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

Hello, and good morning to all of you. Thank you for being here on today's call. Certain remarks we make in our prepared comments and in answering your questions might qualify as forward-looking statements, made under and within the meaning of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995, as amended. Those forward-looking statements carry both known and unknown risks and uncertainties, and actual results could differ materially from what we anticipate. For a discussion of known risks and uncertainties, please see today's press release along with the company's most recent Form 10-K filed with the SEC. Investors shouldn't assume that anything stated on the call will still hold true at a later point. 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. Good morning, and I appreciate everyone being with us on today's call. Joining me is our CFO, John Enwright. Companywide first-quarter revenue came in at $98.5 million, which was under what we had anticipated, and that produced a net loss before certain charges of $0.19 per diluted share. Even so, we kept rolling out our price increases, and those helped counter logistics and sourcing cost pressures. We kept pushing product innovation forward, held the line on expenses, and bought back $10.5 million in shares, all while keeping our balance sheet free of debt and in solid shape. It's obvious that spending across our customer base is splitting into two distinct groups. At Vera Bradley, full-line revenues in the Direct channel came in higher than a year ago, since shoppers from higher-income households stayed engaged and spent more than they did last year. We also enjoyed a solid rebound in Indirect channel revenues compared with a year ago. That said, inflation-related pressures, among them rate — among them climbing gas prices, hit hardest on spending by Vera Bradley customers whose household incomes are under 55,000, and they also weighed on traffic and spending at our Vera Bradley Direct channel factory stores during the quarter. Beyond that, Pura Vida's e-commerce revenues remain substantially pressured by the change in how effective social and digital media have become, along with growing digital media costs. For the rest of the year, we're acting decisively to make the enterprise stronger and staying sharply focused on our 2 core brands. Across the whole company, we're in the middle of a thorough effort to cut costs and boost efficiency. We expect to finish pinpointing the cost reductions and keep putting them in place during the second quarter, and we anticipate annualized savings somewhere between $15 million and $25 million. We're also still assessing and carrying out strategic price increases for both brands so we can offset higher raw material and freight costs where it makes sense. As you may remember, we started introducing some price increases back in the fourth quarter of last year. With the Vera Bradley brand, our confidence in the core strategy hasn't wavered. The brand is strong at its foundation, even though we've been battling macro headwinds, among them fast-rising supply chain costs, recession-style spending from customers in lower-income households, soaring gas prices, and exponential growth in digital marketing costs. We keep innovating and advancing our lifestyle merchandising approach, focusing intently on safeguarding the core while amplifying it through targeted marketing. We're getting the most out of the travel category, which has almost returned to where it stood before the pandemic, and we're optimizing the all-important back-to-campus season ahead with strategic improvements to our product assortment. Naturally, we're also carrying on with successful product collaborations such as Disney. And in just the second quarter, we've launched partnerships with iconic names including Star Wars, Coleman and Target and Tupperware. We're excited to broaden our home assortment and to bring cloud slip ons and miles into our Vera Bradley footwear franchise for this fall and holiday season. When you look at Pura Vida, what we're doing is shifting how the company operates. It used to lean heavily on digital commerce and online marketing, and now we're moving toward being genuinely omnichannel, with a marketing mix that's far more varied. That shift won't happen overnight, but steps are already underway to bring it about and get the brand growing again. Our Chief Growth Officer, Lockie Andrews, has come on board at Pura Vida. Her main priority, working alongside the team, is to craft a marketing program that's more inventive, more effective, and grounded in performance, which means strengthening both our in-house marketing and data analytics people and our platform. Lockie is a wonderful addition to Pura Vida and to the whole company. Her viewpoint, her know-how, and her creative approach will be essential as we unlock Pura Vida's full potential as a distinctive lifestyle brand. In this brand-new position, she oversees every aspect of digital performance marketing, direct-to-consumer sales, and merchandising efforts spanning Pura Vida's channels and distribution. Teaming up with co-founder Griffin Thall and Paul Goodman, she won't just reinforce our marketing work — she'll also investigate, grow, and keep watch over these sales channels while pushing category growth and expansion as time goes on. Retail, marketing, digital strategy, technology, and data analytics are all areas where she brings deep experience, and most recently she held important e-commerce and digital roles at Party City and Untuckit, in addition to operating a boutique consulting firm over the last 15 years. We're thrilled to be opening 3 more Pura Vida retail store locations this year, following the success of our first store, which opened in San Diego last summer. That San Diego location keeps surpassing what we expected, and ever since it opened, our San Diego e-commerce business has shown a double-digit differential compared with the rest of the country, which proves how much a retail presence can do to fuel digital sales, omnichannel loyalty, and spending — so additional store growth has us very enthusiastic. We'll be opening Pura Vida stores in Irvine Spectrum in Orange County, California and in the high tourist area of Myrtle Beach, South Carolina in July and in the Phoenix market in September. We're eager for even more store growth down the road. Going forward, Pura Vida's growth will come from a mix of online expansion and growth in physical distribution channels. As we keep diversifying our marketing platforms, stores will be central to bringing in new customers. We'll also keep generating excitement and engagement among Pura Vida customers through collaborations like Disney, Hello Kitty and the World Surfing League, partnering with key influencers and offering same collections centered around key events like upcoming Shark Week. At this point, let me 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 some first quarter highlights. Everything I mention today is non-GAAP; for full details on what's excluded from the non-GAAP figures, along with a reconciliation between GAAP and non-GAAP, please see today's press release. Consolidated net revenues came to $98.5 million, down from $109.1 million in the first quarter of last year. Consolidated net loss was $6.1 million, or $0.19 per diluted share, versus a loss of $1.7 million, or $0.05 per diluted share, a year ago. Revenues in the Vera Bradley Direct segment reached $61.6 million, a 7.6% decline from $66.7 million last year. Comparable sales were down 11.1% in the first quarter. The Vera Bradley Indirect segment brought in $17 million, an 11.2% gain over $15.3 million in the prior year's first quarter. Pura Vida segment revenues were $19.8 million, a 26.8% drop from $27.1 million last year. Consolidated gross profit for the first quarter was $52.5 million, or 53.3% of net revenues, versus $59.2 million, or 52.2%, last year. This year's rate took a hit from higher inbound and outbound trade expense, partly offset by price increases. Consolidated SG&A expense came to $59.6 million, or 60.5%, this quarter, compared with $60.1 million, or 55.1%, last year. The consolidated operating loss for the first quarter was $6.9 million, or 7% of net revenues, compared with $1.2 million, or 1.1% of net revenues, a year ago. Now let's move to the balance sheet. As of April 30, 2022, cash, cash equivalents and investments came to $64 million, versus $52.7 million at the close of last year's first quarter. At quarter-end, we had no borrowings under our $75 million ABL credit facility. We're still in a strong cash position with no debt on the balance sheet; we'll keep taking a conservative stance on cash through disciplined expense management, especially given the volatile and challenging environment. Total inventory at quarter-end was $161.8 million, versus $150.3 million at the close of last year's first quarter. During the quarter, we bought back roughly $10.5 million of our common stock, which works out to 1.4 million shares at an average price of $7.35. $35.3 million is still available under the $15 million repurchase authorization; now let's shift to our — let's shift to our fiscal 2023 outlook. Since we expect a challenging macroeconomic environment to persist through the rest of the year and believe it will take time to return the period e-commerce business to growth, we've reduced our outlook for the fiscal year. All forward-looking guidance figures I'll discuss are non-GAAP. For fiscal 2023, we expect consolidated net revenues between $490 million and $505 million, versus $540.5 million in fiscal 2022. We expect our consolidated gross margin to land in the 54.5% to 55% range, versus 53.3% last year. The possible year-over-year improvement is mainly tied to price increases, partly offset by incremental freight expense. On the SG&A side, when consolidated, we're looking at a range of $248 million to $253 million, which compares with $258.8 million in fiscal 2022. What's behind that lower SG&A figure? A few things: our cost reduction initiatives, plus a decrease in compensation expense, and less spend on marketing and other variable related expenses, all tied to the sales decline we anticipate versus last year. For consolidated diluted EPS, our expectation is $0.35 to $0.50, against $0.57 last year. Net capital spending should come in at roughly $10 million to $12 million, versus $5.5 million in the prior year. Operator, at this point we'd like to open the call to questions.

Tom Nash here, sitting in for Oliver Chen. I've got a few questions regarding consumer health. When it comes to price increases, might you give us a bit more detail about where those are showing up, both by channel and by category? And are there certain parts of the business where prices are being absorbed more easily than in others?

Yes. On the subject of pricing, perhaps I'll start by brand. Over at Pura Vida, they've raised prices in just about every product category. And the consumer seems to be accepting that pretty well. At Vera Bradley, our approach to raising prices has been more surgical, really evaluating item by item, since our assortment there is so diverse. What we're observing, though, is that as we've pushed prices up, consumers are accepting it, but that acceptance has limits. So we have to stay very disciplined and very targeted, and we'll keep assessing that and keep reviewing pricing going forward. That said, I'd say the overall reaction hasn't really differed by channel; what we have noticed, as we mentioned earlier, is simply that the higher income customer is accepting more and spending more overall, while the lower-income customer has clearly pulled back. What's been interesting is that even when we look at promotional activity, we've found promotions really aren't needed for the high-income customer — they appear to be accepting their price increases.

All right, that's helpful. Then I want to ask about issues with the supply chain as a second topic. Through the summer months, I'm curious to hear how you're thinking about managing inventory. And on top of that, assuming inflation tops out at this point, what's the company's broader perspective on discounting opportunities by category and by channel?

Happy to address that. On the supply chain side, we're still experiencing a certain amount of disruption. On-time delivery hasn't returned to where it stood before the pandemic, even after we pushed out our timeline for when goods ought to arrive. That said, our inventory situation is solid — stronger than it was at any point during last year — and we anticipate an improved inventory position over the summer; plus, in light of our lower sales, we'll be considering possibly reducing future buys, since that's where our present inventory level sits. As for discounting, when we look ahead to the — later portion of the year, consistent with our gross margin guidance, we don't anticipate discounting shifting from what we initially expected, though we'll keep evaluating it all summer long and for the remainder of this year.

That's quite useful. So, one last thing about Pura Vida. Could you share more specifics on what we're planning for the marketing platform improvements, plus any synergies we could get from the Vera Bradley platform?

Sure. Excellent question. To start, getting Ian back on board was an essential move. If you recall our history from a few years back, we added Daren Hull, who essentially reconstructed the marketing platform over at Vera Bradley, introduced data analytics, and genuinely pushed us ahead. With Pura Vida, what we're doing is essentially taking a comparable route by bringing Lockie in, since the Pura Vida team has accomplished an amazing job over the years of truly capitalizing on social media platforms for acquiring customers — we're genuinely top tier at that. However, with this entire shift — the whole channel and the terminology change — it has clearly become far less productive. So at this point, what we're doing is genuinely constructing our data platform, constructing our first-party marketing, and then additionally beginning to grow in stores and treating stores as yet another path for acquisition, which will be truly essential. Then there's another element: while we're considering marketing for Pura Vida, it isn't only about the data, but it's also examining various channels, both in terms of performance marketing and also drawing even more heavily on the influencer side of the business, because what we observe across many direct-to-consumer companies that have lower AOVs is how crucial it is to sort of re-leverage the influencer, investing additional time and effort into what you might call the influencer tribe. That effort is already well underway, with Griff truly spearheading that initiative.

Could you speak a bit about the collaborations, clearly, with Beary Merry — you've been somewhat pricier with them and also has been creative regarding items such as the recent Tupperware collaboration. How do you — where is, I suppose, sort of a ceiling on how far you wish to push the collaborations moving forward for both Pura Vida and for Vera Bradley?

Ron, the partnership collaborations we are engaged in really concern acquiring customers, reaching new buyers, growing the community of customers within Vera Bradley and Pura Vida. And across the past 2 years, we've truly enjoyed a great deal of success achieving that via our Disney partnerships, our Harry Potter partnerships, and most recently via the Star Wars partnership that we find genuinely delivers a fresh excitement and a new customer who uncovers our brands, which we consider excellent. I think you're correct that when we consider the Coleman opportunity, right, entering some of this outdoor category being in Target; it's wonderful to see the brand and sort of the in-cap and Target. It brings many new customers to see it as well as considering items like Tupperware that it's a means to bring new customers into brand, people that may not be considering us from a bag business. But love the pattern and love the brand and a fresh way to join. So we believe we must keep balancing that, keep seeking new, distinctive partnerships to keep it fresh and keep it exciting. And I would say that probably the amount of collaborations we've been doing is probably about where we would want to be. I don't think that we'll keep doing more and more. I think the key is continuing to find more and more powerful ones. But we've been very thrilled with the ones we've launched in both brands so far and have had very good customer responses.

All right. As we examine — and you touched briefly on the return-to-campus period, clearly a significant stretch for you and also in the prior year. Certain chances existed that, due to supply chain issues and the movement of goods, didn't pan out as favorably as we would have liked. How concentrated are you, and what ought we to consider regarding your efforts for that period moving ahead? Amazingly enough, I'm certain it will kick off roughly 2 to 3 weeks from now.

Yeah. No, I believe the return — we certainly hold a lot of hope for the upcoming return-to-campus period. Consider the prior year: plenty of commotion, so to speak, surrounded COVID, individuals heading back to classrooms, everything unfolding across media outlets. Thus, with certain supply chain interruptions, plus possibly a missing single-minded emphasis as children returned to classrooms, we see some potential as we enter this year. Our inventory stands in a far improved spot compared to the prior year, and we expect that shoppers will generally have additional willingness to spend as they return to classrooms. So we remain hopeful. We sense that we're arranged and prepared to launch. And after that we'll begin — what we're undertaking this year is truly capitalizing now at Vera Bradley on the streaming TV, and we believe it's a method to attract fresh buyers into our return-to-campus operation.

Great. And for my final question. Regarding how your stores break down, you've got more outlets now on the Vera Bradley side, with outlet locations outnumbering full-price ones. What's the way we ought to be considering that balance, and sort of where does the store — clearly you've been reducing the full-price store count, so where's the right blend of product and number of locations that Vera Bradley should have in the market?

Yes. When it comes to our store mix, I'd say there are 2 things as we consider the full line business, and what we consider is the omnichannel strategy, correct, spanning our e-commerce operation and our full-line stores. Having a blend of the two matters to us. Brick-and-mortar serves a meaningful function within that blend, and it will keep doing so; and I believe you'll see us keep exploring various approaches to innovating across our full line portfolio and keep evaluating possibilities. Especially, I think moving forward, when we consider new real estate formats possibilities in places where customers are, I think experimentation will keep showing up there. Meanwhile, we do feel the factory channel matters a great deal to us. Clearly, at present, given gas prices, that channel faces cyclical pressure. Yet over the long term, it has performed very well for us, from both an acquisition perspective and in terms of volume and profitability. So we anticipate staying focused on the factory channel to sort of balance our full price e-commerce/brick-and-mortar approach.