Vera Bradley, Inc. (VRA) Earnings Call Transcript & Summary

Hello, and good morning to all of you. We appreciate your presence on today's Vera Bradley earnings call. Certain remarks we make in our prepared comments and in answering your questions might be considered forward-looking statements, issued under and as defined by the safe harbor clause of the Private Securities Litigation Reform Act of 1995, in its amended form. These forward-looking statements carry both known and unknown risks and uncertainties, which could lead actual results to differ materially from what we anticipate. For a review of known risks and uncertainties, please see today's press release along with the company's latest Form 10-K submitted to the SEC. Investors shouldn't presume that anything said during this call will still be valid at a future date. We assume no duty to revise any information covered on this call. At this point, I'll hand things over to Rob Wallstrom, CEO of Vera Bradley. Rob?

Mark, thank you. Good morning, everyone. We're glad you could join today's call. Our CFO, John Enwright, is also present with me. Looking at Q4 and the full fiscal year, revenue on a consolidated basis and SG&A landed right where we told you they would, although gross margin rate fell short of our expectations. Our promotional schedule looked the same as a year ago; however, shoppers concentrated their buying around promotions and clearance events, and that squeezed gross margin for both brands. Beyond that, shipping expenses exceeded our forecast. As a result, non-GAAP diluted EPS for the fourth quarter and for the year on a consolidated basis finished below the guidance we had given. While our fourth quarter results fell short of what we had hoped for, the past year still brought meaningful strides as we worked toward creating a solid base for upcoming expansion and better returns for shareholders. Over two years back, we introduced Vision 20/20 — our bold three-year initiative aimed at bringing the Vera Bradley brand and company back to a sound footing and getting us back to consistent growth. Now that we're two years into this effort, we've achieved considerable progress, bolstering the Vera Bradley operation and bringing Pura Vida into the fold. For the year, we delivered a 39% gain in non-GAAP EPS alongside a 19% increase in revenues. During fiscal 2019, our initial objective under 20/20 involved bringing the brand and the business back to a healthy state. We cut back on clearance revenue and returned to selling at full price, achieved decreases in SG&A and cost of goods, made the most of keeping the company's existing customers, and produced cash through operations. In fiscal 2020, we kept advancing from that point by enhancing sales quality once more at our full-line stores and on verabradley.com, thanks to roughly a 3% rise in comparable full price selling across these 2 channels, building on the 20% gain achieved the year before. Having finished the second year of our 3-year journey in fiscal 2020, the dedication we showed to expanding our customer base, sales and profitability produced results. To recap, three priorities shaped our fiscal 2020: first, growth. Getting comparable sales back into positive territory was our primary goal for the year, and at Vera Bradley we delivered a 3.4% comp increase even as the handbag and accessories market remained difficult. Fresh, innovative merchandise powered that gain, with help from marketing grounded in data and an ongoing commitment to engaging customers and improving their experience. Bringing Pura Vida into the Vera Bradley Inc. portfolio played a major part in our fiscal 2020 growth. Pura Vida fits our strategy extremely well and has strengthened our standing as a distinctive lifestyle company. Second, operational excellence. Tariffs went up, but we softened the blow by quickly shifting onto new platforms and spreading out where we source from. Back in 2019, about 54% of what we made came from China, and in fiscal 2018 it was 70% — now that figure sits at roughly 25%. Midway through the year, we launched a two-year push to migrate our ERP and other mission-critical information systems to new platforms, with the goal of making both our tech backbone and how we run the business leaner, more agile, and more effective. Then there's the third piece: ownership. We kept driving home the message that what makes our culture distinctive is an ownership model — every associate has the chance to create real value through what they personally contribute and by working as a team. When we looked at our 2019 associate engagement survey, the results once again put us in the best-in-class range. The same holds true for our fiscal 2020 customer satisfaction number, which came in at 88, and our NPS figure of 76. Let me now walk through several other accomplishments from fiscal 2020 specifically. Turning to the Vera Bradley brand and our products, we continued strengthening our position in the franchise categories that matter most — youth campus, travel and every day — along with our top 10 items. We also established a pipeline of new fabric innovations designed to deepen customer engagement and move the brand forward. The first in a series of performance fabrics, Performance Twill, was introduced; it is lightweight, durable and water repellent. Our shoppers adore this line, especially those between the ages of 25 and 40, folks living in cities, and buyers with larger incomes. We launched the Re-Active collection too, which is eco-conscious and crafted from material derived from recycled plastic bags. To put a figure on it, close to 4 million bottles are going to be recycled during this year to produce the Re-Active fabric. Re-Active is generating robust engagement from customers as well as attention from the media. Silhouette innovation was another area where we made progress. The sling came out, and so did the Lay Flat collection — flexible travel items featuring zippers on 3 sides so they're simple to access. Vera Bradley's Lay Flat Duffel was selected by the Accessories Council as a winner in the Travel/Luggage category of its Design Excellence Awards. We rolled out partnerships with a number of iconic names — Starbucks, Crocs, Disney and Gillette Venus among them — to design and market limited edition product lines. People Magazine's Best New Beauty Products of 2019 Awards gave a nod to the Vera Bradley + Venus razor collaboration. We also revealed a new and exciting tie-up with Warner Bros. Consumer Products for a Vera Bradley + Harry Potter back-to-campus and dorm line, set to debut in summer of 2020. Such partnerships raise how visible our brand is with new groups of customers and build momentum for growth. Our customization program grew as well, letting shoppers create their own bag by combining patterns and solids, plus adding embroidered personalization, inside and out. Turning to Vera Bradley's distribution efforts, we're still working to streamline and reinforce the stores we operate. Six new factory outlets were launched, three of our best-performing factory stores got relocated and enlarged, and eleven full-line locations that weren't pulling their weight were shut down, which left us at the close of the fiscal year with 88 full-line stores plus 63 factory sites. Industry-leading satisfaction ratings among shoppers kept coming thanks to how we serve customers and the Voice of Customer program we'd recently rolled out. Roughly 43,000 devoted fans showed up for our yearly outlet sale, which brought in more than $6 million across the 5-day run — a clear sign of how engaged our community is. Our Online Outlet flash sales gave us a quieter way to clear inventory, and over the last two years that shift pulled over $48 million in clearance volume out of our full-line stores on vb.com. On the marketing side at Vera Bradley, we completed the internal build-out of our customer data science team, grew our business analytics group, and finished deploying the new customer data platform. The rich data we now have lets us adjust our marketing mix and tactics on the fly. Because of that, our count of new customers climbed over 10% compared with a year earlier. We focused our Digital First approach on specific digital initiatives, and that drove brand awareness higher, as overall impressions rose by over 170%, reaching beyond $5 billion across the year. We expanded brand partnerships and influencer work, which show how strong and relevant our brand is and generated a huge amount of media attention. Our influencer campaigns earned multiple industry honors. At the International Council of Shopping Center Deal Making Conference, Vera Bradley received the 2019 Outlet Retail Chain Best Marketing Program Award. Eighty-four outlet chains were up for this prestigious industry award, and Vera Bradley was among them. Through VB Cares, we bolstered our standing as an organization focused on all stakeholders and socially conscious, and we kept building up our community support and charitable initiatives—ones that matter to our customers and that create a significant impact for those in need, especially women and children.

Our work included backing New Hope Girls, running our Blessings in a Backpack initiative nationwide, and generating $2.1 million for the Vera Bradley Foundation for Breast Cancer; during fiscal 2020, we were glad to have given assistance to close to 30 separate charities. Turning to Pura Vida, that brand enjoyed an outstanding sales year, with revenue climbing beyond 50% compared to the year before. The group kept testing and rolling out fresh styles along with its signature cord bracelets and jewelry, while also bringing in new trends such as the mood ring and bracelet, the enameled daisy collection, and semi-precious stone charms plus stone hoops. Charity bracelets remained a major attraction, with Pura Vida passing $2 million in cumulative giving to charitable causes. Pura Vida's presence on social media remains powerful. It ranks among the accessory sector's most engaged brands, having crossed the 1.9 million follower threshold on Instagram, and it appears regularly among the most engaged jewelry brands on Instagram, if not at the very top. Instagram followers, Facebook likes and monthly club subscribers each increased over the course of the year. Pura Vida stayed at the industry's peak for its net promoter and customer satisfaction scores. Now, looking forward to Vision 20/20, year 3. The past year mattered greatly, bringing both wins and difficulties. Ultimately, we made our financial results better, deepened customer engagement, strengthened our culture and put a growth plan in place for what comes next. Fiscal 2021 should prove exciting yet demanding as we finish our 3-year journey. We aim to extend the gains made across the last 2 years. As an organization, we will concentrate on 2 essential areas: robust growth and sustainable health. In a few minutes I will share more about our fiscal 2021 initiatives. That said, uncertainty in the worldwide environment, especially around coronavirus and what it could mean for supply chains and revenue, makes our fiscal 2021 financial performance hard to forecast. Consequently, we are offering guidance only for the full year, and it does not account for any future effects of COVID-19; quarterly guidance will not be given until the situation becomes clearer; we do not think this will impact our long-term strategy and initiatives; at this point let me hand the call to John so he can go over the financial results and outlook.

Appreciate that, Rob, and hello everyone. Just to remind you, our financials now consolidate Pura Vida starting on July 17, 2019 — that's the first complete day after we closed the acquisition. We haven't restated any earlier periods. The non-GAAP figures for the fourth quarter and fiscal year that I'll reference below leave out the Pura Vida, IT, and other net charges we already disclosed, which are laid out in today's release. Consolidated net revenues for the fourth quarter came to $156.9 million, landing inside our guidance range of $155 million to $162 million. If you set aside Pura Vida, Vera Bradley net revenues were $121.4 million, up 2.7% from $118.2 million in last year's fourth quarter. Before net charges, Vera Bradley Inc.'s consolidated fourth quarter net income was $14.3 million, or $0.42 per diluted share — that's an increase of over 60% versus the prior year's $8.6 million, or $0.25 per share. This year's figure included $0.08 coming from Pura Vida. Like Rob mentioned, our fourth quarter came in under our guidance of $0.49 to $0.53. Vera Bradley's direct segment posted $103.6 million in fourth quarter revenues this year, a 5.7% gain over $98 million a year ago. Comparable sales for the quarter rose 2.4%. The Vera Bradley Indirect segment brought in $17.8 million in revenues, down 11.6% from $20.2 million in the fourth quarter of last year. That drop was mostly tied to fewer orders and a smaller count of department store accounts. Pura Vida segment revenues reached $35.5 million. On a non-GAAP basis, once you exclude the Pura Vida inventory step-up amortization, gross margin was $87.2 million, or 55.6% of net revenue, versus $67.1 million, or 56.8% of net revenues, in last year's fourth quarter. Pura Vida didn't affect this year's fourth quarter non-GAAP gross margin at all. Our non-GAAP gross margin came in under our guidance range of 57.5% to 57.8%, mainly because customers spent more during promotional and clearance periods, plus added shipping costs. On a non-GAAP basis, excluding net charges, consolidated SG&A expense was $67.2 million, or 42.8% of net revenues, for the quarter, compared with $55.6 million, or 47.1% of net revenues, in the fourth quarter a year ago. Those non-GAAP expenses landed inside the guidance range of $66 million to $67.5 million. Pura Vida contributed $14.3 million in SG&A expenses, not counting the intangible asset amortization I mentioned earlier. Total SG&A expenses ran above the prior year, largely because of those Pura Vida expenses. On a non-GAAP basis, excluding net charges, consolidated operating income for the fourth quarter was $20.1 million, or 12.8% of net revenues, compared with $11.7 million, or 9.9% of net revenues, in last year's fourth quarter. Consolidated net revenues for this fiscal year came to $495.2 million. Setting aside Pura Vida, Vera Bradley net revenues were $429.3 million, a 3.2% increase over $416.1 million a year ago. Excluding net charges, Vera Bradley Inc. consolidated net income for the fiscal year was $28.2 million, or $0.82 per diluted share. The results we just described contained $0.16 coming from Pura Vida; during the previous year we recorded net income of $20.8 million, equal to $0.59 for each diluted share. Revenue in the Vera Bradley Direct segment reached $347.5 million for the current fiscal year, which represents growth of 5.9% over the $328 million posted a year earlier. Over the course of the year, comparable sales rose 3.4%. At full price, selling through the company's full-line stores along with verabradley.com went up by roughly 3% across the year. For the fiscal year, the Vera Bradley Indirect segment brought in $81.8 million in revenues, down 7.1% versus $88.1 million the year before, a decline driven by fewer orders and a smaller count of department store accounts. Pura Vida segment revenues came to $65.9 million for the partial year. If you set aside inventory step-up amortization, non-GAAP gross margin for the fiscal year reached $280.1 million, which equals 56.6% of net revenues, against $238.6 million, or 57.3% of net revenues, a year earlier. Having Pura Vida in the mix helped this year's non-GAAP gross margin by about 40 basis points. That non-GAAP gross margin landed under our guidance range of 57.3% to 57.4%, the result of greater customer spending through promotional and clearance periods plus incremental shipping costs; measured on a non-GAAP basis and excluding net charges, SG&A expense came to $242.4 million, or 49% of net revenues, this year, versus $212 million, or 50.9% of net revenues, the year before; those non-GAAP expenses fell inside the guidance range of $241 million to $243 million. Pura Vida contributed $28.2 million in SG&A expenses, not counting the intangible asset amortization mentioned earlier. These Pura Vida expenses were the main reason total SG&A expenses came in above the prior year. Setting aside net charges, consolidated operating income for the current year was $38.8 million, or 7.8% of net revenues, compared with $27.1 million, or 6.5% of net revenues, a year earlier. Operating cash flow came to $20.6 million for the fiscal year. I'll now move on to the balance sheet. Net capital spending for the fiscal year was $13.3 million, matching what we had expected. In the fourth quarter, we bought back about $2.3 million of common stock. When the fiscal year closed, roughly $35.8 million was still available under our $50 million share repurchase authorization. Cash, cash equivalents and investments stood at $73.8 million at fiscal year-end, versus $156.6 million a year ago. That drop relative to the prior year is mostly tied to the Pura Vida acquisition. We still carry no outstanding debt. Inventory at fiscal year-end totaled $123.6 million, and that figure includes $17.1 million of inventory tied to Pura Vida. At the close of last fiscal year, inventory was $91.6 million. Inventory — the level came in slightly beneath our guidance range of $125 million to $135 million; let me now spend a couple of minutes walking through our outlook for fiscal 2021. As Rob mentioned, given the uncertain environment, we are giving only annual guidance rather than first quarter guidance. No impact from coronavirus is factored into our annual guidance. Every projection figure I'm about to share is non-GAAP and factors in the Pura Vida results we anticipate. Figures for the earlier period reflect Pura Vida starting from the acquisition date of July 16, 2019. Those earlier gross margin, SG&A, and diluted earnings per share figures leave out the net charges we previously disclosed. No comparable charges are baked into what we're guiding for the current year. Looking at the whole year, our net sales expectation sits between $555 million and $585 million; that figure incorporates anticipated Pura Vida revenues of $125 million to $135 million across the full year, versus $65.9 million in partial-year revenues a year ago. Last year, net revenues came to $495.2 million. Our outlook for the full year assumes the Vera Bradley Direct segment will post a net sales gain in the low to mid-single-digit range relative to the earlier period. Total comparable sales, which will take in Pura Vida direct-to-consumer results during the back half, should land somewhere between flat and a mid-single-digit rise. For the full year, we anticipate Vera Bradley Indirect net sales will decline in the mid-single-digit range. Consolidated gross margin for fiscal 2021 should come in at 56.7% to 56.9%, against 56.6% a year ago. Sourcing and operational efficiencies, along with bringing Pura Vida into the fold, will drive that improvement. SG&A expense should land somewhere between $269 million and $280 million for the year, versus $242.4 million a year ago. Within that figure, $52 million to $56 million relates to Pura Vida expenses across the full year, compared with $28.2 million of SG&A expenses in the partial year a year ago. Full year diluted EPS should fall in a range of $0.93 to $1.08. That figure includes $0.33 to $0.37 tied to Pura Vida across the full year, versus the prior year's partial Pura Vida EPS accretion of $0.16. Capital expenditures should come to somewhere between $8 million and $10 million, against $13.3 million a year ago, which mirrors investments in new factory stores plus technology and logistics enhancements. In fiscal 2021, we anticipate generating $60 million to $70 million in consolidated operating cash flow. Rob?

Thanks, John. Looking ahead to fiscal 2021, it's going to be a year full of challenges, yet also one of excitement, since we're wrapping up the third and last stage of the Vision 20/20 journey. A solid strategy is now in place, backed by a powerful innovation pipeline spanning product, marketing, and distribution. That said, certain internal and external risks exist, with COVID-19 standing out as the biggest one. Even so, our attention will stay on extending the gains achieved over the past 2 years. At both Vera Bradley and Pura Vida, the strategic priorities for fiscal 2021 are going to revolve around strong growth and lasting health. Let me begin with Vera Bradley. Ongoing product innovation, along with stronger brand and customer engagement, will fuel growth at Vera Bradley. While our offerings will stay authentic and faithful to the brand, innovation is growing increasingly essential to our product assortment. To keep marketing relevance, we've built a continuous pipeline of fabric innovation, providing cotton updates and cotton alternatives that serve both to keep current customers and to draw new ones to the brand. We'll keep expanding our newest offerings, Performance Twill and Re-Active, and over the next 12 to 24 months, we'll introduce additional fabric innovation. Beyond that, we'll keep delivering fresh styles and distinctive silhouettes to the market so we can serve every aspect of our customers' lifestyles. Our aim is to establish dominance in our key franchise areas: youth campus, travel, and every day. Brand and customer engagement covers multiple facets, among them marketing initiatives, collaborations, VB Cares, ESG, and store profitability. On the marketing side, we'll take the investments made last year in data science, business analytics, and customer data and use them as a foundation to build on. Further engagement will come from putting customer data to more sophisticated use, allowing us to refine medium spend and mix in real time; beyond that, we'll lean more on user-generated content, spark greater social media engagement, broaden our brand ambassador program, reinforce our customer journey-centered activations, enhance storytelling, and amplify our VB Cares messaging. Our customer segmentation efforts will sharpen our product development and go-to-market strategies; in addition, we'll direct funding toward expanding customer acquisition to underrepresented customer groups; and we'll keep pursuing collaborations and strategic alliances that excite and engage both existing and new customers. These efforts extend our brand reach, boost brand awareness, generate media buzz, and give Vera Bradley chances to strategically test and eventually move into new product categories. Such partnerships genuinely demonstrate the strength and broad appeal of our brand. This year, we'll embark on yet another year of high-profile product collaborations with brands such as Gillette Venus, Disney, and Crocs. We're engaged with several other iconic, internationally-known brands on exciting future product collaborations. Above all, we're thrilled about our 2020 collaboration with Warner Bros. Consumer Products to create a Vera Bradley + Harry Potter back-to-campus and dorm line, plus a Vera Bradley + Harry Potter cozy capsule for holiday gifting. This partnership is going to resonate with the people who already love Vera Bradley, and it should also bring in shoppers who are new to the brand. Through VB Cares, we're making our sustainable, purpose-driven company even stronger — one that delivers meaningful social impact and value for all stakeholders: our associates, our customers, our shareholders and our communities. Our company has been purpose-driven from the very beginning, but we're sharpening that focus and making our work in this area more visible. This spring, our comprehensive ESG report will come out alongside our proxy and go up on our website, laying out our accomplishments and initiatives in detail. We'll keep building up our community support and charitable efforts, finding places where we can make a real difference, especially for women and children. We aim to create positive change, and we frequently ask our customers to join in through calls to action. Only last week, we announced our second annual collaboration with New Hope Girls, a nonprofit that provides jobs for vulnerable women as well as refuge and education for girls in the Dominican Republic. The limited edition mini collection includes a tote, a hobo bag and a travel pouch, all designed and sewn by women — by Dominican Republic artists. As with last year, the collection debuted on March 8 to celebrate international Women's Day and drew enormous media attention. We're thrilled to keep supporting New Hope Girls and to raise awareness for their organization through this collection. In April, we'll proudly back autism speaks with a custom plush throw blanket in honor of Autism Awareness Month. We're looking forward to our third annual back-to-school partnership with Blessings in a Backpack, an organization that mobilizes communities, individuals and resources to provide food for the millions of elementary school children across America who might otherwise go hungry. And naturally, activities supporting the Vera Bradley Foundation for Breast Cancer continue all year. Our annual Vera Bradley Foundation for Breast Cancer Classic in June, the largest women's amateur golfing event in the country, typically brings in over $1 million for breast cancer research. On the store front, our focus will be on strengthening performance in our stores and especially on restoring our full-line channel to health. We're improving the profitability of our full-line store portfolio by rebalancing our existing fleet through select closures while also identifying future market opportunities. We know that improving the top and bottom line performance, the full-line channel will improve the long-term sustainability of the brand portfolio. We'll keep focusing on our highest potential stores, enhancing the customer experience and further localizing our assortments. We'll keep developing and testing new formats; we expect to close approximately 12 additional full-line stores during the year, which would bring our total full-line closings to 38 since the beginning of fiscal 2018. Over the coming year, we'll keep pushing our plants to peak performance by opening 6 additional sites and growing 1 more high-performing location in Myrtle Beach, South Carolina. We'll also keep protecting and building up our well-being through excellent operations and by strengthening the distinctive, solid culture we already have. Right now, we're in the middle of rolling out project NOVUS, our fresh tech platform, which is going to be adaptable, lean and effective. That work ought to wrap up by the close of fiscal 2021 or during the first part of fiscal 2022, and it's going to cut down on how complicated our IT systems are, lower our continuing costs, and let the company reach its goals down the road, near term and far. Simultaneously, we're working on sharpening our go-to-market discipline, looking at where we can gain efficiency and shorten the time line in calendar. We keep lowering how much we depend on China, and our output there is anticipated to fall below 20% this year. Our ownership-based model is making our culture better, since it hands each associate the structure to generate major value via their own and their team's work. On the whole, we're becoming a business that's more inventive, nimble, focused on data and centered on customers. Let's now turn to Pura Vida's strong expansion and lasting health; we're still genuinely thrilled about what lies ahead for the Pura Vida business.

This remains a brand that's expanding quickly, fueled by widening its distribution approach and bringing new products to market, alongside a customer engagement and marketing program that leads the category. Pura Vida keeps testing out and rolling out fresh designs within its trademark core bracelets and jewelry. It's also building on what worked in last year's launches, such as the mood ring and bracelet plus semi-precious stone charms and jewelry. The signature cherry bracelets from Pura Vida remain a major attraction. In the coming year, we're set to introduce charm bracelets linked to particular charities, and we think Pura Vida's cause-focused shoppers will embrace them enthusiastically. That will let us raise price points while also boosting total donations. Pura Vida is going to keep innovating and expanding within a trademark part of the business. For fiscal 2021, new product categories include engravables, which lean into the personalization trend, hair accessories, jewelry meant for the hair, and fashion bags, which are clearly distinct from Vera Bradley bags. Pura Vida is also going to launch its first lab store in San Diego before this fall arrives. That gives us a way to display current products along with fresh innovations and to gather feedback straight from customers. The location will additionally generate Instagram-worthy moments and play host to influencer events. We'll assess how the store performs to determine whether future expansion makes sense. Turning to marketing, Pura Vida's social media engagement remains robust, with a force of more than 100,000 micro influencers having been brought on board. This forms a crucial element of our approach; during fiscal 2021, we'll keep developing this highly effective influencer initiative, with particular attention to those who have the largest followings. Co-founders Griffin Thall and Paul Goodman will likewise energize their grassroots customer outreach gatherings, concentrating on their well-liked meet-up events during college tours. To guarantee lasting health, Pura Vida will concentrate on managing profit, chiefly by fine-tuning marketing spending and delivering strong gross margin results. We'll scale up the cord bracelet operation, scrutinize product pricing carefully, and roll out new categories that could yield better margins. When it comes to distribution, we'll pursue some bigger accounts along with those that will strengthen the Pura Vida brand. As Pura Vida keeps growing, our aim is to keep developing and holding onto the skilled team that will fuel continued expansion. To wrap up, I feel enormous pride in every one of our associates across the company at both brands. Their ability, collaboration, persistence, and everything they've achieved so far throughout Vision 20/20. We've brought the company back to a sound footing, resumed growth in revenue and EPS, and made our distinctive culture even stronger. There's still considerable work in front of us, but we're eager to finish our Vision 20/20 journey and carry our momentum forward. Operator, let's open the call for questions now.

Indirect and Pura Vida came in somewhat below what we'd built into our model. I'd really like to hear how those two are performing versus what you expected and what kind of visibility you have. And what took place in the quarter? On top of that, on gross margin, I'd appreciate more detail on the shipping cost side, plus the promotional reaction, and the reasoning behind it.

Sure. A few points here. First, on Pura Vida, throughout the quarter the business was incredibly robust during the Black Friday stretch — to the point that we trimmed the promotional schedule we'd originally set, and then went ahead and cut that promotion short. However, when we looked at the consumer in December and January, we ran into some inventory outages, which hurt both our availability and our sales volume in the latter portion of the quarter. Beyond that, there was simply some timing and wholesale shipment movement. All that said, we remain confident about Pura Vida's growth rate going forward. Turning to Indirect, we keep seeing pressure there, since department stores are getting increasingly strict about their inventory positions. The holiday window was shorter, so the Indirect channel faced somewhat more pressure than we'd expected. It's worth putting in the forecast that for this year, we still anticipate a modest decline in the Indirect channel. On the gross margin line, there were really two main drivers. First, we observed a great deal of customer spending very heavily concentrated around two key windows. One centered on the Black Friday period, which came in very strong for both brands. Then things were very strong around the Christmas period extending into January, with the real standout performance coming after Christmas. So customers simply gravitated toward those spending windows, which happened to be more promotional by nature. Our overall promotional schedule was quite close to last year's, but where customers opted to spend was somewhat skewed. That accounted for roughly half of the gross margin issue. The remaining half came purely from shipping costs. As those shipping costs rose, that made up the other portion of the gross margin pressure.

Sure, I’ll just mention something briefly regarding shipping expenses. Looking at the two brands, we came in slightly short on those costs; and from the Pura Vida side, since we’re somewhat newer to this business, we took our third quarter estimate and applied it to the fourth quarter, and clearly that skewed things a bit further toward the higher end. Then with Vera Bradley, ultimately, we based our estimate on the trend we’d been seeing, and the increases proved just a touch more significant than we’d anticipated; however, when we look ahead to next year, those higher amounts are already factored into what we expect for gross margin.

The coronavirus situation is one all of us are tracking hour by hour. What's your take on what you're observing from the consumer? And how might this show up, or not, in traffic patterns that are — largely beyond your control? Another worry on our minds is the consumer and a potential recession. How will your business — might it perform? And what strategies do you have that are within your control, as you consider different scenarios?

Yes. Thank you, Oliver. Yes, the coronavirus is clearly the major uncertainty for this year. Initially, when it began to emerge in China and the supply chain, the team moved very fast. Much like a year ago with the China tariffs, I believe the team performed very well in steering through the supply chain difficulties; and so far we've managed to offset the large majority of it. And ideally, as China appears to be stabilizing, the supply chain signal won't be a significant issue, though we're clearly still monitoring that, especially when it comes to logistics and logistics timing, since the shortage of supply kind of moving through the logistics supply chain is causing a bit of disruption to that flow, but we believe we can handle it. The truly major question is what will happen with U.S. consumer demand? And regarding travel, spring breaks are approaching and all the travel activity, we simply aren't certain how consumers will react. And that's why, for clarity's sake, we don't have complete visibility into the impact, but we're keeping an eye on it. We've already observed some effect on our travel businesses. When it comes to our Beach categories, which are really purely spring break oriented. We've noticed some early softness in those businesses; but we'll see as consumers make their spring break choices, will they travel, will they remain home, will they shop nearby, we don't know yet; so we are seeing some traffic, especially over the last couple of days. So there's some effect on traffic, kind of consistent with what I've seen on market — on numbers out there. But we're just monitoring this closely. If we enter, as you said, a more recessionary environment, we've had a history of our brand being able to navigate that fairly well thanks to our price point. We've been one of the brands in the past into which we've seen people trade down; so we would hope to repeat that type of performance; but obviously, it's something we're watching very closely. The team's focused on it, and we're making decisions daily based upon the information that we're given.

Regarding the outlet business and how online traffic interacts with in-store visits broadly, what do you think will occur with shopper behavior because of the coronavirus?

We do anticipate that our bricks-and-mortar locations will feel this more than our e-commerce business. That matches much of what we've picked up from the marketplace and what we're generally observing; still, we'll simply need time to determine how the consumer actually reacts. Is this only a matter of reallocation? Or will the consumer simply become more careful about spending for a brief period? We'll just have to monitor how things unfold across the coming months.

Let's begin with the Vera Bradley comp for Q4. Could you discuss traffic against AUR across your different channels? Then, along those same lines, when you look at fiscal 2020 overall, with the positive 3.4% comp at Vera Bradley, can you say how much of that came from the tactical price increases you implemented because of tariffs last year?

Of course. This is John, Mark. Looking at traffic, during the fourth quarter, traffic was basically flat in our store network. So in the end, we did see some AUR increases that powered the results. And when you consider the full year, for our total comp performance, I'd say a solid share of it resulted from our price increase. In the end, we implemented nearly a low single-digit price increase across both channels, and that probably accounted for a portion of the gain. We also observed some growth in customer count. And that was true in our overall business and online, plus we saw higher ADS in our online business.

Absolutely, when we consider what lies ahead for the coming year and examine how we expect the Vera Bradley business to perform on comps, a few significant factors come into play. First, there's the customer growth we've experienced during this year. We're seeing double-digit growth in customers this year. That leaves us with a substantially bigger customer file as we enter next year; and as we keep figuring out the most effective approach to engaging that customer, it presents an opportunity for us, along with our innovation—our innovation, particularly in product, and our innovation in marketing; and when we look toward the upcoming year, those truly are the main drivers.

That's quite useful. Perhaps I'll just piggyback on that. Looking at the larger picture for fiscal 2021 guidance. Assuming my calculations are right, it seems to suggest operating income excluding Pura Vida is slightly lower compared to the prior year. So first, is my interpretation accurate? And if so, could you help me square that projection with what you said about prioritizing robust growth, sustainable health, and the other innovative initiatives you just mentioned? Because I believe you — I mean, I realize there's significant uncertainty right now, but I think you mentioned COVID-19 isn't factored into that outlook.

Correct. COVID-19 isn't factored into the outlook. What is factored into the outlook is essentially just performance starting from February. So looking at the Vera Bradley brand alone, we don't anticipate the Vera Bradley brand's operating income being below last year's. That may not — there will likely be a low single-digit rise in operating profit, but in the end, we don't anticipate any decline.

Eric, thanks for asking that. Let me address it. Over roughly the past 6 months, we introduced Performance Twill along with react — and Re-Active. How is that shifting who shops with us, and are we widening that group?

Absolutely, Eric, that's a terrific question. With Performance Twill, what we're clearly noticing is a real bolstering of that 25- to 40-year-old shopper segment, and it's been genuinely heartening to observe somewhat greater momentum in our urban markets — a region that historically hasn't performed as well for us. Those are encouraging initial indicators. Beyond that, our partners are giving us favorable responses, and this has brought a fresh buyer through their doors. Turning to Re-Active, it's somewhat comparable, though it draws a different sort of shopper; the one who cares deeply about the environment has responded with real enthusiasm and positivity toward the Re-Active line; and over the long haul, we believe that represents a key platform, and equally a key starting point, as we shift an increasing share of our offerings toward environmentally conscious design, something that will unfold across the coming few years. We expect we'll keep drawing in not just a younger buyer who's deeply engaged with this, but we're also discovering that this younger shopper — let's say the 20-year-old — is likewise swaying her mother. So beyond appealing to a youthful, eco-minded consumer, we're seeing that the 40- to 50-year-old shopper responds quite favorably too. That gives us an advantage on both fronts.

With hands-free items such as the sling, do you notice a similar pattern — a younger shopper at first, and that then brings in older buyers?

Indeed, without a doubt. That's also showing up with the silhouette design; and the terrific thing we've discovered regarding the sling launch is that it has truly turned into an additional buy, correct? Its purpose differs. Within the line it stands out as quite distinct, and it's generating extra purchases; and moving ahead, we'll keep searching for which gaps in the assortment we aren't yet addressing until those that.

Regarding the flash sales, how have people been reacting? Does that approach make a great deal of strategic sense for you? Will you keep growing that? In terms of moving product out the door, how are we supposed to view the flash sales?

Right. Concerning the online outlet sales, our goal there is essentially just — by no stretch do we view that as a significant growth engine for us. A liquidation channel is how we view it. The primary aim of the online outlet is to keep our remaining channels purer, cleaner, and centered on full-price business; plus it lets us move inventory out more discreetly; however, looking ahead, a growth driver is not how we view it. An important liquidation channel is simply how we view it.

When you break down gross margin and merchandise margin, how would you unpack those for Q4? And what's your outlook for 2020? Then, regarding the Indirect business, which has been somewhat tougher, what's the long-term plan there?

Sure. I'll cover the margins for Q4 and for the full year next year. In the quarter, based on how our customers shop, merchandise margins came in down compared to last year, since shopping was more concentrated around promotional and clearance periods. So ultimately, merchandise margins were lower, and we also had — clearly, our shipping costs pushed that back down. So regarding the year-over-year miss and the miss versus guidance, it was essentially split about 50% from merchandise margins and 50% from shipping costs. Looking at next year, right now we aren't seeing — we don't anticipate any major shift in our promotional cadence. Of course, depending on how coronavirus develops, that might change; but as of now, we don't expect any differences there. So for our merchandise margins, we'd anticipate holding them where we saw compared to fiscal 2020.

Now, regarding Indirect. There are a few aspects to this. First, I'd say our main emphasis is on the strong partners we have, and on how we can reshape and expand our business alongside them; we're noticing this in different parts of the business. That said, partners such as Amazon have delivered significant growth for us. We recognize the need to start re-platforming Indirect and to locate partners that are in a growth mode rather than a consolidation mode, and that work is underway at this moment. Still, our view is that certainly next year, we'll keep seeing some contraction within the Indirect channel. Even so, we'll keep concentrating on new points of distribution.

Understood. Turning to the supply chain, with all the disruption that's occurred in China, where do things stand for you? I'm aware you've been working on diversification. How would you characterize the opportunities on the supply chain side for this year, and where things stand?

Sure. Looking at it through a supply chain lens, on finished goods production, our expectation is that we'll be under 20% coming from outside China. And I think it's worth reminding everybody that in the end, a meaningful share of our raw materials continues to come out of China and go into those other nations. Still, our sense is that we've likely diversified beyond China to about the extent we're going to. Over the near term, our view is that getting that under 10% isn't something we can do. I'd note that across the past 3 years, we've achieved considerable progress by leveraging our partners to shift into nations where, in the end, we enjoy a lower total FOB cost, since in a number of those places we aren't paying duty. So apart from next year, I don't anticipate any major shifts, with production within China moving from 25% to, let's say, somewhere in the high teens.

The one point I'd make is that when it comes to our supply chain, we see it as something that keeps shifting, evolving, and growing. Flexibility, in my view, ranks among our strategic assets. Our team here is quite capable, and they can move fast; last year they moved fast in response to the China tariffs, and they moved fast when we ran into those early problems tied to the coronavirus impact in China. They simply keep staying nimble, putting more money into our most important partners, while still watching the global market closely for chances to preserve that flexibility. So it absolutely counts as one of our strategic assets.

Great work handling everything and bringing the Pura Vida acquisition on board. It genuinely seems like a fantastic addition to the business. And it definitely brings diversification given what's happening with the coronavirus here. My assumption is that within your forecast, you're treating the Pura Vida portion of the business as not having — as not being hit too hard by coronavirus. Would that be accurate?

Correct; we absolutely think Pura Vida faces less exposure to coronavirus's effects than the Vera Bradley brand does, no question.