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

Hello, everyone, and thanks for being here this morning. We appreciate your participation on today's 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 they could cause actual results to differ materially from what we expect. For a discussion of known risks and uncertainties, please see today's press release and the company's most recent Form 10-K filed with the SEC. Investors shouldn't assume that anything said during the call will still be operative at a later time. We have no obligation to update any information discussed on today's call. Now I'll hand the call over to Vera Bradley's CEO, Rob Wallstrom. Rob?

Thanks, Mark. Morning, everyone, and I appreciate you being with us on the call today. John Enwright, who serves as our CFO, is here alongside me as well. When the year started, our goal was to build further on two powerful brand franchises—Vera Bradley and Pura Vida—and to push revenue and earnings higher via four key strategies: carrying out our digital-first approach, strengthening the pipeline for product innovation, deepening engagement with our communities through marketing, and continuing to develop our distribution channels. Over the course of the year, we made progress on those fronts across both brands, produced robust cash flow, achieved a consolidated revenue gain of more than 15% versus the prior year, and basically got back to revenue levels seen before the pandemic. For Vera Bradley, it was a strong year of revenue growth, with total sales up more than 18% year over year, as customers responded to our product innovation and collaborations backed by targeted, data-driven marketing. Our customer base expanded compared with the prior year, and our demographics skew younger and more diverse. Pura Vida total sales rose a little more than 6% for the year. We recorded double-digit growth in Pura Vida wholesale revenues and our first successful retail store opening during fiscal 2022. That said, the major change in social and digital media effectiveness stemming from the Apple IDFA update, which hit D2C companies, meant e-commerce sales came in below expectations; beyond the Apple IDFA update, we encountered a string of other unprecedented macro problems, such as dramatic supply chain delays and higher freight costs, the delayed renewal of GSP tariff relief, and substantial increases in digital advertising costs—all of which significantly hurt profitability during the year. Taken together, the incremental freight costs and GSP impact reduced our EPS by roughly $0.25 for the full year. Without those two items, we would have placed the company in line with our original guidance of $0.80-$0.90. Although our earnings results came in under our expectations, a great deal of what hurt our earnings, especially the supply chain challenges and GSP, tied back to those two issues. During the fourth quarter, we started rolling out strategic price increases across both brands to offset some of these inflationary and supply chain pressures, and we are continuing to implement price increases throughout 2022. Looking back, we should have raised prices sooner. The price increases ought to more than offset continued rising freight costs, producing year-over-year gross margin improvement in fiscal 2023. GSP, or Generalized System of Preferences, is more specific to the Vera Bradley brand. The lower gross margin rate across the year reflected higher tariffs from formerly duty-free countries where we source products whose GSP or duty-free status lapsed at the beginning of 2021. We had expected Congress to pass the GSP legislation early in 2021, but they are still working on the legislation as we head into 2022. Historically, Congress has retroactively restored the duty-free status of such tariffs back to the beginning of the year. While industry and government sources still expect it to be retroactive, we are not certain when or if this will happen. We keep a tight rein on costs, and we closed out the fiscal year with a sturdy balance sheet: more than $88 million in cash and zero debt. Despite the macroeconomic hurdles of the past year, we produced $34 million in free cash flow, a touch above our 10-year average, and gave back $7.7 million to shareholders via stock buybacks. We stay well positioned to keep investing in our two lifestyle brands, seize further growth opportunities as they arise, and return capital to shareholders through ongoing share repurchases or potential dividends down the road. Our company stayed focused on the long term and notched important strategic wins while steering through the sharply climbing inflationary climate. Our remarkable culture has enabled us not just to endure these difficulties, but it has strengthened us and matters even more amid this tight labor market. Only last month, we felt deeply honored to be ranked number one on the Forbes list of America's Best Midsize Employers for 2022. Our culture ranks among our main competitive edges. As I mentioned for fiscal 2022, we concentrated intently on four strategies to bolster our brands and push the business ahead. First, we keep advancing our digital-first strategy; we carried out strategic organizational changes and investments to shift us into a digital-first company, transforming into a customer-centric, data-driven, technology-enabled and digitally focused enterprise, which lets us connect effectively with our customers and deliver a seamless shopping experience. More than 1/3 of our consolidated revenues now come from e-commerce sales, and if you set aside our factory stores, over 1/2 of our total company sales are driven by e-commerce. Second, we strengthened our product innovation pipeline, collaborations and category extensions further; we keep developing our Vera Bradley and Pura Vida lifestyle brands to draw in new customers and boost share of wallet among existing ones. Third, we keep growing our community via marketing. Both brands are working to engage, diversify and expand their customer bases through analytics, targeted marketing and ESG efforts. We regularly sit at the top of the industry for our net promoter and customer satisfaction scores for both brands. Fourth, we advanced our distribution channels further. We are constantly seeking fresh ways to reach our customers and to reimagine the shopping experience in the ever-shifting retail landscape. The future of both brands will be a potent blend of digital and brick-and-mortar. At both of our brands, we achieved a great deal over the year. A fuller list appears in this morning's release, but let me touch on just a few. During the past year at Vera Bradley, we kept pursuing prominent product partnerships, teaming up with a number of legendary names such as Disney, Harry Potter and Peanuts. We sped up our strong fabric innovation efforts and introduced the Cotton ReImagined line, grew our apparel offering, kept working to reinforce and streamline our network of stores, and kept widening the ways customers can shop with us — that included the debut of our Canadian website and the addition of distribution through chewy.com. We also kept working to engage, diversify and grow our customer base by means of analytics, targeted marketing and VB Cares initiatives. Compared with the prior year, our customer count rose by almost 15%, which has basically returned us to where we stood before the pandemic, and our social media following keeps expanding, with Facebook now at close to 2 million, Instagram nearing 600,000, and TikTok on the rise. Over at Pura Vida, we secured a number of prominent product partnerships, among them Hello Kitty, Disney and Harry Potter, which drew new shoppers to our brand. We keep bolstering our standing as a lifestyle brand by moving into additional product categories, apparel among them. Our debut jewelry line, created with Outer Banks actor and influencer Madison Bailey, appeals to a customer who is more diverse. In August we opened our first brick-and-mortar location, situated at Westfield UTC Mall in San Diego, and it is delivering well beyond what we expected; through Nordstrom as a department store distributor, we brought in more than 400 new wholesale partnerships. Inside 23 full-line Vera Bradley stores, we introduced Pura Vida shop-in-shops, and we finished integrating Pura Vida's ERP, meaning the whole enterprise now runs on one shared technology platform. We likewise deepened our dedication to operating as a purpose- and ESG-driven organization. Pura Vida finished its B Corp impact assessment and, only last month, received its B Corporation certification. We stepped up Project Quilt, our company-wide diversity and inclusion push, to keep improving diversity, equality and inclusion, with attention on 3 central areas: the associate experience, the customer experience and the community experience. Our board of directors became stronger and more diverse with the arrival of Nancy Twine, founder and CEO of Briogeo Hair Care, which lifted female representation on our board to 60% and makes us part of just 8% of Russell 3000 Index companies whose boards are gender-balanced. Through the VB Cares umbrella and our Pura Vida charity bracelet program, we keep reinforcing our community support and charitable work. I'll now hand the call to John so he can walk through the financial results. John?

Thanks, Rob, and good morning. I'd like to walk through several highlights from the fiscal year. All of the figures I'm about to share are non-GAAP. If you want the full breakdown of what's excluded from those non-GAAP figures, along with a reconciliation between GAAP and non-GAAP, that's available in today's press release. For the year, consolidated net revenues came to $540.5 million, up 15.4% from $468.3 million a year earlier. Consolidated net income reached $19.7 million, or $0.57 per diluted share, versus $21.4 million, or $0.63 per diluted share, in the previous year. Turning to Vera Bradley direct segment revenues, those were $354.9 million for the current fiscal year, which represents a 22.7% rise from $289.3 million last year. Vera Bradley indirect segment revenues for the fiscal year came in at $66 million, basically unchanged from $66.5 million a year ago. Pura Vida segment revenues reached $119.6 million, up 6.3% from $112.5 million the prior year, mostly driven by a recovery in wholesale account orders following the prior year's negative COVID-19 impact, partly offset by lower e-commerce revenues. Gross profit for the current fiscal year was $287.9 million, or 53.3% of net revenues, versus $266.8 million, or 57% of net revenues. Last year, we substantially expanded gross margin by roughly 200 basis points thanks to cotton mask sales, something that didn't repeat this year. This year's margin took a hit of about 145 basis points from higher freight costs and about 70 basis points from the GSP issue. SG&A expense for the fiscal year was $258.8 million, or 47.9% of net revenues, in the current year, compared with $233 million, or 49.7% of net revenues, last year. As we expected, expenses this year came in above last year, largely because of COVID-19-related cost cuts last year that no longer apply. We achieved expense leverage year over year on the strength of higher revenues. Operating income for the fiscal year was $30.1 million, or 5.6% of net revenues, this year, versus $34 million, or 7.3% of net revenues, last year. Let's now move to the balance sheet. Net capital spending for the fiscal year was $5.5 million, compared with $5.7 million last year. Cash and cash equivalents at year-end were $88.4 million, versus $65.5 million at the end of the prior year. We carried no borrowings on our $75 million ABL credit facility at year-end. Total inventory for the fiscal year was $149.2 million, compared with $141.4 million at the close of last fiscal year. In the fourth quarter, we bought back roughly $5.6 million of our common stock at an average price of $8.63, which brought our year-to-date purchases to $7.7 million. In 2021, our board approved a new $50 million share repurchase authorization expiring in December 2024; we expect to buy back the full $50 million well ahead of that expiration date. Across the past 7 years, we bought back just under $115 million worth of company shares — that works out to 9.3 million shares. Let's turn now to how we see fiscal 2023 shaping up. Our fiscal 2023 estimates rest on where trends and expectations stand today, and they factor in some industry and economic headwinds, including ongoing rises in freight and digital marketing. Every piece of forward-looking guidance I'm about to give is non-GAAP. Here's what we expect for fiscal 2023: Consolidated net revenues between $555 million and $575 million. In fiscal 2022, net revenues came to $540.5 million. On a year-over-year basis, Vera Bradley revenues should rise somewhere in the low- to mid-single-digit range, while Pura Vida revenues should be flat to up by low single digits. Free cash flow of $35 million to $45 million, versus $34.4 million a year earlier. Consolidated gross margin of 54.5%-55%, versus 53.3% last year. That year-over-year gain stems mainly from retail price increases, partly offset by incremental inbound and outbound freight costs. Gross margin guidance includes no GSP benefit. Consolidated SG&A expense of $273 million-$281 million, versus $258.8 million a year earlier. The anticipated SG&A increase stems mainly from inflationary increases in payroll and marketing, plus general variable expense increases tied to higher sales expectation. Consolidated operating income of $29.5 million-$35.5 million, versus $30.1 million in fiscal 2022. Consolidated diluted EPS of $0.57-$0.67, on diluted weighted average shares outstanding of 33.3 million. Diluted EPS came to $0.57 last year. Net capital spending of roughly $10 million-$12 million, versus $5.5 million a year earlier, reflecting investments tied to new Vera Bradley factory stores, new Pura Vida stores, and technology and logistics enhancements. Rob?

Thanks, John. When we think about fiscal 2023 and the years ahead, four main strategies stay at the center of what we do: pushing forward with digital first, strengthening the pipeline for product innovation, growing our community via marketing, and developing our distribution channels. Executing on those strategies lets us keep making both of our core brands stronger, while also delivering steady growth in revenue and earnings and continuing to produce significant cash flow — money we can put back into the business, chase growth opportunities with, and return to shareholders. Now, about our two brands. We'll start with news on Vera Bradley. That brand posted solid comp growth in the fourth quarter compared with fiscal 2021, and it has now seen four quarters of solid sales growth even with supply chain disruptions. During fiscal 2023, we'll keep leaning into what's working across product, marketing, and distribution, while also continuing to innovate in all three areas so we can grow our customer base and market share. Looking ahead, our expectation is that Vera Bradley will be a low to mid-single digit growth brand that produces most of the company's yearly cash flow. On the product side, we remain focused on extending our dominance in three core franchise areas: everyday, travel, and youth and campus. Our steady stream of customer-centric product and fabric innovation is getting a response from customers. Innovation never stops here as we work to offer more eco-friendly choices, with a goal of converting 100% of our fabrics to more sustainable alternatives by 2025; we plan to deliver another exciting year of product collaborations, including some new ones added this year, alongside continued fan favorites such as Harry Potter, Disney, Peanuts, and Crocs. Our price increases will keep being implemented through the first half of this year, which will lift AURs and offset gross margin pressure tied to freight. On top of that, should GSP legislation ultimately pass, that would give gross margin an incremental benefit. Now to marketing. The money we've put into customer data science and business analytics keeps putting us in a good position, letting us gather and study data, react to shifts in customer behavior, and modify marketing spend in real time and in an agile way; we stay focused on finding fresh ways to engage our customers creatively, build brand awareness, and bring new customers to our brand cost-effectively. That is getting harder and more expensive for both of our brands. Ever since the company acquired Pura Vida in 2019, Pura Vida has passed along its digital know-how to Vera Bradley and assisted Vera Bradley in improving its digital effectiveness. Vera Bradley’s marketing approach is going to stay a mix of digital plus older-style channels such as direct mail, email, high-quality media placements, PR, and targeted TV advertising; going forward, Pura Vida can now tap into Vera Bradley’s traditional marketing strengths to help rebuild its marketing mix; when it comes to distribution, our long-term priority has been digital as the main engine of revenue growth for Vera Bradley, and we’ve made big strategic changes and investments to shift us into a digital-first business. We’re making it possible for her to shop smoothly and we want her to shop wherever and however she chooses. Stores remain a core piece of this omni-channel approach. In markets where we have a retail footprint, digital sales tend to be stronger, and the typical omni-channel customer spends more than 3 times what a single-channel customer does. We’re still working to boost the profitability of our full-line fleet by concentrating on our stores with the greatest potential and by rationalizing the portfolio we already have through chosen closures when appropriate, and that continues to be a changing process; we also anticipate opening 5 new factory stores during this year; when it comes to wholesale, we’ll keep growing our digital marketplaces such as Amazon, serving customers wherever they’re shopping; let’s move on to Pura Vida now. As I said earlier, at Pura Vida we delivered double-digit wholesale revenue growth and a successful retail store opening in fiscal 2022. Marketing difficulties led to weaker e-commerce performance, which made total Pura Vida sales rise only 6%. We’re directing resources toward fixing that problem in fiscal 2023; for the coming year, we expect Pura Vida’s normalized revenue growth to land in the low- to mid-single-digit range. On the product side, raising AURs, innovation, and collaborations will keep playing a major role in Pura Vida’s growth over the long term. We keep adding new designs and elements to our jewelry lines, and we’ll keep expanding our apparel offering of hoodies and tees by launching bottoms later in this year. We’re creating a lifestyle brand. As I mentioned, we started raising prices on Pura Vida products during the fourth quarter, which ought to lift AURs and more than offset the margin pressure from ongoing freight increases in fiscal 2023. Let’s turn to marketing now. Fixing our marketing problems is a top priority for the company. We’re currently bolstering our in-house marketing and data analytics talent and platform at Pura Vida, similar to what we did 3 years ago at Vera Bradley. Our teams keep working hard to dig further into customer analytics and to create a more varied and balanced marketing program by expanding our SMS subscriber base, bringing on a new email marketing agency, and shifting some of our marketing resources to additional platforms such as TikTok, podcast, and YouTube; we recognize that gaining traction on those other platforms will take time. With digital marketing getting pricier, Vera Bradley can assist Pura Vida in tapping into more conventional avenues such as direct mail and email while they keep broadening their promotional efforts. Beyond these promotional adjustments, our attention will go toward launching new locations to deepen connections with current shoppers and draw in fresh buyers for the brand. Thanks to our San Diego location, we're able to highlight the Pura Vida way of life through a comprehensive selection of current items alongside fresh product developments, particularly as we move into additional categories such as apparel. That location keeps surpassing what we anticipated, and ever since it launched, we've seen a double-digit lift in our San Diego e-commerce operation compared with the remainder of the nation, which shows how much a brick-and-mortar footprint can fuel online purchases, loyalty across channels, and spending; we're thrilled about further expansion of our stores. Come July of this year, our next Pura Vida location is set to debut at Irvine Spectrum in Orange County. We anticipate launching one more location along the East Coast at a busy tourist beach spot during the summer, plus another in the fall; we're eager for still greater store expansion down the road. Going forward, Pura Vida's expansion will involve a mix of digital channels and physical distribution points. Crucially, locations are going to be key moving forward for bringing in new shoppers as we keep widening the range of marketing platforms we use. Our wholesale performance is still robust, and we anticipate bringing on additional partnerships within this year. Operator, at this point we'll take questions on the call.

Hello, and thank you all. Morning to everyone. Regarding the Vera Bradley outlook, how do you view pricing in relation to channel, specifically what is baked into that low- to mid-single figure? On the subjects you covered, you provided lots of useful information about supply chain and pricing alike. What lies ahead regarding risk factors for each? Have those situations settled down? What has been factored into your guidance concerning these matters? The two are quite distinct. I'd appreciate your perspective. Thanks.

Yes, thank you, Oliver. Regarding guidance, when we consider revenue growth at Vera Bradley alongside price increases, our expectation is that the price increase across the whole assortment will be approximately equal to total revenue growth. Put differently, the main force behind that growth will come from raising prices. Our belief is that these higher prices ought to offset what we expect in added freight expense, and we anticipate additional freight expense during this year as it keeps moving through the product assortment. When it comes to marketing with privacy, we recognize that digital pricing has kept rising, yet we think that with the shifts in the algorithms, hopefully we've gotten past the worst portion, though additional effort remains necessary. Over at Pura Vida, the way we genuinely describe Pura Vida's platform is that they had been extremely, extremely concentrated on social media, particularly the bigger Facebook platform, for marketing. At present we're truly focused on recruiting talent and implementing analytics, just as we did at Vera Bradley a couple of years back, in order to properly rebalance that marketing platform, ensuring we capitalize on our influencers, plus more conventional routes such as reviewing and assessing direct mail campaigns and other methods to concentrate more on first-party marketing rather than depending so heavily on third-party marketing. We have numerous initiatives in progress there, and we'll share further specifics during this year.

The sole point I'd tack onto that question, and when it comes to logistics, is that in the end, things have improved a bit, though just marginally; our expectation remains that 2024 will prove quite a difficult year. With all that's happening at the ports, as you're aware, plus everything unfolding in the broader economy, we've factored into our guidance the level of expense we consider right for our logistics network. To help you grasp how large the jump is, consider the pre-pandemic period — today a container, or contract container, runs roughly 4x its former cost from, you know, earlier years, those historical years before the pandemic. Clearly, that's a substantial figure. Depending on circumstances, should we purchase on spot, that amount might climb higher. At present, our expectation, and what we've guided toward, is that all of it is incorporated in our numbers.

All right. You brought up pricing, you know, you.

Oliver, there's one additional item we didn't bring up. I want to confirm we actually did bring this up, which is that the approach we took to guidance means we aren't factoring in any relief related to GSP.

Right.

Should the GSP be approved, that might bring an added advantage.

All right. That's quite useful. During your comments, you brought up that you wish you'd raised prices sooner. Given the channels through which you distribute, making price adjustments is not necessarily simple for you. As you proceed in a careful, targeted manner and gauge elasticity, what's your plan for handling price hikes throughout the portfolio? What level of demand do you believe exists for that?

Excellent question. You're correct, Oliver, that for us, altering prices is certainly not simple, purely because of how we deliver, the variety within our supply chain, and the reality that the bulk of what we sell stays consistent in style. That was among the reasons we weren't fast, and given that difficulty, we didn't wish to act too hastily. Last year, we reached that decision. We began working through deliveries so that we could adjust prices when they arrived. Going forward, we've been focused on becoming more flexible and speedy in our capacity to change prices, in order to cut down that timeframe. We believe that's truly essential. After that, what we do is track things as we start adjusting prices. We have begun making price changes. At the close of the year, we did a handful of our factory items in Vera Bradley. We likewise began implementing price changes in Pura Vida; thus far, the consumer has shown no adverse response; we're hoping to keep seeing that as we keep increasing prices, but, you know, across the first half of this year.

All right. Rob, when it comes to Vera Bradley's channel strategy, where do you see the biggest opportunity as you consider, you know, outlet versus your retail and wholesale partners? Final question, you're in a really strong spot when it comes to capitalization. I know you brought up a possible dividend, but what are you thinking about in terms of giving capital back to shareholders and also building a larger platform? Thanks.

Thank you, Oliver. Regarding distribution, I'd say there are a few different things happening with us. First, we do believe the factory division, our e-commerce business, and even e-commerce wholesale — so places like Amazon — probably deliver the more outsized growth, but we do believe full line still plays a genuinely critical role for us. Especially as everyone starts to travel, we think full line is an area we're examining. I'd say the other three are the larger growth areas. When you think about capital, you're correct. We do have a very strong balance sheet, very good cash flow. That gives us a lot of ability. As we've said, you know, we always wanna make sure we're funding our growth first as our top priority when it comes to capital allocation. Second, you know, we do keep evaluating what's out in the marketplace. As we know, valuations were higher last year, so you didn't see us do anything last year, but we keep evaluating the market, but we wanna make sure we stay highly disciplined from a valuation standpoint; we also do believe that returning capital to shareholders is gonna be an important part of our story. We've seen that last year with our share repurchase, the $50 million share repurchase plan that we announced; we think that's important. We are having conversations with the board of exploring all the other opportunities, including something like a future dividend. I'm sure there'll be more that we'll talk about in the future.

All right, many thanks. Warm regards.

Appreciate it, Oliver. Oliver.

Good morning.

Morning, Eric.

Good morning. Would you mind giving us some detail regarding how logistics is going to keep being a problem? What actions are you putting in place so that we can be sure stores keep getting a steady supply of goods, and so that those goods show up in the depth that's needed?

Thanks, Eric — that's a really good question. As you're aware, Eric, we're evaluating ways to bring some product in by air freight as we keep an eye on our in-stock levels. During the fourth quarter, in-stock was under pressure, so we've been exploring air freight — extra air freight beyond what we laid out last year — to reach a stronger position. On top of that, we're considering using other ports and routing our goods through those alternative ports, plus giving ourselves the ability to truck items in more smoothly rather than sending them via L.A., then moving them by rail through Chicago and onward down to Fort Wayne. In terms of ensuring we land in a better spot on in-stock level, we're reviewing essentially every option we have.