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

Hello, everyone, and welcome — glad you could be here this morning. Thank you for taking part in the conference call for Vera Bradley. During our prepared remarks, as well as when we answer your questions, certain statements we make might qualify as forward-looking statements. These are issued under, and within the meaning of, the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995, as amended. Both known and unknown risks and uncertainties apply to such forward-looking statements, and those factors might lead actual results to differ materially from what we anticipate. For a review of the known risks and uncertainties, please see today's press release along with the company's most recent Form 10-K as filed with the SEC. Investors shouldn't presume that anything said on this call will still hold true at a future point. No obligation is undertaken by us to refresh any information covered during the call. At this point I'll hand things over to Rob Wallstrom, Vera Bradley's CEO. Rob?

Thanks, Mark. Good morning, everybody, and I appreciate you being with us on the call today. Our CFO, John Enwright, is here with me as well. Let's begin with the topic on everyone's mind: the COVID-19 pandemic. Without question, this has ranked among the most disruptive and difficult stretches in this company's history, yet our robust culture and our innovation are carrying us through it. We've made efforts to reduce the pandemic's effects on our associates, our shareholders and our other stakeholders. The safety and well-being of our associates and customers stay at the top of our priorities in each decision we take. It's going to take time before consumer confidence, customer traffic and shopping activity get back to where they stood before the pandemic. Even so, I have confidence that the steps we've taken will let us steer through this difficulty and put us in position to come out a stronger company and prosper over the long term. Adversity brings opportunity with it. This crisis is going to leave a lasting mark on consumers and reshape the way they shop. Because of our 2019 acquisition of Pura Vida, e-commerce now accounts for a bigger portion of our total company revenues, and the digital capabilities of both companies will matter even more in this new environment. We're pressing forward with innovation that will improve the consumer experience and drive us ahead — innovation across product, marketing and technology. A great many of our customers were eager to shop, even while our stores remained shut. Our Vera Bradley and Pura Vida e-commerce businesses together, which make up roughly one-third of our total company revenues on a normalized basis, performed well in the first quarter and keep surpassing last year's results as we move into the second quarter. At Vera Bradley and at Pura Vida, customers are responding to new product launches and to our marketing initiatives; and at Vera Bradley, cotton mask sales are contributing revenue as well. We're grateful to our customers for their ongoing loyalty and particularly thankful for the many associates in our distribution centers, e-commerce, customer service and other areas, who have worked tirelessly to keep our e-commerce business running smoothly throughout this time. Starting in mid-March, we started taking a number of actions to steer through the COVID-19 crisis, safeguard our financial position, maximize liquidity and get ourselves ready for a strong reopening ahead. Among the steps we took were shutting down every Vera Bradley retail site for a time starting March 19; placing roughly 80% of our staff on temporary furlough partway through the quarter; temporarily cutting base pay for the associates who remained, using a graduated scale that ran from 15% to 30%, and 75% in my case; pausing cash compensation for the Board of Directors for a period; putting a halt to our share buyback program for now; pulling $60 million against our $75 million revolving credit agreement, which had gone unused until then; doing away with our 401(k) and associate charitable donation matches on a temporary basis; keeping tight control over inventory by canceling orders, postponing receipts, or pursuing price concessions wherever we could; working actively alongside landlords to handle rent abatement payment terms, speed up store closures, and push back or scrap some planned new store openings; lowering non-payroll operating costs such as marketing and travel, among other items; and stretching out vendor payment terms; later in this call we'll go into greater detail on a number of these steps; at this point, I'd like to bring you up to date on Vision 2020 and the way COVID-19 is affecting that strategy. More than two years back, we began Vision 2020, our ambitious three-year effort to bring the Vera Bradley brand and business back to a healthy foundation and return the company to solid growth. Across fiscal 2020, we achieved enormous progress in reinforcing that foundation, expanding our Vera Bradley brand business, and speeding up growth in total company revenue and earnings through the Pura Vida acquisition. For fiscal 2021, our aim was to generate even stronger growth, yet the COVID-19 crisis has weighed heavily on that aim. Even so, in spite of the COVID-19 situation, we stay committed to our central Vision 2020 strategies of improving our brands and long-term growth via deeper customer engagement and ongoing product innovation, all while steering through the crisis. I'll now hand the call to John so he can walk through the financial results. John?

Appreciate it, Rob, and hello everyone. Just to remind you, our financials have been put together on a consolidated basis with Pura Vida folded in starting July 17, 2019 — that was the first complete day after we closed the acquisition. We did not restate the numbers from earlier periods. When I go through the current non-GAAP income statement figures for the first quarter, those leave out the impairment charges we already told you about, amortization of intangible assets, costs tied to redoing our IT systems, changes in the Pura Vida earn-out liability, and COVID-19-related charges — all of which appear in today's release. Non-GAAP EPS likewise leaves out the ASC 480 measurement adjustment that today's release describes. The non-GAAP income statement figures for last year's first quarter leave out Pura Vida transaction charges. Consolidated net revenues came to $69.3 million in the first quarter of this year, down 23.9% from a year ago. If you set aside Pura Vida, Vera Bradley net revenues were $48.1 million, which is 47.2% below the $91 million posted in last year's first quarter. For the first quarter, excluding charges, Vera Bradley Incorporated, non-GAAP consolidated net loss came to $10.2 million, or $0.31 per diluted share; in last year's first quarter, excluding charges, the company reported a non-GAAP net loss of $1.8 million, or $0.05 per diluted share. Revenues in the Vera Bradley Direct segment were $36.8 million, down 48.2% from $71.1 million in last year's first quarter. That drop came mainly from our company stores being shut temporarily because of COVID-19 for roughly half of the first quarter. E-commerce sales in the first quarter, which fall within Direct segment revenues, rose 20.5% versus last year. Vera Bradley Indirect segment revenues were $11.2 million, down 43.5% from $19.9 million in last year's first quarter. That decrease was mostly driven by fewer orders from specialty and department stores along with other key accounts, largely tied to COVID-19, and by having fewer specialty and department store accounts. Pura Vida's segment revenues came to $21.2 million in the first quarter. On a non-GAAP basis, setting aside charges for canceled purchase orders stemming from COVID-19, gross profit was $35.5 million, or 51.2% of net revenues, versus $50.5 million, or 55.5% of net revenues, in last year's first quarter. On a non-GAAP basis, setting aside the impairment charges described earlier, intangible asset amortization, information technology replatforming charges, the adjustment to the Pura Vida earn-out liability, and certain department store exit costs, consolidated SG&A expenses were $51.6 million, or 74.5% of net revenues, for the quarter. On a non-GAAP basis, setting aside Pura Vida transaction costs, consolidated SG&A expenses in last year's first quarter were $53.5 million, or 58.7% of net revenues. On a non-GAAP basis, excluding charges, the consolidated operating loss this year was $16.1 million, or 23.2% of net revenues. On a non-GAAP basis, excluding charges, the operating loss in last year's first quarter was $2.8 million, or 3.1% of net revenues. Because of the uncertainty around COVID-19, predicting how fiscal 2021 will turn out is extremely difficult. So we are now offering forward-looking guidance. Turning now to our balance sheet position. Capital spending, net, came to $2.2 million during Q1. For the full fiscal year, we anticipate capex landing somewhere in the $8 million to $10 million range, mostly tied to new factory stores along with technology and logistic improvements. Roughly 2.9 million of common stock was bought back by us in Q1. We finished the quarter with about $32.9 million still available under the $50 million authorization for share repurchases. Keep in mind that repurchases under the plan have been temporarily suspended by the Board of Directors. Cash, cash equivalent and investments stood at $85.1 million as of May 2, 2020, versus $144.2 million at the close of last year's first quarter. That decline versus the prior year comes from the $95.2 million Pura Vida purchase price and earn-out payment, offset by the $60 million we drew on our $75 million revolving credit facility during the quarter. Inventory at quarter end reached $132.9 million, including $15.9 million tied to Pura Vida. At the close of the first quarter a year ago, inventory was $90.1 million. Due to the COVID-19 situation, we have canceled roughly 30% of our fall and winter inventory orders. The good news is, a lot of our inventory isn't seasonal and doesn't carry a shelf life like fashion apparel does. As we clear inventory, we'll stay rational and prudent, just as we always aim to be. Rob?

Thanks, John. Like I mentioned before, we're still committed to strengthening the Vera Bradley and Pura Vida brands by way of innovation that boosts how consumers connect with us and moves us ahead — innovation across our products, our marketing, and our technology. I'll begin with Vera Bradley. Our goods have to stay genuine and faithful to who we are as a brand, yet innovation matters more and more when it comes to what we offer. We've built a continuous pipeline for fabric innovation so we stay relevant in the market, providing cotton refreshes along with cotton substitutes, which lets us keep the customers we have while drawing new ones to the brand. We'll keep expanding our newer lines, Performance Twill and Re-Active, and we'll introduce additional fabric innovation during the coming 12 to 24 months. We'll also keep delivering fresh styles and distinct silhouettes to the market so we can serve every aspect of how our customers live. One area we're emphasizing is hands-free, since that's growing more essential to the people who buy from us. Over the long haul, our aim remains to build dominance in our core franchise segments: youth campus, travel, and everyday. Given the conditions we're facing right now, we've accelerated our production and distribution of masks along with other personal protective equipment. I'll cover these efforts in more detail shortly. We're pressing ahead with collaborations and strategic alliances that energize and draw in both current and new customers, widen our brand reach, lift brand awareness, create media buzz, and give Vera Bradley chances to strategically test. And eventually move into new product categories. These partnerships genuinely demonstrate how strong our brand is and how broadly it appeals. We introduced our latest Disney collection on verabradley.com during March, we're still distributing our Gillette Venus collaboration through Target. And we're eager for year two of our Crocs partnership, which arrives in August. We're engaged with a number of other iconic, internationally recognized brands on exciting product collaborations down the road. Above all, we're excited about teaming with Warner Bros. Consumer Products to build a Vera Bradley, plus Harry Potter, Back to Campus and dorm line that arrives in July. This effort will draw not just our Vera Bradley fans, who also happen to be Wizarding World devotees, but also new customers to the Vera Bradley brand. Through the VB Cares umbrella, we'll keep reinforcing our community support and charitable work, pinpointing places where we can deliver real impact, especially for women and children; we aim to spark positive change and frequently ask our customers to join in through calls to action. We're doing everything we can to assist during this unprecedented time, and that includes using our facilities and global supply chain to deliver critical and demand supplies to people in need across the nation. Ours is a three pronged approach. First, our Taking Care Together program has let us reach into the worldwide supply chain we use to source and deliver the personal protective equipment that is in highest demand, and that covers millions of medical masks going to the nurses, doctors, and first responders who are looking after each of us in so many different ways; we've managed to place medical-grade surgical masks into the hands of people who struggle to keep an adequate stock of PPE — places like smaller regional medical centers, doctors' offices, retirement facilities, and businesses doing essential support work. Second, we've increased how much we distribute from the Vera Bradley Healthcare Professional Collection, which covers medical scrubs, additional wearables, and bags. All of those products can be bought at verabradley.com. Third, we transformed our Vera Bradley Fort Wayne selling facilities, and made use of our worldwide supply chain, to produce and sell hundreds of thousands of cotton face masks meant for the general public. Those masks, together with filters, can be bought at verabradley.com and in our stores. Since the CDC now advises everyone to wear cloth face coverings to help limit the spread of COVID-19, we're seeing an enormous response from customers to these products; we back the nurses who work without rest and with great courage on the COVID-19 crisis front line by giving a percentage of every cotton mask sold to the Coronavirus Response Fund, for nurses. We take pride in how our associates have committed to these efforts and carried them out. And we know that when we work together, we make a difference. Connecting people has always been what the Vera Bradley brand stands for. And the team has truly helped show that through these hard times. On our social media, we've observed growing strength in both new followers and customer engagement across the social channels. We've also observed that customers respond very positively to how much user-generated content customers and our associates have shared. Earned media was strong in the first quarter, with 1.4 billion impressions. We received very good media coverage of our new and sustainable reactive fabrication, and also of the work we're doing to bring customer face masks to the market. Our second annual collaboration with New Hope Girls for International Women's Day, plus our new partnership with Autism Speaks, did more than generate financial support — they raised awareness through tremendous media attention for two causes that are very worthy. Our mini capsule collection with Olympian Shawn Johnson East launched in May, and it included a charitable tie-in with Blessings in the Backpack. Even though we've reduced media spend, we've managed to accomplish far more with less. Our earlier investments in data-driven marketing and data science, made to build a programmatic marketing platform, helped our teams reach — respond to the uncertainty as it happened. We moved brand speed quickly out of categories like travel and beach and toward areas like hands-free, washable, and health care products. Thanks to this, we achieved notable double-digit gains in paid media effectiveness and in revenue tied to paid media, all while bringing down our total marketing expenses. Our improved Voice of the Customer initiative is delivering results. Vera Bradley received the Verint Customer Engagement Award for excellence in customer service, as well as for remarkable achievements in customer engagement metrics such as customer satisfaction and our Net Promoter Score. Now let me shift to stores and update you on our reopening schedule. As you're aware, numerous states are relaunching their economies, and we've started opening Vera Bradley stores in places where rules permit. After following direction from local governments and health authorities, and after evaluating consumer sentiment, store readiness, and whether our associates are willing and able to come back to work, we're pursuing a cautious, measured strategy for reopening our stores, making sure we've adopted the required precautions to safeguard the health and safety of our associates, customers, and communities. On March 5th, we started reopening our Vera Bradley full-line and factory stores in phases, with 18 of our 83 full-line stores and 40 of 64 factory stores open as of the end of May. We expect most of our store base to be open by the end of June. As stores reopen, the company is putting in place a number of procedures and precautions to keep customers and associates safe and secure.

We aren't basing any projections about what will happen going forward on just a small amount of sales data. That said, the 27 locations open at least 14 days as of May 5th have brought in combined revenue equal to roughly 75% of what they did a year earlier, even though they ran with fewer staff and shorter hours. That result beat our expectations. Traffic tends to be lower, yet conversion and units per transaction have risen. It's exciting to have customers back in our stores, and we think a certain amount of pent-up demand exists. As additional retailers reopen and shoppers grow more at ease buying, we think traffic and sales at Vera Bradley stores will pick up. We're currently in discussions with our landlords about our rent obligations covering the stretch when the malls were shut. A majority of landlords are willing to discuss deferrals, yet they aren't eager to grant abatement for that closed stretch. Our hope is to reach a fair resolution for both parties, covering both the stretch in question and later stretches. Throughout these talks, we haven't paid rent for the stretch when the malls were shut. We anticipate shuttering no fewer than 12 full-line stores permanently within the year, which would push our total full-line closures to 38 from the start of fiscal 2018; 5 have already closed this year; we'll add 5 or 6 new factory stores this year; 1 opened in May, 1 is set to open this month, and 3 are set to open in July; we also just opened our expanded Myrtle Beach South Carolina factory store. As you're aware, we're rolling out Project Novus, our new technology platform built to be flexible, streamlined, and efficient. Microsoft Dynamics 365 will serve as our new ERP, order management, and POS system, while Shopify Plus will become our new e-commerce platform. Completion of the project is expected by the close of this fiscal year, and it will not only simplify our IT systems but also cut ongoing expenses, create a platform for the whole enterprise, and let the company reach our future objectives over both the near and long term; we think it matters more than ever to make fast, databased, informed decisions and to further improve our customer experience. Now, let's discuss the innovation and excitement happening at Pura Vida. Now, more than ever, we feel confident about what the Pura Vida business can achieve. Each day, more customers want to take part in the easy and fun Pura Vida lifestyle. Even while the pandemic was ongoing, Pura Vida's total revenues climbed 8% versus a year ago, driven by a 35% rise in e-commerce sales. Average order values and conversion rates keep increasing year-over-year. Total revenue growth would have been even greater, except our distribution facility in Mexico was shut for several days and our El Salvador manufacturing facility was shut for several weeks because of the pandemic. Mexico's distribution center is back up and running, and just now our El Salvador production site has started operating again. When it comes to product, we keep rolling out fresh designs of the Pura Vida signature core bracelets along with style packs, and the metal, mood, and semiprecious stone charms and jewelry we recently added have stayed well-liked and carry higher price points compared to our classic string bracelets. Several key introductions made our spring launches quite a success — for example, our open heart bracelet sold out within under seven days. May marked the debut of hair accessories, which are off to a robust beginning. Personalization remains a trend that keeps drawing interest. By selecting a color combination that feels special to them, customers are able to personalize their signature core bracelets. Patches, pins, and stickers serve as simple add-ons to sales and give buyers more ways to further customize their looks. Our engravable collection arrived in January, and daily we move hundreds of engravable bracelets, necklaces, and rings. Over the coming quarters, we intend to grow this program. An important piece of the Pura Vida lifestyle and a major attraction for our cause-minding shoppers continues to be Pura Vida's signature charity bracelets. This year, we've brought out charm bracelets connected to particular charities, including save the dolphins, save the floss, save the butterflies, and save the elephants, among others. So many of these charity charm bracelets have proven popular that right now they're sold out and will be restocked shortly. Watch for additional charity charms arriving later this year. Our special charity style packs represent another well-liked expansion of the charity lineup — for instance, the clean water for all pack that benefits charity water and the breast cancer awareness pack that supports boarding for breast cancer. There's even a breast cancer awareness ring. Adding charms and style packs to our charity component lets us not only raise our price points but also boost our total donations to these wonderful causes. In this signature part of the business, we'll keep innovating and growing. On the distribution side, Pura Vida is growing as well. During the early part of the second quarter, we rolled out Candid Shopify fulfillment capabilities. We've additionally entered an agreement with Hectic Europe, recognized for its seasoned warehouse and logistics crew and established transportation network, for wholesale distribution of our products across Europe, which complements the e-commerce business and third-party fulfillment we already have there. Pura Vida fans already exist in many places worldwide, and this global expansion lets us not only serve those customers but also reach others. Because of COVID-19, we've decided to delay the opening of Pura Vida's first lab store, which had been set to open in San Diego this fall; this potential experiential location excites us, as it will let us showcase existing products, gather customer feedback on new product innovations, and provide the backdrop for Instagramable moments and influencer events. How well this spot performs is going to guide our decisions about where Pura Vida stores go next. Pura Vida also knows how to connect with its customers, and we're constantly seeking fresh methods to deepen that connection and draw more people into the Pura Vida lifestyle. Through our well-loved monthly bracelet and jewelry clubs, members receive strong value, surprises each month, exclusive items, and an ongoing link to Pura Vida. A new loyalty initiative we've rolled out is named The Shore Club. Customers earn — receive points when they follow us on Instagram and Facebook, and naturally, when they purchase products. The points they build up can be cashed in for discounts and free merchandise. We're regularly engaging with our customers via social media, and we even invite them to tell us what we ought to create next. To us, our customers are everything. That's the reason we're always eager to learn what's on their minds, whether it's thoughts on the brand, a fun concept for an upcoming product, or a new cause they feel we should get behind; in fact, several of our top-selling designs came about because of fan feedback. When it comes to marketing, Pura Vida's strength in social media engagement is clear.

We have an army of brand ambassadors—nearly 150,000 micro influencers—who actively participate in the brand and play a key role in our marketing approach. We'll keep expanding these highly effective programs, with particular emphasis on those who have the largest follower counts. These enthusiastic supporters assist us in spreading the Pura Vida movement, expressing their affection for the brand while earning rewards in the process. Among accessory brands, Pura Vida ranks as one of the most engaged, having crossed 2 million market followers on Instagram, and that figure rises every month. Pura Vida is regularly regarded as the most—as one of the most, if not the most, engaged jewelry brands on Instagram. And we're thrilled to have signed an agreement with dancer and TikTok star Charli D'Amelio to launch a Pura Vida bracelet influencer style pack this holiday season. With over 55 million followers, she is the most-followed personality on TikTok and was called the Reigning Queen of TikTok by the New York Times. Charli's target demographic fits perfect with the Pura Vida brand. Before I close, I want to take a mention—I wanted to mention that as a corporation, we are strengthening our stance as a sustainable purpose-driven company that delivers meaningful social impact and value for all stakeholders, our associates, our customers, our shareholders and our communities. Although our company has been purpose-driven throughout our history, we are enhancing that focus and increasing the visibility to our activities in this area. In the first quarter, we published our comprehensive corporate responsibility and sustainability report, which was mailed with our proxy materials and is available on our website; this report outlines our ESG accomplishments and initiatives in detail. I am so proud of how our organization has responded to this unprecedented crisis. Even while working remotely our teams have been collaborative and demonstrated focused and thoughtful decision-making innovation, tenacity and flexibility. Our extraordinary culture has allowed us to not only persevere through the prices, but has made us stronger. We look forward to fully reopening business and returning to our new normal. Operator, we will now open up the call to questions.

Good morning.

Good morning, Eric.

Hey, Eric.

I've got 2 things. First, how did people react to Re-Active? I'm aware some of those stores were open prior to the closing. And is the younger shopper you were targeting actually showing up?

Yes. The reaction overall to Re-Active has been really strong, and it shows up in a few different ways. To start, a younger consumer is genuinely responding to it. I think there are 2 reasons behind that. The first is the sustainability angle, which they're embracing quite enthusiastically. The second is the active role it plays in a certain lifestyle; on top of that, we've gotten quite a bit of press around it. Clearly, the planet and sustainability matter so much that many folks are latching onto this, since we can deliver a real impact there. And we genuinely think this is just the first of many steps in the coming years as we keep pushing our products to be more sustainable.

You've launched quite a few outlets and fewer full-price locations. Is that intentional, or does it simply come down to which sites become available and what you're able to manage?

There are a couple of reasons it's genuinely intentional. First, our outlet stores tend to sit outdoors, correct? They're in open-air shopping centers, and what we're seeing is that customers appear to be reacting well and feeling at ease in that open-air setting; so we think that matters a great deal, plus the sales volumes at our outlets run higher. That means even with reduced revenue while we're starting to reopen, they remain quite favorable for us. So our thinking was to put our efforts where customers are reacting better and where the economics work best for us; and — yet we're pushing hard to reopen our full line stores; and we're aiming to have every one of our stores reopened, we hope, by the start of July, subject to government rules and how the health situation keeps developing. Yet if all those conditions unfold as we anticipate, we'd anticipate having our stores reopened by the start of July.

Then one final item — that Harry Potter line, will it be carried in the outlets, in the full-price locations, or in some mix of the two? In what way will it be rolled out?

It will be available both in our full line doors and on verabradley.com, our website.

Understood.

That will be available at our partner locations as well, plus through our Indirect channel.