Over the past six months, Torrid has been a great trade, beating the S&P 500 by 30.2%. Its stock price has climbed to $1.57, representing a healthy 37.3% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Torrid, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Torrid Will Underperform?
We’re glad investors have benefited from the price increase, but we’re cautious about Torrid. Here are three reasons why CURV doesn’t excite us and a stock we’d rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales for a retailer’s e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Torrid’s demand has been shrinking over the last two years as its same-store sales have averaged 5.7% annual declines.
2. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Torrid’s margin dropped by 7.9 percentage points over the last year. This decrease warrants extra caution because Torrid failed to grow its same-store sales. Its cash profitability could decay further if it tries to reignite growth by opening new stores.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Torrid burned through $21.87 million of cash over the last year, and its $405.5 million of debt exceeds the $20.44 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Torrid’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Torrid until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Torrid doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 7.7× forward EV-to-EBITDA (or $1.57 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in – you can find more timely opportunities elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
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