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

Hello, and welcome, everybody. Thank you for being with us on today's call. Certain remarks we make in our prepared comments and in answering your questions might qualify as forward-looking statements, issued under and as defined by the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, as amended. Those forward-looking statements carry both known and unknown risks and uncertainties, which could make actual results differ materially from what we anticipate. For a review of known risks and uncertainties, please see today's press release along with the company's most recent Form 10-K filed with the SEC. Investors shouldn't presume that anything said on this call will still hold true at a future point; we assume no duty to revise any information covered in today's call. Now I'll hand the call over to Vera Bradley's outgoing CEO, Rob Wallstrom. Rob?

Thanks, Mark. Morning, everyone, and I appreciate your being with us on this call. Joining me today are our new CEO, Jackie Ardrey, along with John Enwright, our CFO. Jackie came aboard in November, having most recently held the role of President at Grandin Road, and she brings prior experience from Harry & David and Hanna Andersson. She's hit the ground running, and we're thrilled to have her steering the company ahead. To start, a few thoughts about the quarter. We achieved a year-over-year gain in non-GAAP EPS, mostly the result of putting our targeted expense reductions into place. Revenues totaled $124 million, slightly ahead of what we had broadly anticipated, and our gross margin rate started to show some stabilization as supply chain difficulties eased and strategic price increases helped counter higher raw material and freight costs. Just like in earlier quarters, we keep seeing a split in how our customer base spends. Vera Bradley's direct full-price channel shoppers from higher-income households stay more engaged and keep spending more than those from lower-income households, particularly in our Vera Bradley factory channel, where inflation weighed on traffic and discretionary spending. That said, our Vera Bradley indirect channel posted its third straight quarter of year-over-year growth. Within our Vera Bradley brand, we keep feeding our innovation pipeline and furthering our lifestyle merchandising emphasis in the core areas of travel, back to campus, every day, and collaborations; during the Q3, we carried on our strong product collaborations with Disney and Harry Potter, rolled out a new rain gear collaboration with Totes, brought out our VB Cloud casual footwear collection, grew our family sleep and loungewear collection, and entered the Metaverse for the first time with our NFTs marking our 40th anniversary. Although stores will remain an important piece of our Vera Bradley distribution strategy ahead, we keep rationalizing our store base, shutting underperforming stores as leases come up for renewal. This year we have shut 10 full-line Vera Bradley locations. Pura Vida's e-commerce revenues remain under pressure from social and digital media effectiveness and elevated costs. This year, we reduced Pura Vida's year-over-year marketing spend until we can figure out the best ways to maximize marketing effectiveness, which hurt sales; during the Q3, we did start reinvesting more marketing dollars than we spent in the first and Q2s. We observed a favorable effect on e-commerce sales trends, though they're still down versus the prior year. At the same time, however, we saw a negative trend in Pura Vida's wholesale revenues. Our top priority is building a marketing program for Pura Vida that's more diverse, innovative, effective, and performance-based in order to drive Pura Vida e-commerce sales. We're currently putting in place a comprehensive customer data platform for Pura Vida to create a single, coherent, complete view of each customer, so we can target and personalize marketing better and depend less on third-party marketing. The target for finishing that is the beginning of next year. While that's underway, we keep collaborating with our micro-influencers, growing what we do on TikTok, rolling out high-impact Connected TV advertisements, refining SMS, and looking hard at additional avenues for connecting with our customers in an effective way. Our new Pura Vida full-price locations opened in August at Broadway at the Beach in Myrtle Beach, South Carolina, and in September at SanTan Village in Metro Phoenix. As we keep broadening the marketing platforms we use, stores have a big part to play in bringing in new customers, and they show how much a retail footprint can do for digital revenue, loyalty across channels, and spending. To this point, every one of our Pura Vida full-price retail stores is on track to beat the sales figures projected for its first year. When it comes to Pura Vida products, we keep generating enthusiasm and involvement among customers via partnerships such as Disney, Harry Potter, and Hello Kitty, teaming up with important influencers and pursuing ongoing innovation, including growing our demi-fine and stone jewelry lines and broadening what we offer in apparel. It's my pleasure to formally present our new CEO, Jackie Ardrey. Jackie?

Rob, thank you. I may have only been here for 2 or 3 weeks, but it's already clear to me that there's unrealized opportunity in the market for Vera Bradley as well as Pura Vida. The macro backdrop will likely stay hard to predict, in my view, yet our teams remain dialed in, and we still have a strong balance sheet and cash position. I'm eager to collaborate closely with our leadership teams as we build and carry out robust plans for growth, capitalize on the numerous opportunities we have — particularly around merchandising and marketing — and produce steady, sustainable growth along with value for our shareholders across the long term. I'm looking forward to sharing more with you regarding our go-forward plans on our Year-End Earnings Call in March. I'll now hand the call to John so he can walk through the financial results. John?

Thanks, Jackie. Good morning, everyone. I'd like to walk through some key points for Q3. All the figures I'm about to share are non-GAAP and leave out the charges described in today's release. If you want the full breakdown of what's excluded from the non-GAAP figures, plus a reconciliation between GAAP and non-GAAP, that's all in today's press release. Consolidated net revenues came in at $124 million, versus $134.7 million in last year's Q3. Consolidated net income was $6.3 million, or $0.20 per diluted share, versus $6.2 million, or $0.18 per diluted share, a year ago. As Rob mentioned, the EPS improvement largely came from expense leverage tied to the cost reduction initiatives. Vera Bradley direct segment revenues were $80.1 million, down 7.6% from $86.6 million a year ago. Comparable sales fell 9.6% in Q3. Vera Bradley indirect segment revenues reached $22.3 million, up 6.7% from $20.9 million in the prior year Q3, driven by higher orders from certain key accounts, partly offset by fewer specialty account orders. Pura Vida segment revenues were $21.7 million, down 20.3% from $27.2 million a year ago. Q3 gross margin came to $65.6 million, or 52.9% of net revenues, versus $72.3 million, or 53.6% of net revenues, a year ago. The current year gross profit rate took a hit from higher inbound and outbound freight expense, overhead cost deleverage, and channel mix changes, partly offset by price increases. Q3 consolidated SG&A expense was $57.6 million, or 46.4% of net revenues for the current year Q3, versus $63.7 million, or 47.3% of net revenues, in the prior year. As we expected, current year expenses came in below prior year, mainly because of cost reduction initiatives and a decrease in variable related expenses tied to lower sales volume. The company's Q3 consolidated operating income was $8.2 million, or 6.6% of net revenues, versus $8.7 million, or 6.5% of net revenues, in the prior year. Now let's move to the balance sheet. Total quarter end inventory stood at $178.3 million, versus $148.3 million at the close of Q3 last year. Total current year inventory was above prior year, mainly because of roughly $17 million in incremental logistics costs weighing on overall inventory, along with additional Vera Bradley factory inventory stemming from revenues that came in below expectations. Cash, cash equivalents and investments at quarter end were $25.2 million, versus $75.3 million at the close of last year's Q3. The company carried no borrowings on its $75 million ABL credit facility at quarter end. One main factor behind the lower cash position is the $30 million inventory build over last year. We'll keep taking a conservative approach to cash, especially in this volatile and challenging environment. Let's turn to our Fiscal 2023 outlook. We expect the Q4 macroeconomic environment to remain unpredictable. The Pura Vida business will stay challenging. Persistent inflation is going to keep hitting Vera Bradley shoppers who have less money coming in, especially through the factory channel, and gross margin will stay under pressure as well. Every piece of forward-looking guidance I'm about to share is non-GAAP. Looking at Q4, our expectation is consolidated net revenues between $136 million and $141 million, which compares with $149.6 million a year ago. We're anticipating a consolidated gross margin rate of 49.5%-50.5%, versus 50.9% in the same period last year. That projected decline stems mainly from added targeted promotional efforts and deleverage across overall head costs, with price increases and reduced freight expense year over year providing a partial offset. Consolidated SG&A expense should land at $61 million-$63 million, down from $67.1 million during the prior year. That decrease comes largely from cost reduction initiatives and lower variable related expenses tied to the anticipated sales decline. Consolidated EPS is expected at $0.16-$0.20, compared with $0.17 a year ago. Turning to the full year, our revised outlook calls for consolidated net revenues of $489 million-$494 million, against $540.5 million in Fiscal 2022. We expect a consolidated gross margin rate of 51.9%-52.1%, versus 53.3% last year. The anticipated year-over-year drop is chiefly tied to added inbound and outbound freight expense, added targeted promotional efforts, and deleverage on overhead costs, partially offset by price increases. Consolidated SG&A expense of $242 million-$244 million, compared to $258.8 million in fiscal 2022. Cost reduction initiatives and variable expenses are what's driving the decrease in SG&A expense. Consolidated diluted EPS of $0.22-$0.26, compared to $0.57 last year. Net capital spending of roughly $10 million, versus $5.5 million in the prior year. Operator, we will now open up the call to questions.

Good morning, everyone. Hello Jackie, Rob, and David. Rob, when you consider the various channels, might you give us some insight into how full price should be sized properly? Looking toward factory, that particular customer has been putting you under pressure. How do you see that developing? The indirect figure was impressive too. I'd appreciate your perspective on whether that kind of momentum is sustainable. Jackie, what I'd like to know is what drew you to Vera Bradley more than anything else. During your first weeks and months in the role, which priorities matter most to you? And last, Rob, regarding the inventory figure, you provided plenty of useful specifics. Could you perhaps shed light on how we should approach modeling inventory growth against sales moving forward? That would be helpful. Thanks, everyone.

Appreciate that, Oliver. So, a few points, I suppose. Let me address some of the channel discussions and the questions you raised. Regarding full price, we've consistently said that our full price door count is being trimmed back this year, which is what we've been executing, ensuring we truly get the sizing right. Our view is that we should keep capitalizing on the e-commerce operation, the indirect side of things, and genuinely treat our full price operation as a means of reaching the customer in the most effective manner and in a location where she actually shops. My sense is that this streamlining will likely persist throughout this year. On the factory side at present, we genuinely think the major driver for us has been the broader economic situation along with that inflationary squeeze and the constriction felt throughout retail in what I'd describe as more the semi-opening price segments, correct? The non-luxury segments where we're simply observing some pullback from that shopper; we're just going to sort of push through these short-term economic stressors. Our long-term conviction remains that factory is a genuinely vital piece of our operation. The indirect channel has been quite heartening to watch, and truly the strength of growing our e-commerce operations inside that indirect channel, that's genuinely where we're finding the momentum. Once more, we simply believe that continuing to capitalize on that e-commerce arena will matter. Perhaps I'll pass things to Jackie for a moment so she can discuss what drew her in, and then we'll wrap up with the inventory remark.

Thank you, Rob. The chance to be here definitely appealed to me. What I really appreciate is that the entrepreneurial mindset shaped both Vera Bradley and Pura Vida, two truly iconic brands. Our customers are loyal, deeply connected to us, and span multiple generations, and we enjoy strong brand awareness, a socially conscious and purpose-driven identity, plus vast room to grow in the market. Right now I'm collaborating closely with the leadership team and the board to honor what this company was built on while capitalizing on our opportunities — especially in merchandising and marketing, areas where I'm currently investing most of my time — so we can genuinely fuel sustainable, profitable expansion across both brands. In the roughly one month since I came aboard, aside from moving to Fort Wayne, I've thrown myself into learning the business, partnering with Rob, sitting down with the corporate teams behind Vera Bradley and Pura Vida, walking the stores, and getting together with our Board of Directors. It's been an incredibly full yet wonderful and thrilling month. Honestly, my main focus at this moment is simply assessing the strategy we'll pursue going forward, so that come March we'll have some genuinely thrilling updates to share.

Oliver, regarding the inventory question — sure, we're running stock levels somewhat above what we'd prefer, and honestly, when this year began, we figured things would play out a bit differently. The inventory grew. Like we laid out, a big chunk of that increase comes simply from what it costs to move product from Southeast Asia over to Indiana. Looking ahead to next year — and of course, guidance for next year will come with our next earnings release — we expect that by the time next year wraps up, we'll have inventory back where it typically sits. In the end, we'd look for that to deliver some free cash flow upside next year through bringing inventory down.

All right, thanks. Rob, when we consider the consumer and the industry, October was quite volatile — it came in softer, and then shoppers did their shopping later. Are you observing the same thing? If you could, help describe some of the dynamics at play there. My second question concerns the gross margin line. You mentioned promos in the prepared remarks, but you're also implementing strategic price increases. So what should we take away, you know, from those two dynamics, and how should we model or think about gross margins? Thank you.

From a consumer perspective, Oliver, I believe you're correct that October showed softness. When Black Friday approached, we observed shoppers starting to come back around that time. That sort of momentum has carried on beyond Black Friday. What we've clearly noticed, however, is how crucial promotional activity is in generating that lift — customers are certainly hunting for bargains, essentially going back to that classic Black Friday mindset. As you know, we've introduced certain promotional offers within the brand, and shoppers reacted favorably. We anticipate that throughout Q4, it will remain driven by promotions — targeted ones, yes, but promotionally driven all the same. I believe part of the challenge as we head into the coming year involves striking the right balance with that promotional landscape for customers while locating ways to counterbalance those costs elsewhere — be it via product cost or through overall SG&A. That likely touches on the gross margin figure somewhat, since we do anticipate some promotional strain on that gross margin figure. Over the long term, international logistics will genuinely benefit us, given that it has, you know, fallen sharply. Domestic logistics expenses, though, are still, I'd say, elevated, and we aren't observing any decline on that front.

Mm-hmm.

But the international logistics costs will be a tailwind as we move forward.

To build on what was just said, clearly we aren't providing any outlook again for the coming year, yet one favorable factor heading into it will be international logistics returning to something closer to normal, similar to levels seen before the pandemic, and that will clearly be a plus for our P&L, you know.

This brings us to the final question. Over at Cowen, we've put substantial effort into non-fungible tokens and NFTs, as well as the Metaverse, along with developments in decentralization and Web3. What was the rationale behind NFTs fitting with Vera Bradley, and are there any notable patterns emerging regarding the customer profile in that area, plus any views on what's planned next? Thank you.

For us, entering the NFT space has really come down to a couple of things. First, innovation has always been what drives this company, and we were eager to move into that area, pick up knowledge there, start trying things out there, and remain connected to our customer in particular. We saw it as a fantastic chance. We felt we could turn it into leverage for our foundation, and leverage for the collectibility of our patterns as well. This is something we're going to keep experimenting with, correct? At this point it isn't a massive commercial opportunity, but it's one of those spaces we want to be sure we're exploring, learning, and sort of developing alongside as that space expands in the years to come.

Thank you. Best regards. Happy holidays.

Thanks, Oliver.

Thank you.

Good morning.

Hey, Joe.

I'd like to begin with Pura Vida. As you know, for roughly 12 months we've been discussing what's happening with digital trends. I realize you're focused on, well, assembling that database. What genuinely has to take place before we're able to observe, you know, some enhancement in that segment? It simply appears to be consuming quite a while to, I suppose, determine the next direction on that front, apart from launching the brick-and-mortar locations.

That's an excellent question, Joe, I believe. Several distinct items, correct? One item already in motion is the customer data platform, the technology itself. The team has been laboring quite diligently on numerous technology components throughout the previous quarter. We've achieved positive results with many such platforms at Vera Bradley, so we're navigating that process and absorbing those lessons. We genuinely believe first party data will figure into it. The second element involves a genuine broadening of the marketing platform. Something I find quite promising about Jackie joining us, along with her guidance given her merchandising and marketing experience, is simply obtaining a new perspective to examine it, since we truly must discover a different approach to bringing in customers that relies less heavily on our former channels. That has, that clearly hasn't been a simple shift, yet it's one we believe we can navigate. The stores have demonstrated that the consumer continues to be involved. It's boosted our e-commerce business, so whenever we're in front of the consumer, we're witnessing a favorable increase. I believe it will genuinely be a combination. As we've observed, numerous of these direct consumer businesses have begun shifting toward becoming more omni-channel, launching stores, broadening their marketing, and I believe we ought to be doing likewise; re-platforming the business at Pura Vida hasn't been a simple shift, but I believe we're achieving some advancement, and I believe with Jackie joining, we can speed up that advancement in the months to come.

Alright. Regarding the retail locations, I recall we discussed this previously — you've got that San Diego shop, and I believe it's now hitting its anniversary. So, how's it doing? What do the year-over-year comps look like for San Diego? And it's fantastic news about the new openings, that every one of them appears to be beating expectations?

When it comes to the Pura Vida stores, I'd say we're still in the early stages, correct? The positive thing is that across all four of our full-price locations that we've launched, each one is on track to surpass what we projected for their first year. That's genuinely heartening. The other really heartening piece is that we're noticing a meaningful rise in e-commerce activity within those metropolitan regions. Once again, it simply demonstrates the strength stores bring — not merely as a four-wall revenue and profit center, but for the franchise as a whole too. I'm aware that's among the things Jackie is evaluating as she maps out the go-forward strategy — specifically, how to diversify the Pura Vida platform so we can get that business growing once more. I realize I'm partly speaking on her behalf, but we've had so many discussions over the last 30 days that she truly perceives excitement and potential surrounding that brand. I believe we'll see improvements as we progress through next year.

All right. And if I can, one additional question. Regarding the guidance, I was hoping you might provide a bit more detail. In the prior quarter, gross margin guidance stood at 53.7%-54.1%. You've raised the revenue range for the full-year outlook, yet lowered gross margins considerably, to 51.9%-52.1%, despite freight expense falling and the other items you mentioned. Could you perhaps shed a bit more light on why that gross margin projection dropped so sharply.

Yes. Joe, we did discuss somewhat more tactical discounting than we had likely originally factored into our forecast when 3Q started. That truly is the bigger factor. Clearly, it assisted us in generating somewhat more revenue, since we anticipate generating more revenue because of it. From a profit standpoint, at a rate difference, hey, we're neutral to positive about it. We believe it's the correct move, helping us stay competitive within the marketplace. She is out there, she is seeking a larger discount than I think we originally expected when we assembled our guidance as Q3 began.