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

Hello, and thanks to each of you for being here this morning. We appreciate your participation on today's call. Certain remarks we make in our prepared comments and in answering your questions could be considered 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, which might cause actual results to differ materially from what we anticipate. For a discussion of known risks and uncertainties, please see today's press release regarding the company's most recent Form 10-K filed with the SEC. Investors should not assume that anything said during the call will still be operative at a later time. We assume no obligation to update any information discussed on today's call. I'll now hand the call over to Vera Bradley's CEO, Jackie Ardrey. Jackie?

Thanks, Mark. Morning, everyone, and I appreciate you being on the call today. We're quite happy with the substantial earnings improvement in Q2 versus a year ago, which came from considerable gross margin gains and effective cost cuts throughout the company. As an organization, we're paying closer attention to our expense structure and are being deliberate about where we put our money to fuel profitable growth over the long term. Our transformation work keeps delivering results, and I want to thank every one of our associates nationwide for what they've contributed to this crucial effort. During Q2, we prudently oversaw our balance sheet, which carries no debt, building up cash while also making strategic enhancements to our inventory situation. A major objective for us this year involves steadying our top line; we're still moving forward on that, with Q2 consolidated revenues reaching $128.2 million, just slightly under the prior year. For the Vera Bradley brand, total Q2 revenues slipped 1.2% versus a year ago. Declines in Vera Bradley direct revenue stemmed from stores we closed during the past year, though our full-line stores posted a modest comparable gain. The triumphant comeback of the Vera Bradley annual outlet sale counterbalanced softness at our factory outlet locations and also made up for dropping one online outlet sale this quarter. The rest of our e-commerce business kept performing nicely. Finally, Vera Bradley indirect revenues ticked up a bit compared with last year. Pura Vida sales fell 3.6% year over year, mostly because of a wholesale revenue shortfall, which we expect to get better during the back half of the year. < > to capture the advantages from adjustments to our performance-based marketing program; broadly speaking, at both brands, customers have shown eager responses to our collaborations and product lines when those are inventive and on-trend, even though they've grown pickier about discretionary purchases given today's macro conditions. We're still achieving solid headway on Project Restoration, centered on four essential pillars of the business for each brand: Consumer, Brand, Product and Channel. Across the first half of fiscal 2024, we've moved ahead as anticipated. We're confident that carrying out Project Restoration will produce profitable growth over the long run and bring value to our shareholders. Let me share a little more about the 4 key pillars of Project Restoration and a few of the initiatives we have going right now. To start, at Vera Bradley, on the Consumer side, we're aiming to rebuild brand relevancy, going after casual and feminine women aged 35 to 54 who appreciate both fashion and function. On the Brand side, we're striving to market strategically around our distinctive and unique standing as a feminine, fashionable brand that forms a deep emotional connection with consumers. On the Product side, we're returning our focus to the core categories and items where we excel, by constantly innovating and growing within our core products. In the coming year, our colorful feminine heritage will be taken up a notch—we'll keep what makes it special while making it feel more on-trend via refreshed prints and designs. On top of that, we'll keep rolling out strategic additions in adjacent lifestyle categories that our customers will find appealing. Featherweight, Performance Twill, ReActive and Ultralight—our performance fabrics—are performing strongly, and the typical buyer is getting younger while earning more per household. That's still a significant opening for us, both right now and within our future transformation roadmap. Signature patterns will remain central, yet matching solids are likewise a major chance for growth. This fall we'll broaden what we offer in solids, and that includes bringing back a modest leather goods assortment next month. Collaborations on products matter a great deal when it comes to expressing who we are. The first Hello Kitty tie-up, which arrived in June, did really well, and the Peanuts collection we'd been building anticipation for—just released this month—is getting a strong reaction from shoppers too. We're particularly excited about the NFL collection, which came out in August right as football season got going. There's a lot in the works on the innovation front and in our new product pipeline for next year, and I can't wait to tell you more over the coming months. Last, on the channel side, we're stepping up our digital-first emphasis and web presence, crafting a balanced store footprint that draws a sharper line between full-line and factory outlet locations, while pursuing ties with wholesale partners that fit our strategy. Along those lines, the site rebrand and navigation updates we made recently worked well—bounce rate is down and conversion and sales are up; when it comes to Vera Bradley's factory outlet channel, we're tackling the downward trends head-on with a wide-ranging, multipronged effort that involves possible price changes and focused marketing pushes meant to boost traffic and average order size. Switching now to Pura Vida: for the shopper, we're honing in on women aged 18 to 24, the brand's initial core audience. For the brand itself, we've brought our ethos back to embracing life to its fullest. The marketing we do now shares genuine moments, places and faces. Launched in June, our Live Free campaign highlighted travel, adventure, friendship and freedom, sparking engagement and enthusiasm among our customers. Several social media influencers and customers took part in a nationwide tour tied to the campaign, visiting adventurous U.S. destinations. With our comprehensive customer data platform, newly launched, we're targeting customers and prospects more strategically, with retention as a deep priority. Beyond that, marketing efficiency has improved this year at both brands; on the product side, we're concentrated on delivering distinctive, fun, playful designs that are affordable and accessible, with a major focus on bracelets and jewelry plus other strategic adjacent categories. Customers have connected with our new summer collection, which features string and metal jewelry alike. Our men's collection just debuted, and certain items sold out fast. The assortment continues to serve our main shopper, the woman who is buying these products for the guys in her life. Custom bracelets — whether Harper charms, engravable pieces, or build-your-own styles — are performing well, and we see ongoing growth potential there. We'll keep going after big-name tie-ins such as Hello Kitty, Shark Week, and Harry Potter, since those are perennial customer favorites that draw new shoppers to the brand. Beyond that, we keep adding to our charitable giving lineup the causes our customers care about most, including the Hawaii Wildfires relief bracelet. On top of that, both brands have excellent holiday gifting assortments ready to go. Last, when it comes to the channel, we're sharply focused on growing e-commerce and thoughtfully widening wholesale through strategic partnerships and by growing our bigger existing accounts; we've also started shaping and refining a plan to expand our current store format across both brands. To capture operational and strategic efficiencies, we shifted Pura Vida store operations beneath the Vera Bradley team this quarter; we're taking steps to steady and then gradually lift Pura Vida's revenues and to turn around the trajectory of Vera Bradley's factory outlet channel. Everyone on our team is committed to delivering long-term revenue growth, widening gross margin, and maintaining rigorous financial discipline and expense management, which we believe will produce profitable growth over the long haul. At this point I'll hand things over to our CFO, Michael Schwindle, for a look at the financial results. Michael?

Appreciate that, Jackie, and good morning to all of you. I'd like to kick things off with some second quarter highlights, though first, just so we're all on the same page, everything I'll be going over — every figure I mention today is non-GAAP and leaves out the charges described in today's press release. For full details on what's excluded from the non-GAAP figures, plus a reconciliation between GAAP and non-GAAP, please take a look at today's release. Our consolidated net revenues for the second quarter came to $128.2 million, versus $130.4 million in last year's second quarter. Consolidated net income came to $10.2 million, or $0.33 per diluted share, against $2.4 million, or $0.08 per diluted share, a year ago. Revenues in the Vera Bradley Direct segment came to $85.7 million, down 1.5% from $87 million the prior year. Over the past 12 months, we shut down 19 full-line stores and 2 factory outlet stores for good, while opening 3 factory outlet stores. Our comparable sales fell 5.3%, driven mainly by softness in the factory outlet channel that Jackie mentioned earlier; this year, direct segment revenues also picked up sales from the Vera Bradley annual outlet sale, which didn't take place last year. Revenues in the Vera Bradley Indirect segment came to $17.4 million, up 0.2% from $17.3 million a year ago. Pura Vida segment revenues came to $25.1 million, down 3.6% from $26 million the prior year, which mirrors a drop in sales to wholesale accounts along with a slight decrease in e-commerce sales, partly offset by new store growth that generated noncomparable retail store sales. Gross margin for the second quarter came to $72 million, or 56.2% of net revenues, versus $67.8 million, or 52% of net revenues, the prior year. This year's gross margin rate got a favorable lift from lower inbound and outbound freight expense compared with a year ago and from sell-through of inventory we'd previously reserved, partly offset by more conditional activity. Keep in mind that last year's gross margin took a material hit from elevated inbound and outbound freight expense, along with deleverage of our revenue costs. SG&A expenses came to $58.3 million, or 45.5% of net revenues, versus $64 million, or 49.1% of net revenues, the prior year. That drop versus last year mirrors the early stages of our cost reduction efforts across the whole company, spanning various parts of the organization. Consolidated operating income for the second quarter came to $14 million, or 10.9% of net revenues, versus $3.9 million, or 3% of net revenues, a year ago. Now on to the balance sheet. Cash and cash equivalents at the end of quarter 2 came to $48.5 million, versus $38.3 million at the close of last year's second quarter. We still carry no borrowings against our $75 million ABL facility. And after the quarter closed, we finished renegotiating our ABL agreement, and the changes, among other things, shift the interest calculation from LIBOR to SOFR and strengthen our ability going forward to expand the ABL, should that become necessary. We feel sure that the liquidity and capital we can access will be enough to meet our requirements for the foreseeable future. At the close of the quarter, inventory stood at $139.3 million, versus $179.6 million at the close of the second quarter of last year; we've carried out strategic moves to bring our inventory levels down, and we think we're suitably positioned going into the fall selling season. In the quarter, we also bought back roughly 120,000 shares at an average price of $5.16 per share, for a total of about $683,000, with $26.3 million left under the $50 million share repurchase authorization that expires in December of 2024. As Jackie mentioned earlier, we're extremely happy with how we've performed year-to-date and with the headway we've made on the transformation, and I also want to thank each of our associates for their hard work and dedication to these efforts. So looking ahead, using the first half performance along with our initiatives underway and the present macroeconomic trends and expectations, we're updating certain components of our guidance for the fiscal year. And as a reminder, our forward-looking guidance figures are on a non-GAAP basis. We now anticipate consolidated net revenues of between $490 million and $500 million for the year; as a reminder, net revenues came to $500 million last year. We also anticipate a consolidated gross margin rate of 53% to 53.8%, versus 51.4% in the prior year; this year's gross margin rate should be favorably affected by lower year-over-year freight expense, cost reduction initiatives and the sell-through of previously reserved inventory, though partly offset by an increase in promotional activity. Consolidated SG&A expense should come in between $237 million and $243 million, versus $245.3 million last year. The decrease in SG&A expense is being driven by our company-wide cost reduction initiatives, partly offset by restoring < > long-term incentive compensation to more normalized levels. in addition to incremental marketing investment intended to accelerate customer file growth. This results in anticipated consolidated operating income of $24 million to $28 million, versus $12.3 million last year, and a diluted earnings per share of $0.57 to $0.65, versus $0.24 last year. We also still expect net capital spending of approximately $5 million this year, versus $8.2 million last year; and this reflects investments associated with new Vera Bradley outlet stores as well as technology and logistics enhancements. Consequently, we anticipate free cash flow of between $40 million and $45 million, versus a cash usage of $21.7 million last year. So that wraps up our formal remarks. I'd like to open the call to questions now.

Joseph Gomes here, good morning. To kick things off, during the prior quarter you brought up — and again this quarter — initiatives aimed at boosting foot traffic and raising the average transaction value. Could you share a bit more detail about the kinds of initiatives you have underway, what you're observing in these early stages, and where you expect to see additional progress during the back half of this year?

Absolutely. Broadly speaking, we noticed a clear traffic problem, especially at our outlet locations, during the earlier portion of the quarter. We've adopted a multipronged marketing strategy encompassing paid media across various formats that we're piloting — that's one piece of it. So it involves paid media, mall takeovers, plus other avenues available to us, essentially nonstandard media channels we're trialing while maintaining a very careful yet comprehensive method of testing and determining what's generating foot traffic in each market. We began with a relatively modest trial and then scaled it up; we've now scaled it up on two occasions, and we'll keep doing so, rigorously assessing which initiatives deliver results in which markets.

Great. Could you also provide us with a bit more color or detail regarding how the partnerships with Disney, Hello Kitty — once more, I realize it's really early days, NFL, are all panning out?

Sure. We're extremely happy with how these collaboration efforts have turned out, particularly Hello Kitty truly connected with both existing and new customers during the quarter, and NFL at first is that we're very pleased with how that's going. So it will be — it remains a key component of our strategy now and going forward.

All right. If I could, one final question from me, and then I'll rejoin the queue. You touched briefly on the Pura Vida locations and how you've now placed them within Vera Bradley's retail management. And I recall you mentioning previously that you wanted to pause a bit and assess those stores prior to making a commitment to launching additional ones, and another quarter has passed since then. Where do things stand in terms of that evaluation, or your thinking around adding new Pura Vida stores?

Michael here. Look, we've been keeping a close eye on things, particularly through the summer months, which matter a great deal for the Pura Vida brand. We've been extremely happy with the locations we currently operate. We launched one in Myrtle Beach a year ago, and it has performed quite strongly, and the remaining stores have kept up their strong performance too. We've also observed some pleasant gains. So as we finish up the summer season and move into autumn and begin planning for the coming year, we're currently reviewing our choices regarding that.