On Thursday, Morgan Stanley adjusted its stance on Torrid Holdings Inc (NYSE:CURV) stock, shifting the rating from Equalweight to Underweight. The firm maintains a price target of $5.00 on the shares, indicating a potential downside of approximately 40% from the stock's current level.
The downgrade was prompted by a forecast for the company's 2024 adjusted EBITDA that falls short of both the company's guidance and the consensus estimates. Morgan Stanley projects an adjusted EBITDA of $106 million, which is below the company's guidance range of $109 to $116 million and the Street's expectation of $115 million.
The conservative estimate is driven by a more cautious sales forecast, which anticipates a 3% year-over-year decrease compared to the company's guidance of a 2% to flat year-over-year change and the Street's forecast of a 1% decline.
Despite the downgrade, Morgan Stanley does anticipate a positive adjustment for Torrid's second-quarter 2024 adjusted EBITDA, estimating it to be $36 million versus the company's guidance of $30 to $34 million and the Street's expectation of $32 million. This adjustment is based on encouraging sales data.
Moving forward, Morgan Stanley has revised its medium-term forecast for Torrid. The firm has lowered its top-line growth expectations for the years 2025 to 2027 to an annual rate of 2% from the previous 5%.
This adjustment leads to a more moderate projection for selling, general, and administrative (SG&A) leverage. However, the firm has slightly increased its gross margin (GM) assumption to an average of approximately 38% from 2025 to 2028, aligning with levels seen in 2019.
This recalibration of expectations results in a medium-term adjusted EBITDA that is roughly 15% below previous estimates and 6% below the consensus on average. The valuation of Torrid is based on a 7x enterprise value to EBITDA (EV/EBITDA) multiple, which is one multiple above the average for mall-based specialty retail but three multiples below current levels, and one multiple higher than Morgan Stanley's prior assumption.
In other recent news, Torrid Holdings Inc. has reported strong Q1 financial results, with an adjusted EBITDA of $38 million, surpassing expectations due to robust gross margin expansion and disciplined expense management. Despite a decrease in net sales, the company saw a significant increase in gross profit and net income.
Torrid Holdings is planning to expand, with projections for fiscal 2024 net sales to range between $1.135 billion and $1.155 billion and adjusted EBITDA between $109 million and $116 million.
In addition to the financial results, Torrid announced strategic changes in its executive leadership team. Hyon Park has been promoted to Chief Operating Officer, Ashlee Wheeler to Chief Planning Officer, while Mark Mizicko retired as Chief Commercial Officer. The company also plans to open 15 to 20 new stores, expecting capital expenditure to be between $20 million and $25 million.
These developments are part of Torrid's strategy to drive sales growth and maintain robust margins. The company is focusing on product innovation, customer experience, and strategic investments.
However, the company anticipates a double-digit decline in sales by the end of the year, primarily due to lower clearance sales. Despite this, Torrid is optimistic about the positive customer response to its product innovations and store activations.
InvestingPro Insights
As Morgan Stanley revises its outlook for Torrid Holdings Inc, current data from InvestingPro provides additional context for investors considering the firm's analysis. With a market capitalization of $897.41 million, Torrid is trading at a high earnings multiple, with a P/E ratio of 78.64 as of the last twelve months leading up to Q1 2025. This valuation metric indicates that investors are paying a premium for the company's earnings relative to its current market price.
InvestingPro Tips highlight the stock's volatility and its impressive return over the last year, with a 227.0% price total return, which may capture the attention of growth-focused investors. Additionally, analysts predict the company will be profitable this year, which is reflected in the positive earnings per share (EPS) of $0.12 for the same period. However, potential investors should be aware of the financial challenges posed by the fact that the company's short-term obligations exceed its liquid assets.
For investors seeking more in-depth analysis and additional InvestingPro Tips, there are 9 more tips available which could provide further insights into Torrid's financial health and future prospects. To explore these and benefit from an exclusive offer, use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription at InvestingPro.
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