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

Hello, and thanks to all of you for being here on Vera Bradley's earnings call. During the remarks we've prepared, and in answering your questions, certain things we say might be forward-looking statements, made under and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Both known and unknown risks and uncertainties apply to those forward-looking statements, and actual results could differ materially from what we expect. For a discussion of known risks and uncertainties, please see today's press release along with the company's most recently filed Form 10-K filed with the SEC. Investors shouldn't assume statements made on the call will still be operative at a later time. No obligation is undertaken by us to update any information discussed on today's call. Now I'll hand the call over to Rob Wallstrom, Vera Bradley's CEO. Rob?

Thanks, Mark. Hello, everybody, and I appreciate you being with us on this call. Joining me is John Enwright, our CFO; our first quarter results make us happy. We beat what we had expected for revenue and earnings — consumer confidence, traffic and spending all rose as vaccines reached more people, government stimulus money went out, and customers started going back to work, social events and travel. Even with our stores completely open again, e-commerce kept up its strength. We saw strong revenue on both a 1-year and 2-year basis. Consolidated net revenues for the first quarter rose 57% compared with the prior year. Looking at 2 years, Pura Vida's revenues climbed over 40% against the first quarter of fiscal 2020, while Vera Bradley comp sales came in flat versus fiscal 2020 first quarter results. Keep in mind that Pura Vida's first quarter revenue from fiscal 2020 was not included in our consolidated revenue during that period. We brought down promotional levels, lifted our consolidated gross margin rate and kept a prudent grip on expenses. Our balance sheet is still strong, with plenty of cash and no debt. Fiscal 2022 has begun well as we move into the next phase of our company's growth journey. Both of our lifestyle brands, Vera Bradley and Pura Vida, have opportunities ahead that reach far past their core product categories, powered by a focus on Digital First, innovation and customer engagement. Before handing the call to John for the financial results, I want to call attention to the appointment of Nancy Twine, Founder and CEO of Briogeo Hair Care, to the Vera Bradley, Inc. Board of Directors. In 2014, Nancy left her role as VP at Goldman Sachs to formally launch Briogeo, a diverse line of carefully made clean hair care products. These days, Briogeo is sold in more than 3,000 prestige beauty stores worldwide, ranks among the fastest-growing hair care brands at Sephora and stands as one of the largest independent Black-owned prestige beauty brands in the U.S. With Nancy's appointment, together with last year's appointments of Kristina Cashman and Carrie Tharp, women now make up 60% of our Board. We belong to the elite 6% of public companies on the Russell 3000 Index that have a gender-balanced Board, and we are also one of only a few public companies whose board has a female majority. Nancy's entrepreneurial and retail experience and insight, together with their strong financial expertise, millennial perspective and diverse background, will bring in — will be invaluable as we keep executing our enterprise's vision of growing into a purpose-driven, multi-lifestyle-brand, high-growth company. We look forward to Nancy's contributions and counsel. John?

Rob, thanks — and good morning, everyone. I'd like to walk through several first-quarter highlights. Everything I mention in terms of figures today is non-GAAP. For the full list of detailed items that get excluded from those non-GAAP figures I'm about to cover, plus a complete reconciliation between GAAP and non-GAAP figures, please take a look at the press release we issued today. Consolidated net revenues came to $109.1 million in this year's first quarter, which is 57.5% higher than the $69.3 million posted in last year's first quarter. Those prior-year revenues took a negative hit from COVID-19. Leaving out certain charges, and on a non-GAAP basis, our consolidated net loss for the first quarter came to $1.7 million, or $0.05 per diluted share, versus a net loss of $10.2 million, or $0.31 per diluted share, a year ago. In this year's first quarter, revenues for the Vera Bradley Direct segment reached $66.7 million, up 81.2% from $36.8 million a year earlier. Because our stores stood temporarily closed for roughly half of last year's first quarter, a comparable store sales figure tied to that prior year isn't meaningful. To get a cleaner apples-to-apples read, comparable sales came in flat against the first quarter of fiscal 2020. Revenues for the Vera Bradley Indirect segment reached $15.3 million, up 35.9% from $11.2 million in last year's first quarter. Pura Vida's segment revenues reached $27.1 million, up 27.7% from $21.2 million in last year's first quarter. Consolidated gross profit for the first quarter reached $59.2 million, or 54.2% of net revenues, versus $35.5 million, or 51.2% of net revenues, a year ago on a non-GAAP basis. That year-over-year gain came from a shift in channel mix along with more full-price selling. On a non-GAAP basis, consolidated SG&A expense reached $60.1 million, or 55.1% of net revenues, this quarter, versus $51.6 million, or 74.5% of net revenues, for the first — for last year's first quarter. Last year's SG&A expenses and leverage were materially affected by COVID-19; on a non-GAAP basis, our first quarter consolidated operating loss came to $1.2 million, or 1.1% of net revenues, versus $16.1 million, or 23.2% of net revenues, a year ago. Now let me turn to our outlook for the fiscal year. Given how we performed in the first quarter, we are raising our revenue and EPS estimates for the full year above the guidance we gave in March. All forward-looking guidance figures are non-GAAP. For the rest of the year, we're up against a mix of tailwinds and headwinds; on the positive side, we expect store traffic and revenue to grow, especially during the second half of fiscal 2022, as we anticipate continued improvement in our important Back to School and travel businesses. Customers are showing a degree of pent-up demand. On the negative side, we have industry-wide port congestion that's causing product delivery delays, substantial increases in inbound and outbound freight costs, and a tightening of the labor market. Also, we brought in significant revenue from masks during fiscal 2021, and as we anticipated, that won't happen again in fiscal 2022. For instance, although no guidance is being given for the second quarter, cotton masks accounted for more than 10% of Vera Bradley brand revenues and contributed almost 300 basis points to consolidated gross margin in the second quarter of fiscal 2021. Looking at fiscal 2022, our expectation is that consolidated net revenues will come in at $555 million to $575 million, versus $468.3 million in fiscal 2021. On a year-over-year basis, Pura Vida revenues should rise 20% to 30%, while Vera Bradley revenues should increase 15% to 20%. Free cash flow of $50 million to $55 million, up from $15 million a year ago. Consolidated gross margin of 56% to 57%, compared with 57% in fiscal 2021. The possible rate decrease is tied to less mask penetration this year along with higher freight expense costs. Consolidated SG&A expense of $265 million to $275 million, versus $233 million a year ago. That anticipated rise is mainly attributable to Vera Bradley stores being open for the entire year, noncomparable compensation and CARES Act savings in fiscal 2021, and general variable increases tied to greater sales expectations. Consolidated operating income of $46 million to $53 million, compared with $34 million in fiscal 2021. Consolidated diluted EPS of $0.85 to $1. Diluted EPS came to $0.63 a year ago. Net capital spending of roughly $8 million to $10 million, versus $5.7 million in the prior year, reflecting new factory locations plus technology and logistics enhancements. Now let me move on to the balance sheet. Cash, cash equivalents and investments at quarter end came to $52.7 million, versus $85.1 million at the close of last year's first quarter, which included $60 million drawn on our $75 million ABL credit facility. That has since been repaid, so no borrowings remain on the facility. Total quarter end inventory was $150.3 million, versus $132.9 million at the close of the first quarter last year. Quarter end inventory came in above the prior year, mainly because of an additional — because of additional Pura Vida inventory tied to category expansions and product intensifications. We anticipate year-over-year inventory should be down roughly 5% by fiscal year-end. Rob?

Appreciate that, John. Just to recap, when it comes to fiscal 2022, there are 4 main growth catalysts for our business. First, advancing our Digital First strategy by changing how our products reach people digitally and by continuing to sharpen and leverage digital experiences in serving our customers. Underpinning that effort is ongoing improvement of our technology plus the creation of business process and technology platforms that boost agility, database decision-making, customer centricity and speed to market. Second, strengthening our pipeline for product innovation along with collaborations and category expansions so we can bring in new customers and grow share of wallet among those we already have. Third, cultivating our community via marketing and by building an impactful positive brand movement that doesn't just change lives but also deepens the brand loyalty our customers feel. And fourth, developing our distribution channels with an eye on future growth opportunities while responding to the dramatically shifting retail landscape and consumer marketplace. Let me begin with Pura Vida. We've gotten off to a solid start there, with total Pura Vida first quarter revenues climbing 28% versus last year and 44% versus fiscal 2020. We're anticipating a robust summer and back-to-school season in this year. To fuel Pura Vida's growth, we keep broadening our lifestyle offerings and reinforcing our infrastructure. Right now we're in the middle of the project Novus ERP integration at Pura Vida, with completion slated for this fall. Once that happens, the whole enterprise will sit on a single unifying technology platform, enabling better capabilities in sourcing, customer service, CRM and data analytics, along with other areas; we've additionally bolstered key merchandising, inventory planning and customer analytic functions at Pura Vida. On the product side, Pura Vida keeps innovating quickly. New designs and elements go into our jewelry collections constantly, and we've diversified far past our core traditional spring bracelets; these days roughly 50% of our e-commerce business consists of non-string jewelry categories, which truly highlights the broad lifestyle appeal of our brand. What further highlights that appeal is our capacity to move into non-jewelry categories. Back in April, we rolled out the Pura Vida apparel collection of shirts and hoodies, an ideal extension of the Pura Vida lifestyle. Even though we began with a limited collection, we see this as a major revenue opportunity ahead. Several sizes sold out fast. Every product carries Fairtrade certification and key styles have cause related tie-ins, much like our well-liked charity bracelet program. Only last month, we brought out our fun affordable backpack collection. You may remember that Pura Vida and Vera Bradley had teamed up before on a special backpack, and it sold out within just a few hours. So we're confident there's substantial interest in a backpack with a Pura Vida twist. Apparel and backpacks don't just appeal to our current customers — they're also drawing new customers to the Pura Vida brand. In only a couple of months, we'll start announcing some exciting product collaborations and licensing partnerships. Stay tuned. When it comes to marketing, Pura Vida has shown real skill at drawing customers in, fostering loyalty, and bringing new fans into the Pura Vida way of life. Our team never stops searching for fresh, imaginative ways to connect with shoppers, attract new buyers to our brand, create marketing that reaches a wider audience, and get more out of every paid ad dollar. Turning to distribution, our aim for Pura Vida this year is robust expansion in e-commerce and wholesale, especially now that our supply chain infrastructure has been reinforced. With the world settling back into a more typical rhythm, wholesale revenue for our first quarter came in at double what it was a year earlier and rose to roughly 50% of what we saw in fiscal 2020. New wholesale partners keep joining us, and within retailers we already work with, our footprint has grown considerably through bigger in-store presentations. Beyond that, we're seeing enormous gains in core product categories among our wholesale accounts. We're eager to cut the ribbon on our inaugural Pura Vida lab store at Westfield UTC Mall in San Diego by August. That location will give us a venue to display current items alongside fresh product innovations, gather incredibly useful customer input, and play host to influencer events. We'll assess how the store performs to determine whether future expansion makes sense. Meanwhile, we'll keep hunting for more shop-in-shop chances to display the complete range of Pura Vida products inside Vera Bradley stores. This spring, our Vera Bradley plus Pura Vida Charity Bracelet program launched successfully across every Vera Bradley full-line store, and so far the outcomes have made us quite happy. As a result, growth in our core products, combined with fresh product categories and a wider distribution footprint, should deliver substantial top and bottom line growth for Pura Vida this year. Let's now turn our attention to Vera Bradley. We've got a packed schedule of thrilling product debuts and marketing efforts lined up for the year. As John mentioned, we're particularly eager to see our campus and travel business segments keep bouncing back. Studies show that close to 3/4 of Americans intend to take a trip this summer by themselves. On the product side, we've accelerated our innovation pipeline so we can keep creating new fabric options and keep expanding our sustainable fabrics platform. That pipeline matters not just for growing share of wallet among the customers we already have, but also for bringing new shoppers to Vera Bradley. Our latest pledge begins right at our foundation. Only last month, we teamed up with actor and fashion influencer Lana Condor to introduce our new recycled cotton collection. Thoughtfully made from 50% recycled and 50% conventional cotton, and offered in solid colors for the very first time, this collection leaves a lighter footprint on the planet while keeping the same gentle feel and dependable real-world performance as our iconic cotton, which our customers have adored for close to 40 years. Our COTTON ReIMAGINED collection is light in weight and machine washable, and it also introduces several entirely new utility silhouettes, adding functionality to the outside of the bags with plenty of pockets and convenient clips. Our utility assortment features a limited edition Lana Utility Backpack, which comes with unique personalized touches that Lana created, and you can get it right now on our website and in our retail locations. Through the use of recycled cotton, we're providing previously used materials with a second life while consuming fewer natural resources; specifically, we project that incorporating recycled cotton will better our water scarcity impact by 43% and lower our global warming impact by 13%; additionally, we keep expanding our well-liked ReActive line, which is produced from recycled water bottles. We are always conducting research and developing new ideas to provide our shoppers with additional environmentally friendly choices, and we've made a commitment to converting 100% of our fabrics to more sustainable options by 2025. Furthermore, during the previous month, we introduced a reuse initiative alongside thredUP, providing cleanout kits both in our retail locations and on our website to assist customers in giving a second life to their old Vera Bradley favorites along with other premium pre-owned goods from numerous brands in their closets. Those customers who took part in this initiative will receive gift cards they can use to buy new Vera Bradley styles. Changing topics. Our partnerships and strategic alliances continue to be a crucial component of our approach. During this quarter, we maintained our prominent product collaborations with fresh releases from Harry Potter, Crocs and Disney.

Also, earlier this week we revealed an exciting new partnership with Classic Accessories for an outdoor line that includes furniture covers, seats and lounge cushions, accent pillows, umbrellas, rugs and more. Besides being offered on verabradley.com, classicaccessories.com and at select Vera Bradley locations, this line may also be bought online via top retailers like Wayfair, Amazon, Lowe's and Home Depot. Such partnerships energize and draw in both current and new customers, lift brand awareness, create tremendous media buzz and give Vera Bradley chances to strategically try out and eventually move into new product categories. Outside partners keep coming to us regarding possible new collaborations, which shows how strong and broadly appealing our brand is. When it comes to marketing, we keep capitalizing on and adding to the investments made over the past couple of years in data science, business analytics and customer data. Strong media placements keep raising brand awareness, with year-over-year media impressions climbing more than 200%, driven by our collaborations in VB Cares efforts. As anticipated, our customer count has risen sharply compared with last year, and our customer journey centered activations and customer-level personalized messaging are significantly helping reactivate labs customers throughout our full line and factory stores. We are generating greater engagement on social media. Specifically, we are making use of more user-generated content, have grown our influencer program, keep improving our storytelling and have broadened social selling. We have overhauled our brand ambassador program, modeling it on Pura Vida's highly successful one. We take pride that all our marketing efforts, including our ambassador program, reflect our dedication to diversity and inclusion; we keep amplifying our VB Cares mission. We recently launched our pride collection honoring pride month, with a charity component benefiting Free Mom Hugs. And as always, during this back-to-school season, we will again back Blessings in a Backpack and their commitment regarding childhood hunger throughout America. On the distribution side, across the last 18 months, we have made Digital the top priority as the main revenue growth driver for Vera Bradley, undertaking major strategic shifts and investments to transform us into a digital-first company. We are letting her shop seamlessly. We will keep growing the capabilities launched by Project Novus, further driving revenue growth by expanding the digital channels and improving the customer experience across every channel through customer analytics. Even though our digital business now makes up a bigger share of our revenues, stores remain a key supporting element of our omnichannel strategy. An increasing number of customers feel at ease shopping in stores. There is some pent-up demand for our in-person interaction, and many are looking for shared experiences. We remain focused on improving and reinventing the customer experience in our full-line stores. Digital sales tend to be stronger in markets where we have a retail presence, and the average omnichannel customer spends over 3x more than the single-channel customer. We keep working to boost the profitability of our full-line fleet. Our approach centers on the stores with the greatest potential, refining and tailoring our assortments by location, and streamlining the current portfolio via chosen shutdowns. So far this year, 2 full-line stores have been closed, and we anticipate shutting up to 8 additional ones during this fiscal year. That will raise our cumulative full-line closures to 49 from the start of fiscal 2018. In the coming year, we'll keep maximizing factory performance by opening 6 new sites and updating 3 locations that perform strongly. Over at Vera Bradley, growth will keep being driven by product innovation and collaborations, focused marketing, and improved distribution. Operator, please begin the question-and-answer portion of the call.

This is Sarah Goldberg, filling in for Mark. There seem to be plenty of exciting efforts in motion here, and clearly the year has gotten off to a solid start. Turning to the revenue outlook, could you expand a bit on how you view the shape of the year ahead? Also, the first quarter landed comfortably above what was expected, and we're simply attempting to place that in context against how large the guidance raise is.

Yes. Thank you, Sarah. The — so when you consider revenue for the rest of the year, it should track pretty closely with our past averages, if you think about how the summer months balance out and then the winter months, matching what we've delivered previously. That said, we believe there's an opening, as I mentioned, when it comes to our back-to-school period, which roughly straddles Q2 and Q3. We suspect there could be some accumulated demand in that window, and likewise with the travel season, we see an opportunity there. I think we have — looking toward the holiday period, we believe, in the end, there may be some upside there as people head back out and shop in stores; so...

Great; and then, second, you brought up — you've discussed possibilities for M&A. And I was simply hoping you might provide an update regarding how the acquisition pipeline appears at present.

Certainly. When it comes to truly specific discussions about M&A, clearly, we don't offer too much detail, but we are actively out in the market speaking with folks and examining various opportunities, yet we want to be sure that we are extremely prudent and genuinely locate the right one as time goes on. So that is likely the finest update I can provide you at this moment.

Congrats on a strong beginning to the year. During the prior year, Pura Vida encountered certain manufacturing problems, along with other matters. What's the status of that at present? And with Pura Vida, do you now possess the adaptability to push harder regarding a number of the items, specifically when it comes to production flows?

Yeah. So in the prior year — so at this moment, correct, I mean, at this moment, no manufacturing problems tied to the Pura Vida business exist for us. So in the prior year, it truly hit our second — and carried into our third quarter. So we now have the adaptability that allows us to move forward. We've located alternative suppliers for the string bracelet production that we — should the need arise, we can turn to those alternative suppliers. So this year, we're certainly in a superior position compared to where we stood in the prior year.

Great. And when it comes to the Vera Bradley stores, you introduced ReActive last year. This year, you're bringing out the recycled cotton. The strategy appears to be aimed a bit — at a slightly younger shopper, and clearly, Back to School ties into that too. How do you view it — are you noticing younger customers coming to Vera for a broader assortment? And is that the group being drawn in by the environmentally friendly items?

Absolutely. As we've continued shifting toward sustainability, we've certainly observed a younger shopper being drawn in by that, plus all the other things we do via VB Cares. We've noticed our core customers getting older, in the sense that the fastest-growing segment — the one we're really going after — falls in that 25- to 35-year range, which marks a big shift from before. And I believe it truly highlights how, between all the collaborations, the sustainability, the fresh marketing approach centered on social media advertising, influencers, all of it has made us more relevant with that millennial group.

Let me fit in one final question here. Regarding our Performance Twill — what observations do you have? Might there be any consideration of adjusting the timing and expanding that launch beyond what you currently do?

When it comes to Performance Twill, on the whole, it has certainly served as a strong, steady performer for us; it's absolutely among the lines we expect to expand in upcoming years; and we genuinely believe it suits a distinct aspect of our customers' lifestyle, correct? It offers them a chance to wear Vera Bradley in fresh contexts, right? It's somewhat more polished. It's somewhat more formal compared to our typical offering. So we're receiving plenty of positive feedback from individuals able to incorporate that more into their workplace, more for evenings out; and I believe it opens our brand up to a new customer. Thus we feel genuine potential exists in that area.

Regarding what you said about traffic and store traffic, what are you observing in full-price and malls compared with outlet? And how do you expect that to develop compared with 2019? Do you think there will be a fair amount of volatility as it keeps getting better over time?

Yes; so traffic remains down more significantly in, sort of, mall traffic than outlet traffic; and we do expect volatility this year. Our hope is that as we, sort of — as vaccines keep being administered as people go out and feel more at ease going out to malls, we would hope to see, sort of, an improvement in, sort of, the factory traffic first and then in the end, sort of, the mall traffic.

All right. Regarding what you said about congestion at ports and the labor market, which parts can you actually manage, and what kinds of risk could arise when you're planning inventory in a setting that shifts this much?

Sure. The piece we can actually manage comes down to examining, more or less, the launches we have coming up and deciding what might need to move by air freight rather than going by ship. As you're aware, like plenty of other retailers, in the end, the ports are seeing a great deal of congestion. Container shortages are widespread too. So we're reviewing upcoming launches and figuring out the right amount to bring in by air versus the right amount to simply let come by ship and work through it on that basis.

One more point, Oliver — the sole item I wanted to add is that beyond handling things as well as we possibly can, we have genuinely attempted to examine the entire design cycle, from beginning to end, along with the timing of when orders get submitted. What has partly occurred is our belief that port congestion will not last merely a couple of months. It appears it will remain with us for some time. So we are genuinely attempting to examine the full supply chain, starting at design and continuing all the way through, and to grant ourselves somewhat additional room, since in these conditions matters will simply require more time and prove less dependable.

Rob, when it comes to the subject of pricing and inflation, that's a huge driver for the industry and sector at the moment. In the Vera Bradley brand, how do you expect your pricing power and/or average unit retails to develop, whether that's through mix or like-for-like?

Yes. That's certainly a matter we're assessing and examining, because we want to proceed carefully, since we believe our pricing positioning is significant. So there could be a bit of room when it comes to pricing, though we want to be certain we aren't increasing prices too quickly. Still, we're absolutely monitoring the environment. At Pura Vida, I think we're likewise examining the pricing landscape and what possibilities could exist within that part of the business. But we are certainly keeping an eye on these inflationary pressures, no question.

All right. Regarding the digital road map, you shared numerous excellent innovation factors. Which would you characterize as the easiest wins and/or which will affect financial modeling the most heavily on the priority list?