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

Hello, everyone, and thanks for being with us on today's call. A number of things we say in our prepared comments and in answering your questions 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. Those forward-looking statements carry both known and unknown risks and uncertainties, and actual results could 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 what is said during the call will still hold true later on. We have no obligation to update any information discussed on today's call. I'll now hand the call over to Vera Bradley's CEO, Jacquie Ardrey. Jacquie?

Thanks, Mark. Morning, everyone, and thanks for being with us on today's call. During Q4, our emphasis was on generating revenues via focused strategic promotions on seasonal giftable and key items. Consequently, overall company revenues for the fourth quarter came in above our guidance, even though gross margins stayed under pressure. Tight cost discipline allowed us to post fourth quarter non-GAAP diluted earnings per share of $0.16, essentially unchanged from a year ago. In Q4, sales trends improved versus earlier quarters at both Vera Bradley and Pura Vida, with Vera Bradley total sales declining only 1% and Pura Vida sales falling under 5% year over year. For a fourth straight quarter, the Vera Bradley Indirect Channel delivered revenue growth on a year-over-year basis. Targeted customer retention efforts produced higher Vera Bradley e-commerce revenues, while Full-Line and Factory store revenues remained hurt by traffic levels, though trends got better as the quarter progressed. At Pura Vida, e-commerce trends improved versus prior quarters thanks to strategic promotions; nevertheless, broader difficulties persisted regarding the effectiveness of our social and digital media alongside climbing digital media costs; and, we saw a year-over-year sales decline in our wholesale channel. On a positive note, Pura Vida Full-Line retail stores kept beating our expectations, and they generated improved e-commerce traffic and revenues in their markets. We also used the fourth quarter as an opportunity to reset and properly position the Pura Vida business for the future, by recording goodwill and trade name impairments and necessary inventory write-offs. We closed the fiscal year with consolidated revenues of $500 million, surpassing our guidance. Over the year, we started to observe stabilization in our supply chain, tightly controlled our expenses, and prudently managed our cash. In Q4, we significantly lowered our year-end inventory levels compared with the third quarter. Even though fiscal 2023 brought challenges, we took actions and laid the groundwork to position the Company for the future. In mid 2022, working collaboratively, we identified $25 million in annualized cost-reduction initiatives and efficiency processes. The expense savings came from multiple areas of the Company, such as payroll reductions, retail store efficiencies, marketing expenses, information technology contracts and projects, professional services, and logistics and operational costs. A large portion of the savings was realized in fiscal 2023. In January 2023, we further streamlined our corporate structure by eliminating the positions of Vera Bradley Brand President, Chief Creative Officer, and Chief Revenue Officer, and by adding the position of Chief Marketing Officer, intended to drive additional annual cost savings of approximately $2 million, place more focus on marketing and merchandising, and position the Company to deliver steady top and bottom-line growth. These decisions were made so we could right-size our leadership team and cost structure for the size of our business, address the continuing challenging macro environment, and best position us to achieve our long-term strategic plans. After fiscal 2023 wrapped up, in January 2023, we bought out the last 25% stake in Pura Vida, acquiring it from the founders, Griffin Thall and Paul Goodman, for $10 million. Our investments carried on in the areas of customer data science, business analytics, and pricing optimization, which let us gather and examine data and base our decisions on facts so we could run the business more efficiently. Over at the Vera Bradley brand, we grew our already strong pipeline of product innovation, which included the debut of our Featherweight Collection; we kept up another year of collaborations on products, working with iconic brands such as Disney, Harry Potter, and Crocs; we also broadened our collections in cozy, sleep, and outerwear; and we kept working to reinforce and streamline our store fleet. Five new Factory stores were opened while 19 underperforming Full-Line stores plus one Factory store were shut down, so we finished the fiscal year with 51 Full-Line and 79 Factory locations. Beyond that, we kept growing the ways customers can shop, for instance by strengthening our position in third-party marketplaces, Amazon among them, and by adding boutiques in certain high-traffic airports. Turning to the Pura Vida brand, we signed on for a number of prominent product collaborations, teaming with brands like Hello Kitty, Disney, and Harry Potter, and we broadened what we offer by introducing our demi-fine collection and growing our selection of engravable jewelry, all of it intended to draw new customers to the brand. Our efforts centered on creating a marketing program that is more diverse, innovative, effective, and performance-based in order to boost Pura Vida e-commerce sales. We started putting in place a comprehensive customer data platform meant to create one unified, coherent, and complete picture of every Pura Vida customer, which will let us target and personalize marketing better and depend less on third-party marketing; completion of this project is set for this spring; we kept working with our micro influencers, grew our TikTok footprint considerably, rolled out impactful ads on connected TV, refined SMS, and eagerly pursued other avenues for reaching our customers effectively. Three new Pura Vida Full-Line stores were also opened over the year, which brought our Full-Line store total to four, and together they are beating our expectations. As we keep diversifying our marketing platforms, these four stores are helping drive new customer acquisition, and they show how powerful a retail footprint can be for driving digital sales, omni-channel loyalty, and spending. At this point, I'll hand the call to John so he can go over the financial results. John?

Thank you, Jacquie — sorry, and good morning. I'd like to walk through several highlights covering the fiscal year. Everything I mention today falls under non-GAAP, with excluded charges described in the release issued today; to see the full list of items taken out of the non-GAAP figures, plus a reconciliation between GAAP and non-GAAP, please look at today's press release. For fiscal 2023, consolidated net revenues came to $500 million, versus $540.5 million in fiscal 2022. Consolidated net income reached $7.6 million, or $0.24 per diluted share, against $19.7 million, or $0.57 per diluted share, a year ago. Revenues in the Vera Bradley direct segment were $328.2 million this year, down 7.5% from $354.9 million the previous year. Comparable sales fell 9.5%. The Vera Bradley Indirect segment brought in $73.3 million, rising 11.1% from $66 million a year earlier, driven by growth in certain key account orders. Pura Vida segment revenues reached $98.4 million, a decline of 17.7% from $119.6 million the prior year. Pura Vida's e-commerce results were hurt by shifting effectiveness of social and digital media along with climbing digital media costs, plus a drop in sales to wholesale accounts; gross profit this year was $257.2 million, or 51.4% of net revenues, versus $287.9 million, or 53.3% of net revenues, a year ago. The gross margin rate this year took a hit from greater inbound and outbound freight expense and more promotional activity, partly offset by price increases. SG&A expenses came to $245.3 million, or 49.1% of net revenues, versus $258.8 million, or 47.9% of net revenues, the prior year. Expenses this year came in below last year largely because of cost reduction initiatives and fewer variable-related expenses given lower sales volume. For the fiscal year, consolidated operating profit was $12.3 million, or 2.5% of net revenues, against $30.1 million, or 5.6% of net revenues, a year ago. Now let's move on to the balance sheet. Cash and cash equivalents at year-end were $46.6 million, versus $88.4 million at the close of the prior fiscal year. We carried no borrowings against our $75 million credit facility when the fiscal year ended. Total inventory for the fiscal year was $142.3 million, versus $144.9 million at last year — at the close of last fiscal year. Inventory for the current year came in under the prior year mostly because of adjustments tied to excess and discounted inventory, partly offset by additional logistics costs weighing on inventory overall. Inventories stood $36 million below where they were at the end of the fiscal third quarter. Across fiscal 2023, we bought back 18.1 million of common stock, which works out to roughly 2.8 million shares at an average price of $6.40; we'll keep taking a cautious stance on cash, especially given how volatile things are right now. Let's now turn our attention to the 2024 outlook. Our full-year estimates rest on current macroeconomic trends and expectations. We expect the macro environment to stay unpredictable, and for both of our brands, this year will be one of rebuilding. Even so, we anticipate capitalizing on chances to better gross margin and to run our cost base efficiently; no detailed guidance is being offered for Q1 of fiscal 2024, yet we anticipate that both revenue and diluted loss per share will come in at approximately the same level as a year earlier. Q1 represents a quarter of rebuilding while we strive to bring stability to the business. As the year goes on, we are hopeful that momentum will gather. Every forward-looking figure we give is non-GAAP; for fiscal 2024, our expectation for total revenues is $490 million to $510 million. In fiscal 2023, revenues came to $500 million. At both Vera Bradley and Pura Vida, revenues should be roughly unchanged versus the prior year. Gross margin should land between 52.6% and 53.6%, against 51.4% a year ago. That anticipated rise from last year stems mainly from lower inbound freight expense, with higher overhead costs per unit tied to inventory purchases partly working against it. SG&A expense should be $241 million to $251 million, versus $245.3 million a year ago. The main forces behind shifts in SG&A expense from one year to the next are bringing short-term and long-term incentive compensation back to typical levels, partly countered by cost-cutting programs across the company. Consolidated operating income should be $17.3 million to $21.7 million, against $12.3 million a year ago. Free cash flow should fall between $25 million and $30 million, against $21.7 million of cash usage in fiscal 2023. Diluted EPS should be $0.40 to $0.50, assuming diluted weighted shares outstanding of 31 million and an effective tax rate near 28%. A year ago, diluted EPS came to $0.24. Net capital spending should be about $5 million, against $8.2 million a year earlier, which reflects investments tied to new Vera Bradley Factory stores plus technology and logistics upgrades. I'll now hand the call to Jacquie so she can discuss our strategies going forward in more detail. Jacquie?

Thank you, John. Across our two brands, Vera Bradley and Pura Vida, we're kicking off Project Restoration, and we'll concentrate on 4 key pillars: consumer, brand, product, and channel, in order to fuel long-term growth on both the top and bottom lines. Let's start with Vera Bradley. On the consumer side, our attention goes to bringing back brand relevancy, aiming at the casual and feminine 35 to 54-year old women who appreciate fashion and style along with functionality. Through this approach, we'll also engage and keep our loyal shoppers who fall outside that age range. When it comes to our brand, we'll deliberately promote our distinctive and unique positioning as a colorful, feminine, fashionable label that bonds with the customer on a deep emotional level. We'll return our focus to the core product categories and items where we excel, by innovating and expanding within our core products. We'll elevate our colorful feminine heritage, keeping it distinctive while making it more trend relevant via updated print and design. We'll innovate into strategic adjacent lifestyle item introductions that make sense for our customers. And we'll keep pursuing collaborations and partnerships that align with our target customers. Looking at channel, we'll speed up our digital-first focus and online presence through a blend of brand storytelling and product messaging. We'll build a balanced footprint that more clearly separates Full-Line from Factory stores through differentiated pattern and color, product functionality, sustainably sourced fabrics and pricing. And we'll aim for new or stronger relationships with strategically aligned wholesale partners. Turning to Pura Vida, on the consumer front, we'll sharpen our focus on the care-free 18 to 24-year old collegiate girl, whom both younger and older people aspire to be. Our target customer is free spirited, a trendsetter, and focused on living her best life. Pura Vida jewelry is a means of expressing herself and suits her personality. We'll refresh our brand image with a focus on showing what living free looks and feels like, showing real places, real moments and real faces that are authentic, diverse and inclusive. We'll re-center our brand ethos on "living life to the fullest" as well as Pura Vida's < > of supporting charities and social responsibility. We'll focus on delivering unique, fun, playful product designs that are affordable and accessible. We'll keep deepening our expertise and innovating in our hero core category of string bracelets, as well as other jewelry items. And we'll opportunistically explore additional close in adjacent categories that makes sense for our business and our customers. As we look at channel distribution, we'll have a strong focus on restoring e-commerce growth, utilizing our new comprehensive customer data platform to strategically target and personalized marketing. We're going to push wholesale forward through bigger, more strategic alliances and by growing our largest current account; on top of that, we'll sharpen the store model so it lifts both the top and bottom lines, which means we're putting a hold on opening new stores during this year while we figure out how large our store footprint ought to be and what kind of infrastructure that footprint requires. To back the growth and development of both our brands at the corporate level, we'll keep making strategic investments and bringing in the right talent to help propel the transformation, while carefully overseeing our supply chain, gross margin, SG&A expenses and cash flow. This year, with our attention on steadying sales, expanding gross margin and controlling expenses, we think we can raise operating income versus last year by no less than 40% and EPS by no less than 65%; our strategic plans are still being fleshed out more fully, and I'll give you additional details plus long-term financial targets down the road this year. Operator, let's go ahead and take questions on the call now.

Good morning.

Hey, Eric.

Good morning.

Hey. Could you talk — I guess in terms of the reduction in expenses, how far along are you on the $25 million? And how much of that should we incrementally see in this year?

So the bulk of that first $25 million, we actually realized it and pulled it through during fiscal '23. Like Jacquie sort of hinted at toward the close of her prepared remarks, we're examining further opportunities. That's the reason we provided the expense range of 241 to 251, to offset a portion of the incremental costs baked into our budget tied to normalizing incentive compensation. But we believe there are more opportunities we're pursuing — we simply haven't completely pinpointed them and put them into action yet. That's why we offered that range.

All right. So when you take a look — I realize you mentioned there would be a pause regarding Pura Vida store openings, but for the Vera Bradley chain this year, what ought we to consider concerning store openings as well as some closures?

Yeah, so regarding closures for Full-Line, we've got 3 identified Factory stores that we intend to open. Our goal is to keep that figure as low as possible, though at present we're likely near roughly 10 that we plan to shut; it might end up slightly higher or slightly lower than that. Still, we're collaborating with landlords to determine whether we can get through certain rent negotiations, and to keep pushing those locations out when it comes to closing them, while we examine fixing some of the product or enhancing some of the product that we move through our full price brand. So we're actively holding discussions with several of our major landlords in order to bring that figure down; yet from a model standpoint, Eric, you can probably figure on approximately 10.

All right. And regarding, I suppose, the Vera Bradley merchandise, you brought up adjacencies, you brought up attempting to sort of make it so it becomes more concentrated — what ought we to be considering when we head into the stores, in terms of what the product assortment and the category should be doing?

So Eric, my view is that near term, not much will look different. Since we sort of utilize our product development schedule, we are tweaking things according to sales data and customer data as fast as we're able. Yet near term, you likely won't notice a great deal. My sense is it's somewhat early at this point; we want to be sure we possess the proper data to guide the choices about which product adjacencies those ought to be. What exists today might not — it could appear somewhat different down the road. However, we simply want to be sure we have all the data needed to make those choices. So speculating about what — how matters could change is somewhat early; yet I believe you can rely on a more concentrated perspective coming from our product projection. Thus we truly want to assist people in shopping when they walk into our stores and to make obvious what matters for the Vera Bradley brand.

Alright. Regarding partnerships, what are your plans for both Pura Vida and Vera Bradley? I realize that the Harry Potter tie-up for Pura Bradley has ended, and you've kept rolling out collaborative items. Going forward, what criteria will guide who Pura Vida teams up with, and how do you expect those partners to bring more relevance to your shopper? Thanks.

Yes, Eric, excellent question. I'd say at this moment, we want upcoming alliances to genuinely connect with the audience we're targeting. So by — once more, by leveraging data to establish how shoppers engaged with earlier collaborations, and what those buyers' long-term worth turned out to be, we're currently doing all of that analysis so it can inform our upcoming IP roster.

All right, congratulations, and best of luck for the remainder of the year.

Thank you, Eric.