL Facility 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 Amended ABL Facility 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):

 

     Year Ended     Three Months Ended  
     February 2,
2019
    February 1,
2020
    January 30,
2021
    May 2,
2020
    May 1,
2021
 

Net cash provided by operating activities

   $ 115,092     $ 99,090     $ 151,821     $ 7,192     $ 73,834  

Net cash used in investing activities

     (40,507     (56,120     (11,570     (6,076     (2,786

Net cash (used in) provided by financing activities

     (72,841     (23,335     (45,925     48,050       (3,250

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 three months ended May 1, 2021 was $73.8 million compared to $7.2 million during the three months ended May 2, 2020. The increase in cash provided by operating activities during the three months ended May 1, 2021 was primarily as a result of an increase in net income, excluding the impact of share-based compensation expense, compared to the three months ended May 2, 2020. Due to an increase in Torrid Holding LLC’s equity value in the three months ended May 1, 2021, share-based compensation expense was added back to net cash provided by operating activities as a non-cash adjustment, compared to the three months ended May 2, 2020 in which share-based compensation expense was deducted from net cash provided by operating activities. The increase in cash provided by operating activities was also as a result of an increase in accrued and other current liabilities primarily related to increases in accrued payroll and related expenses and accrued inventory in transit, and a decrease in inventory due to increased inventory sell-through during the three months ended May 1, 2021 as a result of an increase in net sales during

 

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the three months ended May 1, 2021, as well as the disruption caused by the COVID-19 pandemic during the three months ended May 2, 2020. The increase in cash provided by operating activities was partially offset by decreases in accounts payable and operating lease liabilities.

Net cash provided by operating activities during 2020 was $151.8 million compared to $99.1 million during 2019. The increase in cash provided by operating activities was primarily as a result of increases in accounts payable and income taxes payable, a decrease in inventory purchases as a result of the decrease in net sales and a decrease in operating lease liabilities. The increase in cash provided by operating activities was partially offset by a decrease in net income and a lower increase in accrued and other current liabilities related to lower accrued payroll and related expenses and lower term loan interest payable.

Net cash provided by operating activities during 2019 was $99.1 million compared to $115.1 million during 2018. The decrease in cash provided by operating activities was primarily as a result of a decrease in net income, an increase in inventory due to increased inventory purchases to support net sales growth and decreases in operating lease liabilities and amounts due to related parties. The decrease in cash provided by operating activities was partially offset by an increase in share-based compensation due to an increase in the Torrid Holding LLC equity value, increases in operating right-of-use assets amortization, accrued and other current liabilities related to higher accrued payroll and related expenses and term loan interest payable.

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 three months ended May 1, 2021 was $2.8 million compared to $6.1 million during the three months ended May 2, 2020. The decrease in cash used in investing activities was primarily as a result of a decrease in purchases of property and equipment due to a decrease in investments in our West Jefferson, Ohio distribution center.

Net cash flows used in investing activities were $11.6 million and $56.1 million in 2020 and 2019, respectively. The decrease in cash used in investing activities was primarily as a result of a decrease in purchases of property and equipment due to fewer new store openings in 2020, a decrease in investments in our West Jefferson, Ohio distribution center in 2020 and the absence of information technology asset purchases from Hot Topic in 2019.

Net cash flows used in investing activities were $56.1 million and $40.5 million in 2019 and 2018, respectively. The increase in cash used in investing activities was primarily as a result of the purchase of certain information technology assets from Hot Topic for $29.5 million and capital expenditures related to the opening of new stores and store relocations and 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 Original ABL Facility, borrowings and repayments related to the Original Term Loan Credit Agreement and fees and expenses paid in connection with entry into our Original ABL Facility, and Original Term Loan Credit Agreement. In addition, financing activities consist of repayments related to our related party promissory note payable, payments related to our related party promissory notes receivable and capital distributions to our parent.

Net cash used in financing activities during the three months ended May 1, 2021 was $3.3 million compared to $48.1 million of net cash provided by financing activities for the three months ended May 2, 2020. The decrease in net cash provided by financing activities is primarily as a result of a decrease in proceeds from the revolving credit facility and an increase in term loan principal payments.

 

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Net cash used in financing activities was $45.9 million for 2020 compared to $23.3 million for 2019. The increase in cash used in financing activities was primarily as a result of an increase in term loan principal payments.

Net cash used in financing activities was $23.3 million for 2019 compared to $72.8 million for 2018. The decrease in cash used in financing activities was primarily as a result of $248.6 million of proceeds related to the Original Term Loan Credit Agreement, net of original issue discount, deferred financing costs and principal payments, partially offset by an increase in distributions to our parent from $60.7 million in 2018 to $256.4 million in exchange for related party promissory notes receivable issued to us, including a $214.6 million promissory note receivable issued in exchange for our $213.2 million investment in HT Intermediate Holdings Corp. senior participating preferred stock and $1.4 million of accrued interest in 2019. The decrease in cash used in financing activities was also partially offset by an increase of $18.6 million of net short-term repayments of our Original ABL Facility, as amended.

Debt Financing Arrangements

For the stated periods, our debt financing arrangements consisted of the following (in thousands):

 

     February 1,
2020
    January 30,
2021
    May 1,
2021
 

Original ABL Facility(1)

   $     $     $  

Original Term Loan Credit Agreement(2)

      

Original Term Loan Credit Agreement

     256,100       210,700       207,450  

Less: current portion of unamortized original issue discount and debt financing costs

     (1,370     (1,494     (1,494

Less: noncurrent portion of unamortized original issue discount and debt financing costs

     (5,307     (4,294     (3,920
  

 

 

   

 

 

   

 

 

 

Total Original Term Loan Credit Agreement outstanding, net of unamortized original issue discount and debt financing costs

     249,423       204,912       202,036  

Less: Current portion of Original Term Loan Credit Agreement, net of unamortized original issue discount and debt financing costs

     (9,030     (11,506     (11,506
  

 

 

   

 

 

   

 

 

 

Total Original Term Loan Credit Agreement, net of current portion and unamortized original issue discount and debt financing costs(3)

   $ 240,393     $ 193,406     $ 190,530  
  

 

 

   

 

 

   

 

 

 

 

(1)

The Original ABL Facility was amended on June 14, 2021 to, among other others, effect an increase in aggregate commitments (subject to a borrowing base) from $70.0 million to $150.0 million. As of June 23, 2021, availability under the Amended ABL Facility was $145.1 million, which reflects no borrowings and $4.9 million of standby letters of credit issued and outstanding.

(2)

On June 14, 2021, we repaid and terminated the Original Term Loan Credit Agreement with borrowings under the New Term Loan Credit Agreement.

(3)

This table does not give effect to our New Term Loan Credit Agreement described above.

Original Term Loan Credit Agreement

On June 14, 2019, we entered into a term loan credit agreement (“Term Loan Credit Agreement”) among Cortland Capital Market Services LLC, as agent, KKR Credit Advisors (US) LLC, as structuring advisor, and the lenders party thereto (the “Original Lenders”). On September 17, 2020, we entered into an amendment to the Term Loan Credit Agreement (as so amended, “Original Term Loan Credit Agreement”) with the Lenders, pursuant to which the definition of total debt used in the calculation of Original Total Net Leverage Ratio (as defined below) was amended. All other material terms of the Term Loan Credit Agreement remained substantially the same. In September 2020, in conjunction with the Original Term Loan Credit Agreement, we prepaid $35.0 million of the outstanding Original Principal (as defined below), associated accrued interest of

 

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$0.2 million and an amendment fee of $0.5 million. On June 14, 2021, we repaid and terminated the Original Term Loan Credit Agreement with borrowings under the New Term Loan Credit Agreement. For the description of the New Term Loan Credit Agreement see “Description of Certain Indebtedness—New Term Loan Credit Agreement.”

The Term Loan Credit Agreement provided for term loans in an initial aggregate amount of $260.0 million (“Original Principal”), which was recorded net of an original issue discount (“OID”) of $2.9 million and had a maturity date of December 14, 2024. In connection with the Term Loan Credit Agreement, we paid financing costs of approximately $4.6 million.

The $257.1 million proceeds of the Term Loan Credit Agreement, net of OID, were used to (i) purchase $213.2 million of senior participating preferred stock from Hot Topic’s Parent, HT Intermediate Holdings Corp., for which we subsequently received a promissory note receivable in exchange from our parent; (ii) purchase certain information technology assets from Hot Topic for $29.5 million; (iii) fund a $10.0 million promissory note receivable from our parent; and (iv) pay for financing costs associated with the Term Loan Credit Agreement.

Loans made pursuant to the Original Term Loan Credit Agreement bore interest at an annual rate equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate quoted by The Wall Street Journal, (2) the federal funds effective rate plus 0.50% and (3) a LIBOR rate for an interest period of one month, plus 1.00%; or (b) at a LIBOR rate for the interest period relevant to such borrowing, in each case plus an applicable margin of either 6.75% or 7.00% for LIBOR borrowings and either 5.75% or 6.00% for base rate borrowings, in each case, based upon our total net leverage ratio as of the relevant testing date.

If we elected the LIBOR rate, interest was due and payable on the last day of each interest period, unless an interest period exceeded three months, then the respective dates that fall every three months after the beginning of the interest period would also be interest payment dates. If we elected the Base rate loan, interest was due and payable the last day of each fiscal quarter. The elected interest rate on May 1, 2021 was approximately 8%.

In addition to paying interest on the outstanding Original Principal under the Original Term Loan Credit Agreement, we were required to make fixed mandatory repayments of the Original Principal on the last business day of each fiscal quarter until maturity (“Original Repayment”). Original Repayments for the first four fiscal quarters, starting in the third quarter of 2019, represented 0.75% of the Original Principal, reduced as a result of the application of prior Prepayments, as defined below. For each of the eight fiscal quarters thereafter, Original Repayments represent 1.25% of the Original Principal, reduced as a result of the application of prior Original Prepayments, as defined below. For each of the fiscal quarters thereafter until the maturity date, Original Repayments represented 1.875% of the Original Principal, reduced as a result of the application of prior Original Prepayments, as defined below.

Under the Original Term Loan Credit Agreement, we were also required to make variable mandatory prepayments of the Original Principal, under certain conditions as described below, approximately 102 days after the end of each fiscal year (each, an “Original Prepayment”). Original Prepayments, if applicable, commenced at the end of 2019 and represented between 25% and 75% (depending on our first lien net leverage ratio) of Excess Cash Flow (as defined in the Original Term Loan Credit Agreement) in excess of $2.0 million, minus prepayments of Original Principal, the Original ABL Facility (to the extent accompanied by a permanent reduction in the commitments thereunder) and certain other specified indebtedness and amounts in connection with certain other enumerated items. As of January 30, 2021, our Excess Cash Flow amount was $2.0 million which did not meet the Excess Cash Flow threshold to require an Original Prepayment.

In addition to mandatory Original Repayment and Original Prepayment obligations, we had the option to prepay a portion of the outstanding Original Principal (“Original Optional Prepayment”). If we made Original Optional Prepayments before June 14, 2022, we would be subject to penalties ranging from 1.00% to 3.00% of

 

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the aggregate principal amount, with the exception of up to $50.0 million that could be repaid with the proceeds of a qualifying IPO without penalty.

All of Torrid LLC’s existing domestic subsidiaries and Torrid Intermediate LLC unconditionally guaranteed all obligations under the Original Term Loan Credit Agreement. Substantially all of the assets of Torrid LLC, Torrid LLC’s existing subsidiaries and Torrid Intermediate LLC secured all such obligations and the guarantees of those obligations, subject to certain exceptions.

Our borrowings under the Original Term Loan Credit Agreement were subject to a financial covenant that required us to maintain a maximum ratio of our total debt to EBITDA, (as defined in the Original Term Loan Credit Agreement) (“Original Total Net Leverage Ratio”). The maximum ratio was 3.60 for the quarter ended November 2, 2019, 3.35 for the quarters ended February 1, 2020, May 2, 2020, and August 1, 2020, 3.10 for the quarter ended October 31, 2020, 2.50 for the quarter ended January 30, 2021, 2.35 for the quarter ended May 1, 2021, 2.10 for the quarters ending July 31, 2021 and October 30, 2021, and 1.85 for all quarters thereafter. The Original Term Loan Credit Agreement amended the definition of total debt used in the Original Total Net Leverage Ratio calculation for the quarters ended October 31, 2020, January 30, 2021, and May 1, 2021 and the quarter ending July 31, 2021. The amended definition of total debt permitted us to exclude indebtedness associated with our Original ABL Facility through the quarter ended October 31, 2020, removed the $20.0 million cap from the amount of cash and cash equivalents on-hand that we were permitted to net against our total debt for purposes of the ratio calculation through the quarter ended January 30, 2021, and raised the $20.0 million cap to $40.0 million and $30.0 million for the quarters ended May 1, 2021 and ending July 31, 2021, respectively, before reverting to $20.0 million for all quarters thereafter. As of May 1, 2021, our Original Total Net Leverage Ratio was 0.91.

The Original Term Loan Credit Agreement contained a limitation on our capital expenditures paid in cash in any year and such expenditures could not exceed 37.5% of prior year Adjusted EBITDA (as defined by the Original Term Loan Credit Agreement). If the amount of our capital expenditures paid in cash in any year was less than the 37.5% threshold, 50% of the difference was to be automatically applied to increase the maximum threshold in the next year. The Original Term Loan Credit Agreement also contained a number of covenants that, among other things and subject to certain exceptions, would restrict our ability and the ability of our subsidiaries to: create, incur or assume liens on our assets or property; incur additional indebtedness; make capital expenditures; issue preferred or disqualified stock; incur hedging obligations; consolidate or merge; sell assets; pay dividends or make distributions, make investments, or engage in transactions with our affiliates. As of May 1, 2021, we were compliant with our debt covenants under the Original Term Loan Credit Agreement.

As of May 1, 2021, total borrowings, net of OID and financing costs, of $202.0 million remained outstanding under the Original Term Loan Credit Agreement. During 2019, we recognized $14.9 million of interest expense and recognized $0.9 million of non-cash interest expense related to OID and financing costs related to the Term Loan Credit Agreement. During 2020, we recognized $19.2 million of interest expense and recognized $1.4 million of OID and financing costs related to the Original Term Loan Credit Agreement. The OID and financing costs were amortized over the Original Term Loan Credit Agreement’s five and a half-year term and were reflected as a direct deduction of the face amount of the term loan in our consolidated balance sheets. We recognize interest payments, together with amortization of the OID and financing costs, in interest expense in our consolidated statements of operations and comprehensive income.

Senior Secured Asset-Based Revolving Credit Facility

In May 2015, we entered into a credit agreement for a senior secured asset-based revolving credit facility (“ABL Facility”) of $50.0 million (subject to a borrowing base), with Bank of America, N.A. On October 23, 2017, we entered into an amended and restated credit agreement which amended the ABL Facility and this agreement was subsequently amended on June 14, 2019, September 4, 2019 (the ABL Facility as so amended, the “Original ABL Facility”) and on June 14, 2021 (the Original ABL Facility as so amended, the “Amended

 

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ABL Facility”). Under the Original ABL Facility, (i) $70.0 million in aggregate commitments (subject to a borrowing base) were available to us and (ii) we had a right to request additional commitments of up to $30.0 million plus the aggregate principal amount of any permanent principal reductions we could take (subject to customary conditions precedent). The principal amount outstanding of the loans under the Original ABL Facility were due and payable in full on October 23, 2022. Under the Amended ABL Facility, (i) $150.0 million in aggregate commitments (subject to a borrowing base) are available to us and (ii) we have a right to request additional commitments of up to (a) $50.0 million plus (b) the aggregate principal amount of any permanent principal reductions we may take plus (c) the amount by which the borrowing base exceeds the aggregate commitments (subject to customary conditions precedent). The principal amount outstanding of the loans under the Amended ABL Facility is due and payable in full on June 14, 2026.

The borrowing base for the Original ABL Facility at any time equaled the sum of 90% of eligible credit card receivables, plus 90% of the appraised net orderly liquidation value of eligible inventory and eligible in-transit inventory multiplied by the cost of such eligible inventory and eligible in-transit inventory (to be increased to 92.5% during the period beginning on September 1 of each year and ending on December 31 of each year). The Original ABL Facility included borrowing capacity for letters of credit and for borrowings on same-day notice, referred to as Swing Line Loans, and is available in U.S. dollars.

Under the Original ABL Facility, we had the right to request up to $30.0 million of additional commitments plus the aggregate principal amount of any permanent principal reductions we may take (as compared to (a) $50.0 million of additional commitments plus (b) the aggregate principal amount of any permanent principal reductions we may take plus (c) the amount by which the borrowing base exceeds the aggregate commitments, under the Amended ABL Facility). The lenders under this facility are not under any obligation to provide any such additional commitments, and any increase in commitments is subject to customary conditions precedent. If we were to request any such additional commitments and the existing lenders or new lenders were to agree to provide such commitments, the size of the Original ABL Facility could increase to up to $100.0 million (as compared to at least $200.0 million under the Amended ABL Facility), but our ability to borrow under this facility would still be limited by the amount of the borrowing base.

Borrowings under the Original ABL Facility bore bear interest at an annual rate equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Bank of America, N.A., (2) the federal funds effective rate plus 0.50% and (3) a LIBOR rate plus 1.00%; or (b) at a LIBOR rate for the interest period relevant to such borrowing adjusted for certain costs, in each case plus an applicable margin that ranges from 1.25% to 1.75% for LIBOR borrowings and 0.25% to 0.75% for base rate borrowings, in each case, based on average daily availability. As of May 1, 2021, the applicable interest rate for borrowings under the Original ABL Facility was approximately 4% per annum.

If we elected the LIBOR rate, interest was due and payable on the last day of each interest period, unless an interest period exceeded three months, then the respective dates that fell every three months after the beginning of the interest period would also be interest payment dates. If we opted for the base rate (including a Swing Line Loan), interest was due and payable on the first business day of each month and on the maturity date.

In addition to paying interest on outstanding principal under the Original ABL Facility, we were required to pay a commitment fee in respect of unutilized commitments. The commitment fee ranged between 0.25% and 0.375% per annum of unutilized commitments and were subject to adjustment each fiscal quarter based on the amount of unutilized commitments during the immediately preceding fiscal quarter. We were also required to pay customary letter of credit fees and agent fees.

If at any time the aggregate amount of outstanding loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Original ABL Facility, exceeded the lesser of (a) the commitment amount and (b) the borrowing base, we were required to repay outstanding loans and/or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount.

 

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We could voluntarily reduce the unused portion of the commitment amount and repay outstanding loans at any time under the Original ABL Facility. Prepayment of the loans could be made without premium or penalty other than customary “breakage” costs with respect to LIBOR loans.

All obligations under the Original ABL Facility, were unconditionally guaranteed by substantially all of Torrid Intermediate LLC’s existing majority-owned domestic subsidiaries and were required to be guaranteed by certain of Torrid Intermediate LLC’s future domestic majority-owned subsidiaries. All obligations under the Original ABL Facility and the guarantees of those obligations, were secured, subject to certain exceptions, by substantially all of Torrid Intermediate LLC’s assets.

The Original ABL Facility, required us to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 if we failed to maintain Specified Availability (as defined by the Original ABL Facility), of at least the greater of 10% of the Loan Cap (as defined by the Original ABL Facility) and $5.0 million (as compared to $7.0 million under the Amended ABL Facility). The Original ABL Facility contained a number of other covenants that, among other things and subject to certain exceptions, restricted our ability and the ability of our subsidiaries to: incur additional indebtedness; pay dividends on our capital stock or redeem, repurchase or retire our capital stock or our other indebtedness; make investments, loans and acquisitions; engage in transactions with our affiliates; sell assets, including capital stock of our subsidiaries; alter the business we conduct; consolidate or merge; and incur liens. As of May 1, 2021, we were compliant with our covenants under the Original ABL Facility.

The Original ABL Facility, specifically restricted dividends and distributions, aside from amounts to cover ordinary operating expenses and taxes, between our subsidiaries and to us. However, dividends and distributions were permitted at any time that either (1) availability under the Original ABL Facility, was equal to or greater than 15% of the maximum borrowing amount on a pro forma basis and we were pro forma compliant with a 1.00 to 1.00 fixed charge coverage ratio or (2) availability under the Original ABL Facility, was equal to or greater than 20% of the maximum borrowing amount on a pro forma basis. As of May 1, 2021, the maximum restricted payments utilizing the Original ABL Facility that our subsidiaries could make from its net assets was $55.0 million.

Availability under the Original ABL Facility at the end of 2019 was $68.0 million, which reflects no borrowings and $2.0 million of standby letters of credit issued and outstanding. Availability under the Original ABL Facility at the end of 2020 and as of May 1, 2021 was $65.5 million, which reflects no borrowings and $4.5 million of standby letters of credit issued and outstanding.

Except as noted above, the terms of our Amended ABL Facility are consistent with terms of our Original ABL Facility. For a description of our Amended ABL Facility. See “Description of Certain Indebtedness—Amended ABL Facility.”

Contractual Obligations

We enter into long term contractual obligations and commitments in the normal course of business, primarily debt obligations, purchase obligations and non-cancelable operating leases. As of January 30, 2021, our contractual cash obligations over the next several periods are set forth below (dollars in thousands).

 

     Payments Due by Period  
     Total      <1 Year      1-3 Years      3-5 Years      Thereafter  

Contractual Obligations:

              

Original Term Loan Credit Agreement Obligations(1)

   $ 210,700      $ 13,000      $ 35,750      $ 161,950      $  

Interest Expense on Original Term Loan Credit Agreement Obligations(1)(2)

     55,416        16,129        28,724        10,563         

Purchase Obligations

     232,922        232,922                       

Letters of Credit and Other Obligations(3)

     38,897        24,098        12,192        2,607         

Operating Lease Obligations(4)

     355,986        65,746        119,530        93,536        77,174  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(5)

   $ 893,921      $ 351,895      $ 196,196      $ 268,656      $ 77,174  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1)

Amounts assume that the Original Term Loan Credit Agreement was paid upon maturity and do not consider any variable mandatory principal prepayments or optional principal prepayments which we may make in the future. On June 14, 2021, we repaid and terminated the Original Term Loan Credit Agreement with borrowings under the New Term Loan Credit Agreement.

(2)

Assumes an interest rate of approximately 8% per annum, consistent with the interest rate at January 30, 2021.

(3)

Amounts listed above do not include cash obligations related to relocation expenses in connection with the involuntary separation of certain employees due to the uncertainty regarding the amount of such expenses.

(4)

Includes estimated annual future minimum occupancy payments under operating leases including minimum base rents, common area maintenance charges and heating, ventilation and cooling charges, for lease terms that include periods covered by options to extend some of our leases, as we are reasonably certain to exercise those options. Options to terminate our leases have not been included in any lease terms as we are not reasonably certain to exercise those options. See “Note 9—Leases” contained in the consolidated financial statements and notes, included elsewhere in this prospectus for additional disclosure related to operating lease obligations.

(5)

This table does not give effect to the New Term Loan Credit Agreement described above. Our anticipated contractual cash obligations under the New Term Loan Credit Agreement amount to (A) principal payments of (i) $8,750,000 for the next 1 year after the completion of this offering, (ii) $35,000,000 between 1-3 years after the completion of this offering, (iii) $35,000,000 between 3-5 years after the completion of this offering and (iv) $271,250,000 thereafter; and (B) assuming an interest rate of approximately 6.25% per annum, consistent with our interest rate on June 23, 2021, interest expense of (i) $21,034,180 for the next 1 year after the completion of this offering, (ii) $41,024,740 between 1-3 years after the completion of this offering, (iii) $36,601,128 between 3-5 years after the completion of this offering and (iv) $32,833,767 thereafter.

We have not included any income tax audit settlement payments due in less than one year in the contractual obligations table above as we do not expect any income tax audit settlements related to open audits to be fully settled in 2021 or any material gross unrecognized tax benefits for which the statutes of limitations are expected to expire in 2021. In addition, due to the uncertainty regarding the timing of future cash outflows associated with noncurrent unrecognized tax benefits of $2.0 million, we are unable to make a reliable estimate of the periods of cash settlement with the respective tax authorities and have not included such amounts in the contractual obligations table above.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements or financing activities with special-purpose entities.

Critical Accounting Policies and Significant Estimates

Our discussion of results of operations and financial condition is based upon the consolidated financial statements included elsewhere in this prospectus, 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 consolidated financial statements and accompanying 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 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 consolidated financial statements and

 

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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 consolidated financial statements are described below (see Note 2 to our audited consolidated financial statements included elsewhere in this prospectus for additional information regarding our critical accounting policies).

Revenue Recognition

In the first quarter of 2018, we adopted ASC 606 using the modified retrospective adoption method. Under the modified retrospective adoption method, our consolidated financial statements as of and for the year ended February 2, 2019 and thereafter, reflect the provisions of ASC 606. The adoption of ASC 606 did not have a material impact on our consolidated financial position, results of operations or cash flows. Under 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

 

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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.

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 effective the second quarter of 2019, 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 effective the second quarter of 2019, 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 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

On February 3, 2019, we adopted ASU 2016-02, Leases, and all related guidance (“ASC 842”) and recorded a $317.7 million right-of-use (“ROU”) asset and a corresponding $366.7 million lease liability in our consolidated balance sheet for all eligible leases with terms longer than 12 months. Our consolidated financial statements for 2019 reflect the provisions of ASC 842, while prior periods do not. The initial ROU assets recognized upon adoption are equal to the initial operating lease liabilities, adjusted for the balances of leasehold interests, deferred rent and lease incentives on the adoption date.

Upon our adoption of ASC 842, we elected not to reassess whether any expired or existing contracts are or contain leases and not to reassess the lease classification for any expired or existing 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

 

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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 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 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 Financial Accounting Standards Board 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

Beginning in 2015 and through May 1, 2021, our parent, Torrid Holding LLC, issued 13.7 million incentive units in the aggregate, net of forfeitures, to certain members of management. These incentive units are intended to constitute profits interests.

We recognize share-based compensation expense associated with incentive units issued by our parent in selling, general and administrative expenses in our consolidated statements of operations and comprehensive income. The share-based compensation expense and related capital contribution are reflected in our consolidated financial statements as these awards are deemed to be for our benefit. The intent of the awards is to provide profit-sharing opportunities to management rather than equity ownership in our parent. In addition, the incentive

 

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units do not have any voting or distribution rights and contain a repurchase feature, whereby upon termination, our parent has the right to purchase from former employees any or all of the vested incentive units at fair value. Based on these aforementioned features and characteristics, we determined that the incentive units were in-substance liabilities. The incentive units are remeasured based on the fair value of the awards at the end of each reporting period as the incentive units are accounted for as liability instruments in accordance with ASC 710, Compensation-General. We record the fair value of these awards as a capital contribution from our parent as our parent is the legal obligor for the incentive units.

The incentive units were valued utilizing a contingent claims analysis (“CCA”) methodology based on a Black-Scholes option pricing model (“OPM”). Under the OPM, each class of incentive units is modeled as a call option with a unique claim on the assets of our parent. The characteristics of each class of incentive units determine the uniqueness of the claim on the assets of our parent. The OPM used to value the incentive units incorporates various assumptions, including the time to liquidity event, equity volatility and risk-free interest rate of return. Equity volatility is 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 is for a term corresponding to the time to liquidity event. The assumptions underlying the valuation of the incentive units represent our best estimates, which involve inherent uncertainties and the application of our judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our non-cash share-based compensation expense could be materially different. Our non-cash share-based compensation expense could also be materially different if there are significant fluctuations in the Torrid Holding LLC equity value.

Jumpstart Our Business Startups Act of 2012 (“JOBS Act”)

In April 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable.

We have chosen to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company” we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of Sarbanes-Oxley, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (United States) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items, such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. We may remain an “emerging growth company” until the last day following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our total annual gross revenue equals or exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an “emerging growth company” prior to the end of such five-year period.

Recently Issued Accounting Pronouncements

See Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for information regarding recently issued accounting pronouncements.

 

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Quantitative and Qualitative Disclosure of Market Risks

Interest Rate Risk

We are subject to interest rate risk in connection with borrowings under our Amended ABL Facility and New Term Loan Credit Agreement, which bear interest at a variable rate equal to LIBOR plus an applicable margin. As of January 30, 2021, we had $204.9 million of outstanding variable rate loans under the Original Term Loan Credit Agreement and no outstanding variable rate borrowings under the Original ABL Facility. An increase or decrease of 1% in the variable rates on the amount outstanding under the Original Term Loan Credit Agreement would have increased or decreased our annual interest expense by approximately $2.4 million. See “—Original Term Loan Credit Agreement” and “—Senior Secured Asset-Based Revolving Credit Facility.”

Foreign Exchange Risk

The reporting currency for our consolidated financial statements is U.S. dollars. To date, net sales generated outside of the United States have not been significant. As a result, we have not been impacted materially by changes in exchange rates and do not expect to be impacted materially for the foreseeable future. However, as our net sales generated outside of the United States increase, our results of operations could be adversely impacted by changes in exchange rates. For example, if we recognize international sales in local foreign currencies (as we currently do in Canada), as the U.S. dollar strengthens it would have a negative impact on our international results upon translation of those results into U.S. dollars during consolidation. We also purchase a significant quantity of merchandise from foreign countries. However, these purchases are made in U.S. dollar-denominated purchase contracts. We do not currently hedge foreign currency fluctuations and do not intend to do so for the foreseeable future.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial. We cannot assure you our business will not be affected in the future by inflation.

Internal Control Over Financial Reporting

In connection with the audits of our consolidated financial statements as of and for the years ended January 30, 2016, January 28, 2017 and February 3, 2018, we identified material weaknesses in our internal control over financial reporting. See the section titled “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—If we are unable to design, implement and maintain effective internal controls in accordance with Section 404 of Sarbanes-Oxley, we may not be able to report our financial results in a timely and reliable manner, which could have a material adverse effect on our business and stock price. We have identified material weaknesses in our internal control over financial reporting.”

 

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BUSINESS

Our Mission

Torrid is on a mission to be the best direct-to-consumer apparel and intimates brand in North America by providing an unparalleled fit and experience that empowers curvy women to love the way they look and feel.

Who We Are

Torrid is the largest direct-to-consumer brand of women’s plus-size apparel and intimates in North America by net sales. We grew our net sales by 8% CAGR between 2017 and 2020, making us among the fastest growing direct-to-consumer brands in the plus-size apparel and intimates market. We served 3.2 million active customers and generated net sales of $974 million in 2020. Our proprietary product offering delivers a superior fit for the curvy woman that makes her love the way she looks and feels. We offer our customer high quality products across a broad assortment that includes 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 good for any occasion, including weekend, casual, work and dressy, all at accessible price points. We specifically design for stylish plus-size women and are maniacally focused on fit because fit is the highest priority for them, according to a consumer study we commissioned. Based on the same study, plus-size consumers consistently rank our fit as #1 among our peers, which contributes to our leading NPS of 55, nearly two times the peer average score of 30. Our consistent fit contributed to a return rate of only 9% for e-Commerce purchases in 2020, whereas return rates for e-Commerce purchases generally can be as high as 30%, according to Optoro’s research. 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 afterthought, have not.

We are the category-leading brand, by net sales, in the $85 billion U.S. women’s plus-size apparel and intimates market, which serves 90 million plus-size women, defined as wearing sizes 10 and up. We design for a 25 to 40 year old curvy woman, who leads a social and active lifestyle and wants to wear clothes that make her look and feel good. While 58% of our 2020 customers are under 40 years old and our average customer is a size 18, our products and style appeal to women of all ages and across the range of plus-sizes. Our target market is large, growing and underserved across both online and in-store channels. The average plus-size woman has historically struggled to find stylish products that fit well and 78% of plus-size women reported that they would spend more on clothing if they had more options available in their size. Through our differentiated product, unified go-to-market strategy, strong connection with our customer and data-driven merchandising approach, we believe we are uniquely positioned to unlock this untapped spend potential by providing her an experience that has not previously been available to her.

We execute a customer-first unified commerce strategy that is channel-agnostic, allowing our customer to experience our brand and unparalleled proprietary fit wherever and whenever she wants. We market directly to consumers via our e-Commerce platform and our physical footprint of 608 stores as of May 1, 2021. E-Commerce sales represented 42% and 48% of net sales in 2018 and 2019, respectively, having grown by 28% in 2018 and 28% in 2019. In 2020, e-Commerce sales represented 70% of net sales as e-Commerce sales grew by 38% and store sales declined as a result of temporary store closures and a slowdown in store traffic associated with the global COVID-19 pandemic. For the twelve months ended May 1, 2021, e-Commerce sales represented 69% of net sales. Our broad digital ecosystem—from our engaging e-Commerce website and mobile app to social media channels and our Torrid Rewards loyalty program—allows us to better connect, engage, track and service customers. This ecosystem also provides robust quantitative and qualitative customer data that we use to inform all aspects of our operations, from product development, to merchandising and marketing. Our stores are designed to create an inclusive and welcoming environment where our customers can discover and engage with our brand, experience our fit and connect with a community of like-minded women. Our stores also serve as an effective and profitable source of new customer acquisition with a

 

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payback period of less than two years. The integration of e-Commerce and stores is fundamental to our customer-centric strategy as those two channels complement and drive traffic to one another. We have a history of converting single-channel customers into highly valuable omni-channel customers. In 2020, on average, omni-channel customers made 7.8 purchases and spent approximately 3.2 times more than single-channel customers. Our consistent product fit and the unified experience between our stores and e-Commerce platform creates a powerful flywheel effect that results in low customer acquisition cost, high repeat purchasing behavior and high customer lifetime value.

We form long-standing relationships with our customers, who are empowered by their Torrid experience and develop what we believe to be a deep, emotional connection with our brand. We were able to attribute approximately 98% of our net sales in 2020 to individual customers through our extensive customer and sales data resulting from our loyalty program and highly engaged customer base. Our customers’ repeat purchasing behavior is evidenced by our strong net sales retention. In 2020, we retained 82% of net sales from the prior year’s identifiable customers. While the net sales retention was down from 96% in 2019 due to temporary store closures resulting from the COVID-19 pandemic, we expect net sales retention to recover in future periods. The rich database of information provided by our loyalty program gives us deep insight into the plus-size consumer’s purchasing behavior and allows us to market to our customers more effectively. Our stores and efficient marketing spend enable low CAC that, combined with our high repeat purchase behavior, generates an attractive ratio of customer LTV to CAC. For example, the 5-year LTV of our 2015 customer cohort was approximately 7.4 times the cost of acquiring those customers, which is a testament to our ability to efficiently acquire new customers.

We employ a data-driven approach to design, merchandising and inventory planning and allocation to deliver high quality products that combine the fit, style and attitude that our customer wants. As a fit-first company, we do not rely on being fashion leaders and instead provide a curated assortment of Basic, Core and New products. We internally design and develop the vast majority of our products, a model we describe as vertical sourcing, which gives us control to deliver consistent fit, quality and cost across our products. We leverage our robust customer data to inform purchasing decisions and have the flexibility to respond quickly to the latest sales trends and incorporate customer feedback to deliver the product our customer wants. Further, we utilize a read-and-react testing approach with shallow initial buys to iterate our New product offering, thus minimizing fashion and inventory risk. Our merchandising strategy has enabled us to generate approximately 80% of our net sales from products sold at regular price, which we define as products sold at initial ticket price or with a standard marketing promotion (e.g., “Buy One Get One 50% Off”). We believe our data-driven approach will continue to drive market growth and market share gains with our rapidly growing and underserved customer base.

Response to the COVID-19 Pandemic

Commencing in December 2019, the novel strain of coronavirus, COVID-19, spread rapidly throughout the world. The global crisis resulting from the spread of COVID-19 has disrupted, and continues to significantly disrupt, local, regional and global economies and businesses in the United States and internationally. Because apparel retail stores were generally deemed “non-essential” by most federal, state, provincial and local government authorities in North America, our stores had to remain closed or operate on reduced hours; we estimate that in 2020, our stores were open, on a same- store-basis, 47% fewer operating hours than in 2019. COVID-19 has accelerated the secular shift towards e-Commerce as consumers increasingly shopped online amid the temporary store closures, and we believe we were well positioned to serve our customers through our robust e-Commerce platform and accelerated investments in omni-channel offerings such as curbside pickup, buy-online-pickup-in-store (“BOPIS”) and ship from store. In response to the COVID-19 pandemic, Torrid proactively implemented various initiatives with a focus on ensuring the health and safety of employees and customers, minimizing the financial impact of COVID-19 and continuing to build the foundation for future growth and profitability. The initiatives implemented include, but are not limited to:

 

   

Accelerated investments in omni-channel offerings and rolled out BOPIS across all U.S. stores in June 2020, and curbside pickup and ship from store in select stores in August 2020;

 

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Made targeted investments and changes to our process to improve the speed and flexibility of our supply chain including shortening our development cycle by two weeks;

 

   

Leveraged data analytics and insights to tailor marketing and promotional strategies in response to consumer behavior changes related to the ongoing COVID-19 pandemic, allowing us to reduce our CAC by 7% in 2020 from 2019;

 

   

Utilized new technologies to communicate with stores in real time and facilitate virtual store visits for District and Regional Managers;

 

   

Managed expenses by reducing headcount and general and administrative expenses;

 

   

Extended and improved payment terms with vendors and negotiated rent relief, including variable rent leases, for a significant portion of stores; and

 

   

Deferred non-essential capital expenditures and new store opening plans.

Our Financial Performance

We believe our fit-focused product strategy, direct-to-consumer model and passionate team have resulted in high growth and a leading market position over the last several years. We have grown comparable sales for 35 of the last 37 quarters; the only two quarters of decline were in 2020 as a result of the disruption caused by COVID-19. In early 2020, as COVID-19 disrupted our customers’ lives, Torrid’s business demonstrated resiliency beyond our initial expectations. By May 2020, net sales growth began to rebound even as store traffic remained challenged, as consumers increasingly shifted their spending to online channels. Financial performance in 2020 demonstrates the strong inherent demand for our differentiated product and the resiliency of our business model. Since 2018, we have recorded the following financial results:

 

   

Total active customers grew 11% year-over-year from 3.0 million in 2018 to 3.4 million in 2019. In 2020, total active customers declined by 5% to 3.2 million, as a number of customers held off on making purchases in 2020. Total active customers grew 6% year-over-year from 3.2 million as of May 2, 2020 to 3.4 million as of May 1, 2021;

 

   

Net sales grew 14% year-over-year from $909 million in 2018 to $1,037 million in 2019. In 2020, net sales declined 6% year-over-year to $974 million as significant declines in store-based sales were partially offset by increases in e-Commerce sales. Nevertheless, we estimate Torrid was able to gain market share in women’s plus size apparel and intimates in 2020. Net sales grew 108% from $156 million for the three months ended May 2, 2020 to $326 million for the three months ended May 1, 2021;

 

   

Net income declined 52% year-over-year from $87 million in 2018 to $42 million in 2019. In 2020, net income declined 41% year-over-year to $25 million. Net income grew 5% from $12 million for the three months ended May 2, 2020 to $13 million for the three months ended May 1, 2021; and

 

   

Adjusted EBITDA grew 36% year-over-year from $97 million in 2018 to $132 million in 2019, representing a margin increase of 200bps from 11% to 13% during the same time period. In 2020, Adjusted EBITDA declined 24% year-over-year to $101 million driven by temporarily lower gross profit margin and fixed cost deleverage as a result of the challenges presented by COVID-19. Adjusted EBITDA grew from $(8) million for the three months ended May 2, 2020 to $76 million for the three months ended May 1, 2021. For a reconciliation of net income to Adjusted EBITDA, see “Prospectus Summary—Summary Consolidated Historical Financial and Other Data.”

 

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LOGO

 

(1)

Net Sales for the Twelve Months Ended May 1, 2021 calculated as Net Sales of $325.7 million for the three months ended May 1, 2021, plus Net Sales of $973.5 million for 2020, less Net Sales of $156.5 million for the three months ended May 2, 2020.

(2)

Net Income for the Twelve Months Ended May 1, 2021 calculated as Net Income of $12.9 million for the three months ended May 1, 2021, plus Net Income of $24.5 million for 2020, less Net Income of $12.3 million for the three months ended May 2, 2020.

(3)

Adjusted EBITDA for the Twelve Months Ended May 1, 2021 calculated as Adjusted EBITDA of $75.7 million for the three months ended May 1, 2021, plus Adjusted EBITDA of $100.8 million for 2020, less Adjusted EBITDA of $(8.2) million for the three months ended May 2, 2020.

As of May 1, 2021, we had $202.0 million of outstanding indebtedness, net of unamortized original issue discount and debt financing costs, consisting of term loans under the Original Term Loan Credit Agreement. On June 14, 2021, we entered into the New Term Loan Credit Agreement and used borrowings thereunder to, among other things, repay and terminate the Original Term Loan Credit Agreement. For a description of our debt service obligations, including mandatory repayments, under the New Term Loan Credit Agreement, see “Description of Certain Indebtedness—New Term Loan Credit Agreement.”

Our Industry

We believe we are uniquely positioned to capture outsized share in the highly attractive and growing women’s plus-size apparel industry.

Large and Rapidly Growing Addressable Market Comprised of 90 Million Plus-Size U.S. Women

The market for women’s plus-size apparel and intimates is large and growing. As of December 31, 2019, more than two-thirds of all U.S. women, or 90 million, were plus-size. According to a third-party study we commissioned, the women’s plus-size apparel and intimates market was approximately $85 billion in calendar year 2019, compared to the women’s straight size market of approximately $96 billion for the same period, and is expected to grow at a 3%-5% CAGR, more than twice the rate of the overall U.S. women’s apparel and intimates market. Further, the number of women in this size range is growing fastest among women under 45 as well as women with higher incomes, according to U.S. government agencies. Based on our 3.4 million active customers as of May 1, 2021, we believe Torrid is less than 4% penetrated among U.S. plus-size women and has a significant opportunity to expand share in this growing market.

 

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Plus Size Women Are Significantly Underserved with Untapped Spend Potential

Plus-size women are underserved with apparel and accessories offerings that are characterized by poor fit, plain styling and limited selection. 69% of plus-size women report that it is difficult to find clothing as stylish and attractive as those available to non-plus-size women. For most apparel brands, plus-size is an afterthought as they do not invest time and resources to optimize fit on real plus-size models but rather simply rely upon “grading-up” existing non-plus-size offerings through extended sizing, which leads to poor, inconsistent quality and fit. Most of the existing dedicated plus-size brands target an older consumer or lack the product design and technical capabilities to deliver the fit she wants. We estimate there is currently only one dedicated women’s plus-size apparel store for every 51 women’s specialty apparel stores. As a result, there were approximately 78,000 plus-size women for each dedicated women’s plus-size apparel store, as compared to approximately 700 women for every other women’s specialty apparel store. We believe our superior fit, brand experience and our unified commerce strategy position us well to cater to this underserved market.

Due to the lack of options, the plus-size woman underspends on apparel and intimates annually compared to her non-plus-size peers and 78% of plus-size women reported that they would spend more on clothing if they had more options available in their size. We estimate this underspend to be $19 billion, implying a 22% embedded wallet growth opportunity beyond the $85 billion calendar year 2019 women’s plus-size apparel and intimates market, for a total addressable market size of $104 billion. We believe Torrid has a significant opportunity to unlock this additional, untapped spend potential and increase overall market share by better serving plus-size customers.

Significant Growth in Digital and Omni-Channel Shopping

The majority of all apparel purchases in the United States occur in stores. However, consumers have increasingly been shopping for apparel online, a behavior that has meaningfully accelerated during the pandemic. We believe this consumer behavior will continue for the next several years. According to Torrid’s estimates based on eMarketer’s Apparel & Footwear 2021 data:

 

   

U.S. online apparel sales were $125 billion in calendar year 2019 and are expected to reach $270 billion in calendar year 2024, growing at a CAGR of 17%; and

 

   

Online penetration in apparel has increased from 20% to 26% in the United States from the end of calendar year 2016 through calendar year 2019. U.S. online penetration in apparel is expected to reach 38% in 2021 and 51% in 2024.

Additionally, digital channels play an important role in consumers’ offline purchase decisions. Specifically, when asked about their shopping behaviors prior to making a purchase in a physical retail store, 39% of digital consumers visited a brand’s website, 36% read customer reviews and 33% attempted to price match the product online, according to BigCommerce’s 2018 Omnichannel Buying Report that is based on a global survey of nearly 3,000 digital consumers. We believe retailers that employ an omni-channel strategy offering both a high-quality experiential brick-and-mortar footprint and a compelling online store supported by a strong digital presence and omni-channel offerings such as curbside pickup, BOPIS and ship from store have a competitive advantage in serving potential customers. We believe our unified commerce strategy, which includes 70% of net sales from e-Commerce in 2020 and robust omni-channel functionality, positions Torrid well to succeed in this evolving environment.

Cultural Tailwinds Driving Torrid’s Market

We believe Torrid stands to benefit from thriving cultural movements involving female empowerment, body positivity and socially-influenced purchasing. Growing celebration of femininity, inclusivity and self-identity, along with the emergence of plus-size celebrities and influencers, inspires young curvy customers to demand more flattering and stylish clothing they are proud to wear. At the same time, younger generations are embracing social media platforms, including Instagram, which act as vehicles for community building and discovery. This seamless, constant exchange of community-based inspiration encourages consumers to purchase better-fitting

 

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and youthful clothing that allows for unapologetic self-expression. We believe these cultural shifts will continue to support the growth of the women’s plus-size apparel market.

The Torrid Approach

To achieve our mission of being the best direct-to-consumer plus-size apparel and intimates brand, we have created a proprietary fit that empowers our customers and drives loyalty. In turn, our loyal customers provide us with a rich set of data that allows us to improve our product and experience, thus creating a virtuous cycle that reinforces our leading position in plus-size apparel and intimates.

A FIT-ENABLED VIRTUOUS CYCLE

 

LOGO

FIT TO PERFECTION

 

   

We provide a fit she knew she wanted but never had access to;

 

   

We accomplish this by fitting every single article of clothing we produce on a real woman, tailoring for her special needs, not simply “grading up” non-plus-size apparel;

 

   

We utilize a proprietary sizing process that is constantly updated through data and our continuous customer feedback loop, until we fit to perfection; and

 

   

We deliver unparalleled technical fit combined with unapologetic attitude and style.

 

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Competitive Strengths

We attribute our continued success to the following competitive strengths:

First at Fit. Our capability to deliver the best fit for the curvy woman is unrivaled in the industry and hard to replicate. We have a maniacal focus on fit across our entire organization, which is rooted in our recognition of the importance of fit to our customer. Our team of highly skilled designers, artists and product engineers internally design and develop products that represented approximately 89% of our net sales in 2020. Unlike other brands, we do not rely on mannequins during the fit process, but rather fit all of our products on full-time plus-size fit models, our staff, and often our most loyal customers. We have developed our differentiated technical fit by building and continuously refining a database of fit specifications derived from testing, measuring and cataloging over 13,000 garments each year on our fit models. The discipline and rigor of our fit process differentiates our approach to technical design. We also utilize proprietary fabrics specifically engineered to enhance the fit for the plus-size woman. Our vertical sourcing model gives us control to deliver consistent fit, quality and cost, and allows us to incorporate customer feedback quickly and effectively. Our customers often start their Torrid journey in fit-critical categories such as denim and intimates that lead to increased loyalty and drive higher LTV over time. In intimates, we leverage our design and engineering expertise to develop highly

 

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technical bra features, such as our patent-pending back smoothing technology and recently introduced wire free bra that require significant investment and are not easy to replicate by competitors. We believe our differentiated ability to deliver consistent fit and quality combined with style and comfort represents a significant competitive advantage.

Differentiated, Leading Brand for the Plus-Size Woman. Torrid is the largest direct-to-consumer brand of women’s plus-size apparel and intimates in North America by net sales. We grew our net sales by 8% CAGR between 2017 and 2020, making us among the fastest growing direct-to-consumer brands in the plus-size apparel and intimates market. We believe many of our customers form a deep emotional connection with our brand, as their discovery of Torrid is often the first time they have felt truly understood and well-served by an apparel company. The Torrid brand represents a distinctive combination of high quality, stylish and well-fitting products combined with a brand experience that makes the plus-size woman feel confident and empowered. Our customers engage with us across multiple channels including online, in-store, through community events, surveys and on social media, with many becoming our biggest brand advocates. Our brand satisfaction is among the highest for apparel brands, as illustrated by our leading NPS of 55, nearly two times the peer average score of 30. We believe this significant brand value will facilitate sustainable net sales growth and market share gains over time.

A Deep Connection to Our Loyal and Passionate Customer. We form long-standing relationships with our customers, who are empowered by their Torrid experience and reward us with their loyalty. In 2020, 2.9 million out of our approximately 3.2 million active customers were members of our loyalty program, accounting for 95% of net sales. Members of the top two tiers of our loyalty program, Torrid VIP and Loyalist, are our most loyal customers who purchase from us more often and spend significantly more than the average customer, accounting for an outsized share of net sales. In 2020, Torrid VIP and Loyalist members accounted for 16% of active customers and 41% of net sales. On average, they purchased more than 9 times per year and spent approximately $750 during the same period. Our customers’ repeat purchasing behavior is evidenced by our strong net sales retention. In 2020, we retained 82% of net sales from the prior year’s identifiable customers, despite the challenges presented by the COVID-19 pandemic. While the net sales retention was down from 96% in 2019 due to the COVID-19 pandemic, we expect net sales retention to recover in future periods. As a result of our strong customer loyalty and net sales retention, we generate high customer LTV, which we intend to leverage to help drive future growth.

Dynamic Direct-to-Consumer Business Model. Our unified commerce platform provides our customer with an inspiring shopping experience whenever and wherever she chooses to shop with us. We market directly to consumers via our e-Commerce platform, which accounted for 70% of sales in 2020, and our physical footprint of 608 stores as of May 1, 2021. Our broad digital ecosystem—from our engaging e-Commerce website and mobile app to social media channels and our Torrid Rewards loyalty program—allows us to better connect, engage, track and service customers. This ecosystem also provides robust quantitative and qualitative customer data that we use to inform all aspects of our operations, from product development, to merchandising and marketing. E-Commerce sales represented 42% and 48% of net sales in 2018 and 2019, respectively, having grown by 28% in 2018 and 28% in 2019. In 2020, e-Commerce sales represented 70% of net sales as e-Commerce sales grew by 38% and store sales declined as a result of temporary store closures and a slowdown in store traffic associated with the global COVID-19 pandemic. For the twelve months ended May 1, 2021, e-Commerce sales represented 69% of net sales. Our stores are designed to deliver an immersive brand and fit discovery experience further supported by personal connection with store associates who act as brand ambassadors. Our stores also act as a low cost source of new customer acquisition, requiring a small upfront investment that is quickly paid back. Our e-Commerce platform and store base complement and drive traffic to one another. Once she discovers her size in store, she increasingly shops online with us as she knows she can rely on the consistency of our fit. Our consistent product fit and the unified experience between our stores and e-Commerce platform creates a powerful flywheel effect that results in low CAC, high repeat purchasing behavior and high customer LTV.

 

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Data-Driven, Low-Risk Merchandising Model. We employ a data-driven approach to design, merchandising and inventory planning and allocation to deliver high quality products that combine the fit, style and attitude that our customer wants. We have excellent visibility into our customer’s preferences through her purchase history and our outsized share of her apparel wallet. We leverage this robust customer data along with market trends to inform all purchasing decisions. Through our vertical sourcing model, we have the flexibility to respond quickly to the latest sales trends and make adjustments to our current offering based on customer feedback to deliver product our customer wants. We focus on fit, not fashion, and do not rely on being a fashion leader. We have a low-risk assortment that is anchored by our recurring, fit-focused offering of Basics and Core styles, which together represented approximately 86% of net sales in 2020. New product, which represents new or emerging styles, accounted for the remaining approximately 14% of net sales in 2020. We utilize a read-and-react testing approach with shallow initial buys and data-driven repurchasing decisions to iterate our New product offering, thus minimizing fashion and inventory risk.

Proven, Experienced Management Team and Mission-Driven Culture. We have created a company culture focused on attracting, training, retaining and developing talent that does not settle for the low expectations historically associated with the women’s plus-size apparel market. Approximately 93% of our employees identify as female. Our organization is comprised primarily of women who are also customers and align with our goal to empower curvy women to love the way they look and feel. In addition, they embody our philosophy and dedication to our product and serve as brand ambassadors on a daily basis. Our team is led by our Chief Executive Officer, Liz Muñoz, who is a direct-to-consumer brand veteran and joined the Company in January 2010 after having served as the President of Lucky Brand. Liz has a strong background in product fit and design, having spent years fitting clothing, and later leading the design and merchandising efforts at both Lucky Brand and Torrid. We employ a highly talented team of 446 corporate employees, comprised of skilled and experienced apparel and direct-to-consumer executives, combined with artists, designers, merchants, product engineers and data analysts.

Growth Strategies

We believe we have a significant opportunity to increase market share in the massive and growing plus size apparel and intimates markets. We intend to continue driving growth in our business through the following strategies:

Grow Torrid Curve

We plan to accelerate growth of Torrid Curve®, our line of bras and other intimates, activewear, loungewear and sleepwear tailored specifically to a plus-size customer, through targeted investments in marketing and product innovation. The same discipline and rigor of our fit process for apparel is applied when designing and developing our Torrid Curve products. In intimates, we leverage our design and engineering expertise to develop highly technical bra features, such as our patent-pending back smoothing technology and recently introduced wire free bra that require significant investment and are not easily replicated by competitors. Our deep connection with our customer has guided our product development pipeline so that we build products she needs and wants. For example, the idea for our back smoothing technology came from direct feedback from customers who expressed their desire for a solution to address her specific needs. We leverage this community to test our new products and perfect their development before launch. According to our estimates, the intimates market is growing at a rate of 8% which is 3 percentage points higher than the growth of the women’s plus-size apparel market, according to Statista. Our customers’ sizes are often not sold by leading intimates brands and we believe existing product options fail to combine functionality with appealing design. Intimates is a fast-growing category with significant incremental penetration opportunity both within our existing Torrid customer base and with new customers. Bras help attract customers to our brand; bras are, behind tops, the second most frequent item in a new customer’s first purchase. For 2019 and 2020, on average, customers who have bought Torrid Curve products spent 3x more than someone who did not and their retention rates were 1.5x higher. We believe Torrid Curve will be a meaningful driver of our growth in the future.

 

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Attract New Customers to Torrid

We believe there is a clear path to further increasing brand awareness and acquiring new customers through an integrated digital marketing and strategic store expansion strategy.

 

   

Increase Brand Awareness and Accelerate Customer Acquisition Across Channels. We intend to grow our brand awareness among plus-size women from approximately 31% as of April 2021, by making incremental investments in our marketing spend, which was only approximately 5.3% of net sales in 2020. We believe we can do so profitably given our high ratio of LTV to CAC. We expect to further drive brand awareness, engagement and conversion through targeted investments in performance and brand marketing, including paid search, retargeting, social media campaigns, plus-size community-based events, in-store experiences and product collaborations.

 

   

Grow With Disciplined Store Expansion. We believe the plus-size woman is dramatically underserved in her choice of apparel and intimates offerings and as a result we plan to capitalize on the opportunity to selectively grow our store footprint. Based on our proven, profitable store model, we intend to continue to capture this underpenetrated market with a disciplined roll-out of new stores that drive both in-store and e-Commerce sales. Our stores generate a high level of positive contribution and act as a low cost source of new customer acquisition, requiring a small upfront investment of capital expenditures and pre-opening expenses that is quickly paid back as a result of our customers’ high repeat purchasing behavior across channels. We target payback periods of less than two years, in line with our historical openings.

Deepen Customer Relationships to Increase Wallet Share

We intend to continue to leverage the strength of our customer relationships and data, which allowed us to attribute approximately 98% of net sales in 2020 to individual customers. This robust customer data allows us to better engage with customers, increase retention and drive spend per customer.

 

   

Expand Assortment Based on Trusted Fit. We intend to leverage data and our customer’s trust in our proprietary fit and style to enhance core entry points, such as denim and intimates, and broaden and deepen our offering in nascent categories, including activewear, workwear, special occasion and footwear.

 

   

Leverage Our Data. We plan to further deepen customer relationships with personalization, customization and clienteling across channels in ways that we are not currently doing today. Leveraging loyalty program data, we seek to tailor our marketing messages, promotions and product recommendations to her preferences, which we believe will further drive conversion online and in stores and increase our share of her wallet.

 

   

Grow Loyalty Program Engagement. As of May 1, 2021, 90% of our active customers are members of our loyalty program and we intend to continuously find new ways to engage her and bring her back to our site, such as increased personalization, dedicated loyalty member events, and opportunities for accelerated tier migration, which we believe will deepen her loyalty and continue to drive recurring purchasing behavior.

 

   

Enhance Customer Experience. We believe near-term initiatives, both online and in-store, will greatly enhance the ease of transaction and overall experience for customers. We are upgrading the functionality and features of our mobile app to deliver enhanced personalization such as size recommendations and complementary items, to expedite purchase decisions and increase order value. Further, we have accelerated our investments in and will continue to invest in omni-channel offerings such as curbside pickup, BOPIS and ship from store to drive both customer acquisition and retention.

 

   

Implement New Technology. We have continued to enhance e-Commerce functionality with tools for product recommendations, enhanced payment options (e.g., buy now pay later), and improved returns process to drive conversion and increase order value. We also believe there is opportunity to further

 

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leverage artificial intelligence and machine-learning tools to drive better customer segmentation, leading to more efficient customer acquisition and retention marketing.

Expand Operating Margins by Leveraging Completed Investments in Data and Multidisciplinary Teams

We have created a highly scalable foundation for growth through significant infrastructure investments. We will continue to strategically invest in our business while driving operational excellence and leveraging our fixed cost base to grow profitability.

 

   

Leverage Data to Improve Pricing and Promotion Strategy. In addition to our robust merchandising team, we plan to continue to leverage data across the organization in various ways, allowing us to optimize pricing and promotional activity, including personalized promotions, to drive increased purchases and higher merchandise margins.

 

   

Enhance Supply Chain Flexibility. We have developed internal processes that we refer to as our “speed model,” including pre-positioning fabrics with our third-party factory partners to accelerate product replenishment cycles, improve inventory turnover and drive higher margin sales.

 

   

Leverage Cost Base. We believe our scalable infrastructure and team will yield increasing operational leverage as our sales continue to grow relative to our cost base.

Product

Product Offering

 

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We offer a full product assortment that addresses our customers’ entire closet, including tops, bottoms, denim, dresses, intimates, shoes and accessories. We believe our products not only provide an unparalleled technical fit, but also have the style and attitude that enable our customers to dress like her non-plus-size friends. We believe we are a destination for our customers to shop for every occasion, from casual to dressy, and everything in between.

While we aim to bring her the latest in fashion trends, we do not rely on being a fashion leader. Our offering is built on the foundation of Basics (approximately 19% of net sales in 2020) that represent year-round styles and

 

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colors that are constantly replenished and are not subject to a typical markdown cadence. Our Core offering (approximately 67% of net sales in 2020) includes products that are on-trend interpretations of our basic merchandise that we update with new fabrics, prints, embellishments or features. For example, the Harper Blouse represents a Basics item with Core iterations that feature embellishments such as zippers or button-loops. Approximately 14% of our net sales in 2020 were derived from New product, our trend driven items that incorporate the latest fashions available in the broader market to excite and engage our customer but are bought narrowly and reordered as demand dictates to minimize inventory risk.

We are market leaders in bottoms and intimates, both attractive growth categories where fit is critical. These categories serve as entry point to the Torrid brand and drive customer loyalty. We believe the design of our intimates line, Torrid Curve, inspires confidence and allows our customer to move in effortless comfort throughout her day while feeling confident and sexy. Over the course of almost two decades, Torrid has developed the requisite design and engineering expertise for the highly technical bra category through a rigorous in-house research and development process. We have patent applications pending for our 360° Back Smoothing Bras and our Power Mesh Panels for Tummy-Flattening Pants, both exclusive creations for the plus-size woman. Most other brands do not offer compelling intimates for curvy women due to a lack of focus and scale in plus-size, which results in a lack of investment in the technical product capabilities required in order to execute well. Because of our focus, we have developed a number of technical features, such as a heavier gauge of wire in our bras, which are specifically engineered for the comfort of plus-size women. Consequently, we believe Torrid Curve represents an attractive opportunity to realize growth in a particularly underserved category of the women’s plus-size apparel market. We believe Torrid Curve will be a meaningful driver of our growth in the future.

 

 

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Product Design and Development

We are relentlessly focused on creating youthful, unapologetically sexy products specifically for the plus-size woman. We design, develop and merchandise almost all of our products in-house, under the Torrid® and Torrid Curve® brand names. Our products are exclusive to us, with few exceptions, and provide a consistent quality and fit that we believe she cannot find elsewhere. Our product development is led by a team of more than sixty highly skilled designers, artists and product engineers. Our core competency is our differentiated, market-leading fit that we achieve through the following strategies:

 

   

Maniacal focus on fit across our entire organization;

 

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Differentiated technical fit created through building and continuously refining a database of fit specifications derived from testing, measuring and cataloging approximately garments annually on our fit models;

 

   

Proprietary fabrics specifically engineered to enhance the fit for the plus-size woman;

 

   

Fit all of our products on full-time fit models and our staff, not mannequins; and

 

   

We test new fabrics, new silhouettes and new product lines on our community of loyal customers before launch.

Additionally, 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, and our ongoing dialogue with customers through social media and customer surveys.

Merchandise Planning

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. Unlike brands that do not focus exclusively on plus-size, we have the requisite scale to order in sufficient quantities and effectively manage a continuously refreshed plus-size inventory.

We have excellent visibility into our customers’ preferences through high participation in our robust loyalty program. We regularly use the depth and breadth of our data to assess sales, market trends and new product development to inform purchasing decisions. As a result, we have the flexibility to react quickly to product performance, make in-season inventory purchasing adjustments where possible and to respond to the latest sales trends by ordering or re-ordering as appropriate. Further, we utilize a read-and-react testing approach, with small purchase quantities, to introduce our New product offering, minimizing fashion risk. This strategy also allows us to mitigate inventory risk, particularly for new products or styles, while simultaneously providing our customers access to current fashion. Lastly, 86% of our sales in 2020 were from our Basic and Core categories, which we define as product that is either sold year round or a variation of a style sold in previous seasons. We believe this nature of our assortment enables us to more effectively predict demand for our product and better manage inventory risk.

During 2018 and 2019, we enhanced our merchandise planning and inventory management functions by building out the senior management team with a newly appointed Chief Operating Officer, a newly created position for the Chief Merchandising and Product Officer and the addition of three Merchandising Vice Presidents for each category: apparel, accessories and intimates. We have since introduced rigorous discipline around inventory performance by establishing clear guidelines on in-season product performance, item-level assortment planning and formal product hindsight reviews.

As we have executed on these strategies, we have seen substantial growth across all major product categories, as shown in the graph below, and healthy gross profit margin performance. Our disciplined planning and product lifecycle management strategies enable effective in-season inventory management to maximize inventory turn and productivity. Through these practices, we are able to limit markdowns, which we define as permanent price reductions, allowing us to maximize our gross profit margin.

 

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Net Sales for the Twelve Months Ended May 1, 2021 calculated as Net Sales of $325.7 million for the three months ended May 1, 2021, plus Net Sales of $973.5 million for 2020, less Net Sales of $156.5 million for the three months ended May 2, 2020.

Customers

We believe that our brand has broad appeal and attracts stylish women across a range of ages, ethnicities and sizes. Our typical customer is an employed, youthful woman between the ages of 25 and 40 years old with above-average annual household income (average of approximately $84,000), and wears sizes 10 to 30 (average of size 18). Approximately 58% of our customers are under 40 years old and the ethnic composition of our customer base parallels that of the U.S. population. She leads a busy life, is short on time and wants a curated presentation of quality apparel, intimates and accessories that are on trend and fit her well. This customer is significantly underserved as most plus-size apparel and accessories offerings are characterized by poor fit, plain styling and limited selection. Due to the lack of options, the plus-size woman underspends on apparel and intimates annually compared to her non-plus-size peers and 78% of plus-size women reported that they would spend more on clothing if they had more options available in their size. We estimate this underspend to be $19 billion, implying a 22% embedded wallet growth opportunity beyond the $85 billion 2019 women’s plus-size apparel and intimates market, for a total addressable market size of $104 billion. We believe Torrid has a significant opportunity to unlock this additional, untapped spend potential by better serving plus-size customers.

Torrid Loyalty and Torrid Credit Card Programs

We drive customer loyalty and engagement through our three-tier loyalty program. Members earn one point for every dollar spent and receive a reward for every 250 points collected. The program is tiered by annual customer spend and offers incremental perks with each tier. Torrid Rewards members are those who spend up to $499 annually, while members of Torrid Loyalist spend $500+ annually and Torrid VIP spend $1,000+ annually. We inspire loyalty by continuously engaging with our loyalty members through birthday gifts, social media, dedicated customer service lines and exclusive events.

Our customers are exceptionally loyal: The 2.9 million active customers in our loyalty program generated 95% of net sales in 2020.

Members of the top two tiers of our loyalty program, Torrid VIP and Loyalist, are our most loyal customers who purchase from us more often and spend significantly more than the average customer, accounting for an outsized share of net sales. In 2020, Torrid VIP and Loyalist members accounted for 16% of active customers and 41% of net sales. On average, they purchased more than 9 times per year and spent approximately $750 during the same period.

 

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Additionally, we provide our customers with access to our Torrid Credit Card Program. Torrid Credit Card holders are automatically enrolled in the Torrid Rewards program through which customers receive points, discounts and other perks. As a result, Torrid Credit Card holders are among our most loyal and valuable customers. Our credit card program encourages customer loyalty, serves a valuable source for data and allows us to further invest in marketing efforts without exposure to incremental credit risk as our bank partner substantially manages all administrative processes, including underwriting, and bears the credit balance risk.

Our loyalty and Torrid Credit Card programs provide us with a strong ability to attribute sales and behavioral data to individual customers, which informs our decision making process. By putting the customer insights into action, we are able to more effectively engage with our customer to drive both sales growth and retention.

Unified Commerce Platform

 

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Through our unified commerce platform, which includes our e-Commerce and retail stores, we deliver a seamless brand experience to our customer wherever and whenever she chooses to shop. We are agnostic to the channel where our customers choose to shop, as we are highly profitable across both e-Commerce and store channels. We deliver a consistent brand message by coordinating our strategies across channels, which we believe influences our customers’ buying decisions. This customer-centric strategy enhances customer acquisition, retention and customer lifetime value. Our e-Commerce and store channels complement and drive traffic to one another, creating more loyal omni-channel customers who spent more than 3.2 times what single channel customers spent in 2020.

e-Commerce

Our e-Commerce channel is central to our unified commerce platform and continues to grow rapidly. Our online store provides customers with a highly engaging shopping experience featuring access to our full product assortment, an aesthetically rich and easily navigable website and seamless ordering and fulfillment. Additionally, we successfully use our e-Commerce platform to expand our selection of styles, colors and merchandise meaningfully beyond what is available in our stores, making the online shopping experience highly engaging and additive to our in-store experience. Our website and mobile app feature updates on new collections, guidance on how to wear and put together outfits and a selection of web-only exclusives, all of which facilitate customer engagement and interaction.

We grew e-Commerce revenue by 28% year-over-year in 2019, to represent 48% of total net sales. In 2020, e-Commerce sales represented 70% of net sales as e-Commerce sales grew by 38% and store sales declined as a

 

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result of temporary store closures and a slowdown in store traffic associated with the global COVID-19 pandemic. For the twelve months ended May 1, 2021, e-Commerce sales represented 69% of net sales. Our growth has been multi-faceted, as we have seen gains across many of our key e-Commerce performance indicators, including traffic, orders, conversion rate and average order value. For example, during 2020, we generated, on average, 5.9 million unique visitors per month. The number of monthly unique visitors increased 12% for the final six months of 2020 compared to the final six months of 2019, reflecting the increasing appeal of our site. Our emphasis on fit contributed to an e-Commerce return rate of 9% in 2020, whereas return rates for e-Commerce purchases generally can be as high as 30%, according to Optoro’s research. In 2020, 58% of all new customers made their first purchase online.

We aim to be wherever she is and make the transaction process as convenient as possible. As a result, a majority of our e-Commerce orders and a material portion of all orders are placed directly from her phone. We are upgrading the functionality and features of our mobile app to deliver enhanced personalization such as allowing her to find her recommended size while suggesting complementary items to expedite purchase decisions and increase frequency and order size.

Stores

Our stores are highly valuable strategic assets that remain core to our strategy and continue to play an important role in our customer acquisition strategy. We have an attractive fleet of stores that is growing and generate a high level of positive contribution and provide our customers with a differentiated in-store experience that has previously not been available to her. We provide a sophisticated presentation of products that has an emphasis on outfits, which presents creative styling ideas to our customer and encourages incremental spend. Our stores include large, comfortable fitting rooms with features, such as cooling fans, that are specifically suited for our customers’ needs. Additionally, our stores offer customers the opportunity to connect with a like-minded community, through exclusive in-store events and interactions with our store associates, who act as brand ambassadors and are often customers themselves. We believe our stores enhance brand awareness, drive traffic to our e-Commerce platform and encourage a growing number of customers to shop across multiple channels of our unified commerce platform. In 2020, 42% of all new customers made their first purchase in-store.

 

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As of May 1, 2021, we operated 608 stores in 50 U.S. states, Puerto Rico and Canada. Our stores are located primarily in premium malls, shopping plazas, lifestyle centers and outlet locations, and the quality of our real estate locations is high as substantially all of our stores are located in A and B malls or off-mall locations. Our stores are designed to deliver an immersive fit discovery experience and serve as desirable customer destinations. As a result, they are less dependent on broader traffic trends and perform consistently across all formats. Our average store size is approximately 3,000 square feet and in 2019, prior to the onset of COVID-19, nearly all of

 

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our 607 locations generated positive store-level contribution, excluding any incremental contribution from purchases on our e-Commerce platform from customers of these stores. Our stores are highly productive and have attractive store economics; they require a small upfront investment and have historically produced positive store-level contribution in the first year of operations, resulting in rapid payback and highly attractive cash-on-cash returns. New stores cost approximately $212,000 to open, including net capital expenditures and pre-opening expenses and we target payback periods of less than two years.

We believe we have a significant opportunity to profitably grow our store footprint and unlock untapped spend potential from underserved plus-size women. As of 2018, we estimate there is only one dedicated women’s plus-size apparel store for every 51 women’s specialty apparel stores. As a result, there were approximately 78,000 plus-size women for each dedicated women’s apparel store, as compared to 700 women for each other women’s specialty apparel store. Based on our proven, successful store model, we intend to continue to capture this underpenetrated market with a disciplined roll-out of new stores that drive both in-store and e-Commerce sales.

We believe our real estate selection process allows us the flexibility to profitably grow our footprint while mitigating risk. We conduct regular real estate committee meetings, comprised of both operational and financial constituents, where decisions are made on new and open real estate projects, including remodels, relocations and new stores. Our committee routinely evaluates the financial return on proposed investments utilizing detailed pro forma projections on a store-level basis. We typically commit to a lease approximately four months before a store is scheduled to open, which we believe allows us to respond quickly to changing market conditions. In 2019, 46 leases were on variable rent structures which represented 8% of total leases. In 2020, we transitioned an additional 87 leases to variable rent structures. As of May 1, 2021, 22% of our total leases were on variable rent structures, providing additional flexibility to our store fleet going forward.

People and Culture

We have created a company culture focused on attracting, training and developing talent. Our work environment is open and collaborative with a flat organizational structure that facilitates efficient decision making. We believe that our rich culture of inclusion and diversity enables us to create, develop and fully leverage the strengths of our workforce to exceed customer expectations and meet our growth objectives. Approximately 93% of our employees identify as female, and many are also customers who believe in our mission to empower curvy women to love the way they look and feel. Additionally, we embrace the diversity of our employees and believe that diverse and inclusive teams at all levels across the organization strengthen our ability to serve our customers. Nearly 50% of our employees identify as minorities. In 2020, we established our Diversity & Inclusion Committee, which seeks to create a more equitable and inclusive workplace through open dialogue, training, recruiting, and retaining diverse talent.

The goal of creating a welcoming and supportive environment spans our full organization from our headquarters and distribution centers to our 608 stores. We believe that our in-store brand ambassadors are critical to our success and often represent the face of our organization to our customers. We empower our managers and in-store brand ambassadors to deliver a superior shopping experience. We provide thorough product- and fit-oriented training that aims to strengthen our brand experience in the store. We also provide our in-store brand ambassadors with sales and key performance data that help them optimize their store’s performance and foster a culture of accountability. Communications with our store personnel is a critical channel for valuable product and customer feedback. We believe we have established effective two-way lines of communication throughout our organization, including using new technologies to communicate with stores in real time and routinely synthesize store insights and customer feedback from the field to influence decision making.

As of May 1, 2021, we employed 2,047 full-time and 5,261 part-time employees. Of these employees, 446 are employed in our headquarters in City of Industry, California and 6,862 are employed in our stores and distribution centers. Our number of employees, particularly part-time employees, fluctuates depending upon

 

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seasonal needs. Our employees are not represented by a labor union and are not party to a collective bargaining agreement.

Our talent strategy is to attract, engage and retain the best and most qualified talent to create a diverse and inclusive workforce. We offer competitive compensation packages that are based on market-specific data for comparable roles and geographic locations. We believe in rewarding high performance and seek to design plans and programs to support this culture. To further support the advancement of our employees, we invest in a wide range of training and development opportunities at all levels across the organization, including through both online and instructor-led internal programs, as well as third-party programs. We regularly collect feedback from our employees to better understand and improve our learning and development offerings to meet their needs. To ensure we provide a rich and rewarding experience for our employees, we monitor culture and engagement to build on the competencies that are important for our future success. We routinely engage independent third parties to conduct cultural and employee engagement surveys. These include corporate culture assessments, real-time feedback on employee engagement, and a periodic holistic survey of employee well-being focused on physical, emotional, social and financial health.

Employee safety remains our top priority. We develop and administer company-wide policies to ensure the safety of each team member and compliance with Occupational Safety and Health Administration standards. In 2020, the COVID-19 pandemic brought unprecedented challenges to our business, our communities, and our teams. As we managed through these challenges, we prioritized the health, safety and overall well-being of our teams and customers. At each of our retail stores, our headquarters and our West Jefferson, Ohio, distribution center, we continue to follow applicable local, state, and national government regulations, laws, and recommended guidance. In response to COVID-19 we:

 

   

added work from home flexibility;

 

   

adjusted attendance policies to encourage those who are sick to stay home;

 

   

increased cleaning protocols across all locations;

 

   

initiated regular communication regarding impacts of the COVID-19 pandemic, including health and safety protocols and procedures;

 

   

established new physical distancing procedures for employees who need to be onsite;

 

   

provided additional personal protective equipment and cleaning supplies;

 

   

implemented protocols to address actual and suspected COVID-19 cases and potential exposure;

 

   

prohibited all domestic and international non-essential travel for all employees; and

 

   

required masks to be worn in all locations where allowed by local law.

An important part of our culture is our focus on giving back to the community, which we do primarily through our Torrid Foundation that we established in 2017. The mission of the Torrid Foundation is to support various nonprofit organizations dedicated to helping women and changing lives for our customers and their diverse communities. The funds utilized in these efforts are raised from customer donations, including whole-dollar sale round-ups, and a portion of proceeds from certain product collaborations like our Breast Cancer Awareness Collection. In 2020, the Torrid Foundation has raised over $1.2 million in support of partner organizations dedicated to educating and empowering women.

Data Analytics

We have a significant volume of customer and transaction data, collected from a variety of sources, including e-Commerce and in-store interactions, our loyalty program, social media and customer surveys. For example, we have the ability to track page views, search history, clicks, linger time and purchase route for

 

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visitors to our e-Commerce platform. We use our data to drive decision making across the organization. We have achieved one of the industry-leading data capture rates, driven by our high loyalty program participation, which enabled us to attribute approximately 98% of Torrid net sales to an individual customer in 2020. This customer data is based on information provided by customers who have opted-in to be part of our loyalty program. Our extensive database contains valuable customer information that helps us better market to our customers.

We have significant visibility into our customers’ transaction behavior, including purchases made across our channels. We use our customer database to acquire, develop and retain customers. We can identify customers who purchase products regardless of whether they shop on our e-Commerce platform or in-store. We are beginning to leverage this customer database to drive data analysis and insights that we use in managing our business. For example, to grow the penetration of intimates sales, we are able to offer a promotion targeted at customers who have bought our apparel but not our intimates, which encourages shopping across categories. We believe our robust use of customer data and our data insight capabilities present an opportunity for us to continue to increase spend per customer.

 

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Marketing and Advertising

We promote a message of inclusivity that empowers all women to love the way they look and feel. Our brand inspires women to feel confident, sexy and youthful like they never have before. We believe our brand messaging built around our fit resonates with the attitudes of younger generations who are frustrated with being ignored by other brands. Our marketing collateral intentionally represents the diversity of our customer base, including women of all sizes from 10 to 30, and communicates the confidence and sexiness our product is intended to deliver.

We use a variety of marketing and advertising mediums to increase brand awareness, acquire new customers, and drive repeat purchases across our channels. These programs include our online marketing, such as paid search and social media, product listing ads and retargeting, combined with direct mail, store marketing and public relations initiatives. Further, we collaborate with other leading brands, including Betsey Johnson, Disney, and Warner Brothers to create capsule collections to reach new customers and increase our brand awareness. We strengthen the connection with our most engaged customers through special events featuring plus-size models,

 

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celebrities, bloggers and other influencers. We use our customer database to strategically optimize the value of our marketing investments across our customer base and channels. This enables us to efficiently acquire new customers, effectively market to repeat customers and reactivate lapsed customers.

Our investments in digital and physical marketing drive customer acquisition and engagement across all of our channels. We coordinate the introduction of our collections across our e-Commerce platform and stores, allowing a customer to experience a consistent brand message wherever and whenever she chooses to shop. We have a large and growing following on our social media channels, including Facebook, Instagram, Pinterest and Twitter. For example, we have nearly 1 million followers on Instagram and our engagement rate is over 90% higher than our competitors, which include Lane Bryant, Eloquii, Nordstrom, Third Love and Old Navy. We calculate the engagement rate based on the average engagement (likes and comments) divided by total followers. We use these channels to communicate with our customers, disseminate our outbound marketing messages and collect feedback about their lifestyles and product preferences. We believe this direct dialog with our customers allows us to communicate with them in a way that increases their loyalty to our brand.

We have strategically increased our marketing investment to continue to propel the growth of our business. From 2018 to 2020, we have increased our marketing spend from $48.8 million to $51.4 million, representing a percentage of net sales of 5.4% and 5.3%, respectively. This investment has taken place across various marketing strategies, including online marketing and direct mail. We believe these coordinated efforts will drive increased brand awareness, leading to higher sales across our unified commerce platform.

 

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Sourcing and Production

We outsource the manufacturing of our products, which eliminates the need to own or operate manufacturing facilities. Thus, our product sourcing is not dependent on any one manufacturing facility, enabling a flexible and agile approach to sourcing. We internally design and develop the vast majority of our products, a model we describe as vertical sourcing, which gives us control to deliver consistent fit, quality and cost across our products. In 2020, approximately 89% of our products were vertically sourced. The remaining 11% of products are primarily related to certain footwear and accessories categories where we do not control the entire design process. Our focus on vertical sourcing has contributed to growing net sales and increasing gross profit margins.

We have a diversified vendor base. No single supplier accounted for more than 13% of merchandise purchased in 2020. Approximately 96% of our product receipts in 2020 were sourced internationally, primarily from Asia. We plan to continue diversifying our vendor bases by both vendor and geography. We have been able to mitigate the effects of tariffs on Chinese products and we plan to significantly reduce our exposure to vendors

 

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located within China, as evidenced by the decrease in the share of products sourced from China, from 68% in 2019 to 49% in 2020. Though we are decreasing our share of product manufactured in China, our manufacturing partners may source their own raw materials from third parties in other countries, including China. We maintain compliance guidelines for our vendors that dictate various standards including product quality, manufacturing practices, labor compliance and legal compliance. Through third parties, we periodically monitor our factories and suppliers to ensure compliance with these guidelines.

Distribution and Fulfillment

Our unified commerce business model is serviced by our main distribution facility located in West Jefferson, Ohio, with ancillary services provided by additional distribution facilities located in City of Industry, California. We acquired the operations of the fully-functional, state-of-the-art distribution center in West Jefferson, Ohio in 2018. This 750,000 square foot facility is highly automated and we believe is capable of handling our existing and future needs. Additionally, the West Jefferson facility is already equipped with omni-channel capabilities that have enabled our BOPIS rollout while continuing to drive efficient online returns and position us to execute on our unified commerce strategy. Our distribution center in City of Industry is a shared facility. The City of Industry facility will continue to provide ancillary regionalized distribution services to Torrid’s West Coast locations.

These facilities manage the transportation, receipt, storage, sorting, packing and distribution of merchandise for our e-Commerce platform and store channels. Stores are replenished at least once per week from these facilities by third-party delivery services. This frequency provides our stores a steady flow of new inventory that helps maintain product freshness and in-stock availability. We believe the investments in our distribution capabilities will provide the infrastructure needed for sustained growth across our unified commerce platform.

Information Systems

We utilize a full range of third-party management information systems to support our store, e-Commerce, merchandising, customer data, financial and real estate business teams.

We utilize these systems to provide us with various functions, including customer relationship management, point-of-sales, inventory management, merchandising support systems, financial reporting, e-Commerce solutions and other systems. We believe these management information services provide us the ability to effectively manage and grow our business.

Seasonality

While the apparel industry is generally seasonal in nature, we have not historically experienced significant seasonal fluctuations in our sales. In 2019, prior to the onset of COVID, no single quarter contributed more than 26% of Torrid net sales. We believe this is partly attributable to our broad merchandise offering that encourages purchasing across seasons. We believe our reduced seasonality is also attributable to the behavior of our customer, who is generally purchasing products for herself, not as gifts. We believe our limited sales seasonality provides structural cost advantages relative to peers, including reduced staffing cyclicality and seasonal distribution capacity needs. Further, our low seasonality means we do not need to increase marketing spend during the peak holiday season when advertising rates are highest. As we grow and our brand awareness continues to increase, we believe gift purchases may represent a driver of sales growth that could potentially lead to increased seasonality.

Competition

Although we have built the largest direct-to-consumer brand of women’s plus-size apparel and intimates in North America, and are among the fastest growing direct-to-consumer brands in the plus-size apparel and intimates market, we face competition across a variety of players within the broader apparel industry. Our

 

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competitors range from smaller, growing e-Commerce brands to considerably larger players with substantially greater financial, marketing and other resources. Further, we may face new competitors and increased competition from existing competitors as we expand into new markets and increase our presence in existing markets.

Our competition in the women’s plus-size apparel industry includes:

 

   

Plus-Size Focused Specialty Retailers. We also compete with other specialty retailers that, like Torrid, focus on plus-size customers. We believe we offer a significantly better experience primarily through our fit-first focus as well as broad and stylish product assortment that is further differentiated by our vertical sourcing capabilities. These brands have historically been focused on older consumers or have targeted specific ethnicities, while we target a younger, more stylish consumer with a wide assortment that has broad appeal. We further differentiate ourselves from these competitors based on the strength of our brand, industry-leading unified commerce business model and e-Commerce penetration, strong data capabilities, loyal customer base, customer-focused product assortment and highly experienced leadership team.

 

   

Plus-Size Focused Direct to Consumer Brands. We also compete with a handful of smaller plus-size focused direct to consumer brands. They collectively have limited market share in the women’s plus-size apparel industry. We differentiate ourselves by operating at a much larger scale, which allows us to offer a wider product assortment, better product quality and more convenience to provide a better experience and acquire customers more efficiently.

 

   

Local, National and International Retail Chains. We compete indirectly with department stores, specialty apparel players and mass merchandise retailers who also carry products in our size range and offer similar categories of merchandise to our customer segment. These retailers typically carry women’s plus-size apparel as a small percentage of their overall inventory and treat plus-size as an afterthought. They often relegate the plus-size customers to a less desirable section of the store and fail to design products that address her specific fit requirements. By maintaining a maniacal focus on fit, our proprietary product offering delivers a superior fit for the curvy woman that makes her love the way she looks and feels. Our sole focus on designing for our specific customer needs differentiate her experience when she shops with us.

We believe our competitors may have difficulty in replicating our product-oriented processes and brand equity as they lack our scale and insights into women’s plus-size apparel. Our distinct combination of first at fit design, service, product quality and value allows us to compete effectively within the women’s plus-size apparel market.

Intellectual Property

Our trademarks are important to our marketing efforts. We own or have the rights to use certain trademarks, service marks and trade names that are registered with the U.S. Patent and Trademark Office or other foreign trademark registration offices or exist under common law in the United States and other jurisdictions. Trademarks that are important in identifying and distinguishing our products and services include, but are not limited to Torrid® and Torrid Curve®. Our rights to some of these trademarks may be limited to select markets. We also own domain names, including our website, www.torrid.com. The information contained in or connected to our website is not deemed to be part of this prospectus. Further, we have patent applications pending for our innovative and most popular line of bras, the 360° Back Smoothing Bra, and for our Power Mesh Panels for Tummy-Flattening Pants.

Properties

We are headquartered in City of Industry, California. Our principal executive offices are leased under a lease agreement expiring in 2024, with options to renew thereafter. We do not own any real property.

 

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As of May 1, 2021, we operated 608 stores in 50 U.S. states, Puerto Rico and Canada. Our stores are located primarily in premium malls, strip centers, lifestyle centers or outlet locations. They perform consistently across all formats because, we believe, our stores serve as a shopping destination for our customers and are therefore less dependent on broader traffic trends. The average size of our stores is approximately 3,000 square feet. All of our stores are leased from third parties and expect new leases to have initial terms of six years based on current discussions. A majority of our store leases, including all new leases signed since 2013 include performance-based early termination provisions or “kickout” clauses. These clauses provide us the contractual flexibility to exit a store or renegotiate rent in the event a store’s performance deteriorates. Approximately 21% of current leases will have a termination or kickout within 3 years of the end of 2020, providing us with significant flexibility. The average remaining lease term was 4.5 years as of May 1, 2021 before the assumed benefit of kickout clauses. Assuming termination of each lease at the earlier of its first available kickout date or full term, the average remaining lease term was 2.1 years as of May 1, 2021. Substantially all of our store leases also include early termination provisions based on co-tenancy requirements for the shopping center. Given the positive performance trajectory of our stores, we have historically exercised these kick-out or co-tenancy termination provisions on a limited basis. In 2019, 46 leases were on variable rent structures which represented 8% of total lease. In 2020, we transitioned 87 leases to variable rent structures. As of May 1, 2021, 22% of our total leases were on variable rent structures, providing additional flexibility to our store fleet going forward. A number of our leases have built-in options to extend our tenancy for periods of up to five years.

Generally, store leases contain standard provisions concerning the payment of rent, events of default and the rights and obligations of each party. Rent due under the leases is generally comprised of annual base rent and sometimes includes a contingent rent payment based on the store’s sales in excess of a specified threshold. The leases also generally require us to pay real estate taxes, insurance and certain common area costs. We renegotiate with landlords to obtain more favorable terms as opportunities arise.

The table below sets forth the number of Torrid stores by U.S. state or Canadian province that we operated as of May 1, 2021.

 

U.S. State

   Number
of Stores
     U.S. State    Number
of Stores
     U.S. State    Number
of Stores
 

AK

     2      MD      11      PR      2  

AL

     6      ME      2      RI      2  

AR

     6      MI      20      SC      6  

AZ

     14      MN      13      SD      2  

CA

     57      MO      11      TN      15  

CO

     12      MS      5      TX      55  

CT

     6      MT      2      UT      7  

DE

     2      NC      14      VA      14  

FL

     34      ND      3      VT      1  

GA

     19      NE      3      WA      16  

HI

     3      NH      6      WI      13  

IA

     8      NJ      16      WV      5  

ID

     3      NM      5      WY      1  

IL

     24      NV      7        

IN

     18      NY      21      Canada   

KS

     4      OH      28      CAN-AB      4  

KY

     9      OK      7      CAN-BC      2  

LA

     9      OR      8      CAN-MB      1  

MA

     10      PA      20      CAN-ON      14  

 

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Legal Proceedings

From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, financial condition, operating results or cash flows. We establish reserves for specific legal matters when we determine that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable.

Regulation and Legislation

We are subject to labor and employment, tax, environmental, privacy and anti-bribery laws. We are also subject to regulations, trade laws and customs, truth-in-advertising, consumer protection and zoning and occupancy laws and ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of stores and warehouse facilities. We monitor changes in these laws and believe that we are in material compliance with applicable laws.

A substantial portion of our products are manufactured outside the United States. These products are imported and are subject to U.S. customs laws, which impose tariffs as well as import quota restrictions for textiles and apparel. Some of our imported products are eligible for duty-advantaged programs. While importation of goods from foreign countries from which we buy our products may be subject to embargo by U.S. customs authorities if shipments exceed quota limits, we closely monitor import quotas and believe we have the sourcing network to efficiently shift production to factories located in countries with available quotas. The existence of import quotas has, therefore, not had a material adverse effect on our business. For more information, see “Risk Factors—Risks Related to Our Business—Changes in laws, including employment laws and laws related to our merchandise, could make conducting our business more expensive or otherwise change the way we do business.”

Data Privacy and Security

We collect, process, store, use, and share data, some of which contains personal information. Consequently, our business is subject to a number of U.S. and international laws, regulations, and industry standards governing data privacy and security, including with respect to the collection, storage, use, transmission, sharing, and protection of personal information and other consumer data. Such laws and regulations may be inconsistent among countries or conflict with other rules.

For example, the European Union (“EU”), has adopted strict data privacy and security regulations. The General Data Protection Regulation (“GDPR”), effective May 2018, created new compliance obligations applicable to even non-EU businesses without an establishment in the EU or in the European Economic Area (“EEA”) that offer their goods or services to individuals located in the EU/EEA or observe the behavior of individuals located in the EU/EEA. Companies that fail to comply with their GDPR obligations can face material consequences including large financial penalties (including fines of up to 4% of global annual revenue of the group of undertakings for the preceding financial year or €20 million (whichever is higher) for the most serious violations), investigations, civil actions including claims for damages and cease-and-desist claims and reputational damages.

In addition, rulings from the Court of Justice of the European Union (“CJEU”) may have a great impact on how companies subject to the GDPR process EU personal data. For instance, on July 16, 2020, the CJEU invalidated the EU-U.S. Privacy Shield Framework (the “Privacy Shield”) under which personal data could be transferred from the EEA to U.S. entities who had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism and potential alternative to the Privacy Shield), it made clear that reliance on such clauses alone may not necessarily be sufficient in all circumstances.

 

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In addition, the scope of data privacy regulations worldwide continues to evolve. New, increasingly restrictive regulations are coming into force all around the world. For example, in the United States, the California Consumer Privacy Act, or CCPA, went into effect on January 1, 2020 and became enforceable by the California Attorney General on July 1, 2020, along with related regulations that came into force on August 14, 2020. In short, the CCPA: (1) provides California consumers with new rights to access and require deletion of their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is collected, used, and shared; (2) will affect several marketing activities due to the CCPA’s broad definitions of personal information and sale, and (3) provides for private actions and permits for class action which could result in businesses being subject to substantial statutory fines in cases involving thousands of impacted consumers where the business is found to have failed to implement and maintain reasonable and appropriate security procedures.

Given that CCPA enforcement began on July 1, 2020, it remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted. However, it is clear that the effects of the CCPA are significant and that they will require us to modify our data, security, and marketing practices and policies, and to incur substantial costs and expenses in an effort to comply with the CCPA and other applicable data protection laws. Further, a new California ballot initiative, the California Privacy Rights Act, or CPRA, recently passed in California. The CPRA will amend the CCPA by creating additional privacy rights for California consumers and additional obligations on businesses, which could subject us to additional compliance costs as well as potential fines, individual claims and commercial liabilities.

Additionally, our compliance with our privacy policy and our general consumer data privacy and security practices are also subject to review by the Federal Trade Commission, which may bring enforcement actions to challenge allegedly unfair and deceptive trade practices, including the violation of privacy policies and representations or material omissions therein.

Our marketing activities in the EU/EEA are subject to the Directive on privacy and electronic communications (“ePrivacy Directive”) and national implementation laws, which impose stringent rules and restrictions on electronic marketing such as consent (opt-in) requirements for certain types of direct marketing and the use of cookies and comparable tracking technologies on websites. These legal frameworks are continuously evolving and being interpreted by courts and regulators. Moreover, there currently are a number of other proposals related to data privacy and security pending before several legislative and regulatory bodies. For example, the European Union is contemplating the adoption of the Regulation on Privacy and Electronic Communications (the “e-Privacy Regulation”). While this regulation was planned to take effect simultaneously with GDPR, it is currently still being debated and discussed by the EU member states. The current draft of the e-Privacy Regulation imposes strict opt-in e-marketing rules with limited exceptions to business to business communications and significantly increases fining powers to the same levels as GDPR. Regulation of cookies and comparable tracking technologies may lead to broader restrictions on our online activities, including efforts to understand followers’ internet usage and promote ourselves to them.

 

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MANAGEMENT

Below is a list of the names and ages as of June 23, 2021 of our directors and executive officers and a brief account of the business experience of each of them.