Plus-size fashion retailer, Torrid Holdings Inc (US:CURV) released its financial results for the fourth quarter and full fiscal year 2022 last Thursday. While the company reported a drop in net sales and comparable sales, CURV stock popped 21.9% in trading on Friday as the figures surpassed consensus forecasts.

CEO Lisa Harper believes that the business is on track for long-term growth, thanks to operational changes made in the past year.

One particular area worth noting is the 10% item return rate, as clothing is typcially the most returned online purchase. Recent hire Timothy Martin, Torrid’s COO and CFO, told participants on the earnings call that that is an “industry-leading return rate and speaks to the quality of our fit and assortment.”

However, Torrid’s stock has seen a steep decline, down more than 90% from its post-IPO high in 2021, as the company has encountered the same difficulties as other e-commerce and fashion enterprises. Despite Friday’s gains, the clothing retailer has been facing an uphill battle to regain investor confidence after a challenging period.

Better Valuation

One positive of the weakening share price since listing has been the growing company valuation on an EBIT-to-EV view to 0.12 currently. For comparison, the stock is currently trading on a price-to-earnings ratio of 9.5x. For Q4 of 2022, Torrid’s net sales decreased 5.5% to $301.2 million with comparable sales also declining 5.4% during the period. The decline was better than feared with analysts expecting sales would only reach $290 million. The gross profit margin fell to 31.9%, down 70 basis points year-on-year, mainly due to promotional events and higher inflationary costs.

Torrid generated adjusted EBITDA underlying profits of $16.4 million, beating consensus forecasts of around $12 million, but down from $28.4 million in the prior year.

The retailers narrowed its net loss to $3.8 million, or a loss of $0.04 per share, compared to $22.8 million, or $0.21 per share in the previous year and ahead of polled analyst forecasts for a loss of $0.07 per share.

Looking deeper into the financial performance by management. At Fintel we noticed ROIC (return on invested capital) and cash ROIC exhibiting improving trends from a low point reached in early 2022.

While the operating cash ROIC (OCROIC) is well below its 2021 values, the metric was showing stability over the back half of the year.

Store Growth

During the period, the company opened six new Torrid stores and six Curv stores, while closing two Torrid outlets. That brought the total number of stores at the end of the quarter stood at 639.

Looking ahead to fiscal 2023, Torrid expects net sales between $1.265 billion to $1.320 billion, and adjusted EBITDA between $140 million to $152 million. The company plans to invest between $40 million and $45 million in infrastructure and technology, and between 30 and 40 new stores for the year.

CEO Harper seems satisfied with the company’s achievements, particularly recent operational changes that would drive long-term growth in the business. She added that the quality of the inventory and product moving forward was impressive, and that gross margin rates were stabilizing.

Analyst Outlook

Jefferies analyst Corey Tarlowe said the Q4 results were stronger than forecasted and thinks the store rollout plans should drive earnings predictability.

The firm believes Torrid is well-positioned to benefit from the robust growth in the sector while driving share gains.

Jefferies kept the hold recommendation firm and $3 target price as they expect continued margin headwinds to continue into the next FY.

Fintel’s consensus target price of $4.91 suggests the stock could rise 69.3% over the next year.

High Short Score

Torrid is currently screening high on Fintel’s short squeeze leaderboard with a score of 90.93, at number 26 on the list and in the top 1% out of 4,850 screened securities.

The score is based on several factors including a short interest-to-float ratio of 10.78%.

Borrow fee rates have remained stable around 7.75% over the past few days but the “days to cover” for shorted stock has fallen sharply from 10.89 to 2.21.

This article originally appeared on Fintel

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