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

Hello, and good morning to all of you. We appreciate your presence on today's call. Certain remarks delivered in our prepared comments and in answers to your questions might qualify as forward-looking statements, issued under and as defined by the safe harbor clauses 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 lead actual outcomes to differ materially from what we anticipate. For a review of known risks and uncertainties, kindly consult today's press release along with the company's latest Form 10-K submitted to the SEC. Investors shouldn't presume that anything said on this call will still hold true at a future date. We assume no duty to revise any information covered during today's call. At this point I'll hand the call over to Vera Bradley's CEO, Jackie Ardrey. Jackie?

Thanks, Mark. Morning, everyone, and thanks for being with us on today's call. Work on Project Restoration is ongoing, with associates throughout the organization collaborating to put Vera Bradley Inc. in position for profitable growth over the long term. We're quite happy with the significant strides achieved up to now. On a year-over-year basis, third quarter non-GAAP income came in essentially flat, since we achieved healthy gross margin improvement and kept tight control of costs even though sales were challenging. For the Vera Bradley brand, total third quarter revenues fell 5% versus a year ago. Declines in Vera Bradley direct revenue stemmed mainly from ongoing softness in the outlet store channel plus the effect of store closures. Compared with last year, Vera Bradley indirect revenues rose to the prior year's level. Pura Vida sales on a year-over-year basis dropped 18.3%, with reductions in both wholesale and e-commerce revenues, as the prior year's sales benefited from considerably greater marketing spend together with more liquidation and clearance activity. Store sales continue to be robust. Thanks to rigorous expense management and our emphasis on profitability, Pura Vida's third quarter operating income on a year-over-year basis got better. At both brands, customers have embraced our newest iconic product collaborations and our fresh innovative and on-trend product offerings, even while being more cautious with discretionary spending amid the current macro environment. We keep diligently managing a balance sheet free of debt, building on our year-over-year cash position while deliberately bringing inventory levels down. Strength here matters for navigating a retail environment full of uncertainty and for backing our Project Restoration initiatives. Right now, we're pursuing targeted and prudent steps to stabilize revenues, and we stay committed to strong financial discipline, controlling what is within our control as we respond both strategically and tactically to present market conditions. At the same time, we've achieved meaningful progress and are fully on track with our long-term strategic plan, Project Restoration, centered on 4 key pillars of the business for each brand: consumer, brand, product and channel. We believe carrying out Product Restoration will generate profitable growth over the long term and return value to our shareholders. Let me update you on a few of the initiatives currently underway tied to Project Restoration. We'll share further updates alongside our year-end earnings call, with more rollout details in June. At Vera Bradley, on the consumer side, we're concentrating on restoring brand relevancy, aiming at casual and feminine women aged 35 to 54 who prize both fashion and function above all. We've built a multiyear customer file growth plan centered on this core consumer target, together with a suitable level of marketing investment to bring in new customers as we introduce new product and our refreshed brand vision next year. Our consumer research centered on this target audience, and we prioritized her needs to guide product design and development. On the brand side, we're striving to strategically market our distinctive and unique standing as a feminine fashionable brand that forms a deep emotional connection with consumers. This year, our marketing initiatives have driven up the count of customers we've won back. We keep moving away from acquiring customers channel by channel, toward an omnichannel approach that makes our media work harder. A refreshed brand vision and marketing plan is set to launch midway through next year. On the product side, we're returning our emphasis to the categories and items where we excel, innovating and broadening within core lines such as Travel and Back to Campus. By the midpoint of next year, you'll see how we've lifted our colorful feminine heritage, preserving its distinctiveness while making it more on-trend via refreshed prints and design, and we'll keep adding strategic adjacent lifestyle pieces that resonate with our shoppers. Featherweight, Performance Twill, ReActive and Ultralight — our performance fabrics — keep performing strongly, drawing our younger core shopper, who tends to have a higher household income. In our view, performance fabrics represent a major opportunity. Signature patterns will remain central, yet coordinating solids are still a key opening for us too. We've been growing our solid assortment and will keep doing so. Related to that, September marked the debut of our revamped leather line of bags, wallets, wristlets and other accessories. Customers have responded well to the simple clean lines, lovely designs and outstanding functionality, and we anticipate broadening this collection moving forward. In Q3, shoppers who bought leather spent 7x what their full-price purchasing counterparts did. Collaborations on product will remain a vital piece of how we express our brand. From Disney to Hello Kitty to Peanuts to our newest launch, the Toy Story Collection, the response keeps being strong. More exciting collaborations are coming next year, so stay tuned. We're particularly excited about the NFL collection that arrived in August; come fiscal 2025, we'll extend it across all NFL teams. For the holiday season, we've got a terrific gifting assortment featuring fan favorites and items that are uniquely giftable, from bags to ornaments to our Cozy Collection, all at compelling price points. Items from beloved collaborations also feature in holiday gifting, among them Hello Kitty, Peanuts, Disney, Toy Story and Star Wars. Turning to channel, we're speeding up our digital-first emphasis and online footprint, creating a more balanced store presence and making the full-line assortment clearly distinct from what we offer in outlets. We're likewise intent on boosting full-line store profitability, with future growth plans for this channel that include remodels of existing stores during the first half of next year, plus new format development. Beyond that, we're pursuing ties with wholesale partners that are strategically aligned. Along these lines, our recent site rebranding and navigation updates have succeeded in lowering bounce rate and lifting conversion and sales. What we've learned from those updates will inform a complete site rebrand at the middle of next year. Through product, marketing, and expense discipline, we've made moves to boost profitability at our full-line stores; right now we're working out sensible, measured plans for adding stores next year and after. We're also tackling what's happening in Vera Bradley's outlet channel with a wide-ranging, multipronged effort — that covers focused marketing strategies meant to bring in traffic and lift conversion, changes to pricing, plus testing and a store contest. Switching over to Pura Vida: on the consumer side, we're zeroing in on young women between 18 and 24, which was the brand's initial target audience. When it comes to the brand, we've reanchored our philosophy around living life to the fullest; our marketing has shifted so we genuinely showcase actual moments, places, and faces belonging to our customers and fans; we've become more data-driven, leveraging our recently launched full-scale customer data platform to target shoppers and prospects more strategically, with close attention paid to both gaining and keeping customers. Our Live Free and college mobile tours as of late were enormous wins when it came to engaging customers; on the product front, our emphasis is on creating distinctive, enjoyable, whimsical designs that stay affordable and easy to get, with bracelets and jewelry as the main priority along with other carefully chosen adjacent categories. Innovation and newness are paying off. Our custom bracelets — from Harper charms to items you can engrave to making your own — are well-liked and remain a significant growth opportunity. We'll keep going after prominent collaborations such as Hello Kitty, Shark Week, and Harry Potter, which fans always love and which draw new shoppers to the brand; we broadened our men's collection not long ago; that collection still speaks to our core customer, who buys these pieces for the men in her life. Holiday gifting represents a massive opportunity for us, and what we offer spans special holiday bracelet packs, collectible ornaments, holiday-themed Harper charms, and our extremely popular advent boxes. Social responsibility matters to the Pura Vida customer, and we back that through our charity program, which supports a range of charities, among them Mental Health Awareness, Homes For Our Troops, Best Friends Animal Society, and The Trevor Project. On the channel side, we're heavily focused on fueling e-commerce growth and strategically growing wholesale by chasing larger, more strategic partnerships and growing bigger existing accounts; beyond that, we're starting to hone and build out a plan for expanding our current store model. Given how well our current Pura Vida stores have done, we're in the middle of pinpointing a small number of new Pura Vida store locations for 2024; we'll share more solid plans in March during our year-end call. To achieve efficiency on both the operational and strategic fronts, we shifted Pura Vida store operations under the Vera Bradley team earlier this year. We're taking steps to steady Pura Vida's revenues and then grow them consistently, while also reversing what's happening in Vera Bradley's outlet channel. Everyone here is committed to building revenue over the long haul, lifting gross margin, and maintaining rigorous financial management and expense oversight — and we believe all of that will produce profitable growth over time; at this point I'll hand things over to our CFO, Michael Schwindle, so he can walk through the financial results. Michael?

Appreciate that, Jackie, and good morning to everybody. I'll start by walking through a few specifics on our third quarter, then move into updated guidance for the full year. Just to be clear, the figures I'll reference are non-GAAP and leave out the charges described in today's press release; a full breakdown of what's excluded from non-GAAP figures, along with the GAAP-to-non-GAAP reconciliation, is available in that release. Turning to Q3, consolidated net revenues came in at $115 million, versus $124 million in the same quarter a year ago. Consolidated net income reached $6.1 million, or $0.19 per diluted share, against $6.3 million, or $0.20 per diluted share, a year earlier. In this year's third quarter, Vera Bradley direct segment revenues were $72.3 million, down 9.7% from $80.1 million in the comparable quarter last year. Comparable sales fell 8.2% during Q3, largely the result of softness in the outlet channel. Total revenues also took a hit from store closures during the past 12 months, among them 15 full-line and 2 outlet closures. We additionally opened 3 outlet stores within those same 12 months. Vera Bradley indirect segment revenues were $25 million, up 12% from $22.3 million in last year's third quarter, driven by a sizable one-time key account order that wasn't present a year ago. Pura Vida segment revenues came to $17.7 million, down 18.3% from $21.7 million a year earlier, as sales to wholesale accounts declined and e-commerce sales also dropped, partly offset by gains in retail store sales. Gross margin for the third quarter was $63 million, or 54.8% of net revenues, versus $65.6 million, or 52.9% of net revenues, a year ago. This year's gross profit rate benefited from reduced inbound and outbound freight expense compared with last year, lower supply chain costs, and sell-through of inventory that had previously been reserved, partly offset by heavier promotional activity. Last year's gross profit was significantly affected by elevated inbound and outbound freight expense, along with deleverage of overhead costs. SG&A expenses were $55.1 million, or 48% of net revenues, compared with $57.6 million, or 46.4% of net revenues, the prior year. The drop from last year comes from company-wide cost reduction initiatives spanning multiple parts of the organization. The expense deleverage stemmed from lower revenues. Consolidated operating income for the third quarter was $8 million, or 7% of net revenues, versus $8.2 million, or 6.6% of net revenues, last year. Now let me shift to the balance sheet. Cash and cash equivalents at quarter end were $52.3 million, versus $25.2 million at the close of last year's third quarter. We still carry no borrowings against our $75 million ABL facility. Inventory stood at $129.1 million at quarter end, compared with $178.3 million at the end of the third quarter a year ago. We've made deliberate moves to bring our inventory down, and heading into the holiday season we feel we're in the right spot. In the quarter, we bought roughly 72,000 shares of common stock, paying an average of $6.76 apiece, totaling about $485,000. There's $25.8 million left available under our $50 million share repurchase authorization, which runs out in December of 2024. Given how the first 9 months of the year have gone, along with the initiatives we have in motion and where the macroeconomy stands and is headed, we're revising some pieces of our guidance for the fiscal year, and we've also changed our diluted EPS range. Keep in mind, these figures are all non-GAAP. Our expectation now is consolidated net revenues between $472 million and $478 million. Just to note, net revenues came to $500 million a year ago; we also anticipate a consolidated gross margin percentage between 54% and 54.5%, versus 51.4% a year earlier. Lower freight costs compared to last year, our cost reduction efforts, and sell-through of inventory we'd previously reserved should help this year's gross margin rate, though that's partly offset by more promotional activity, as I said — everything I brought up before. Consolidated SG&A expense should land between $232.5 million and $235.5 million, against $245.3 million a year ago. The drop in SG&A comes from cost initiatives across the company, partly offset by bringing short-term and long-term incentive compensation back to more normal levels, plus some added marketing spend meant to speed up long-term growth of our customer file; that brings anticipated consolidated operating income to between $23.3 million and $25.9 million, versus $12.3 million a year ago, with diluted earnings per share of $0.56 to $0.62, versus $0.24 a year ago. We also anticipate net capital spending of about $4 million this year, compared with $8.2 million a year ago, reflecting investments tied to Vera Bradley outlet stores and certain technology and logistics improvements. And finally, free cash flow should come in between $40 million and $43 million, compared with cash usage of $21.7 million for the full year last year. That wraps up our formal remarks. So operator, let's go ahead and open the call for questions.

So Jackie and Michael, when we spoke during Q2, your traffic was declining, and you were implementing measures like paid media and mall takeovers to bring in more visitors. Could you share what you've learned so far, and what other options you're considering to boost traffic?

Yes. Thanks for asking, Joe. A few things on that. To start, the marketing efforts we ran during Q3 did succeed at increasing traffic and improving the trend. Unfortunately, due to the conversion metrics, they didn't generate sales as effectively. So we've run multiple tests that have led to changes we've made for Q4. We keep adjusting our marketing mix to identify what works, push those efforts, and get the most out of them.

All right. Perhaps shifting focus now to Pura Vida; we entered the year in a fairly favorable climate there. Revenue actually rose compared to the same period last year. However, they fell during the second quarter; in this quarter, they recovered to roughly a 20% decline. I understand a portion of that, as you mentioned, stemmed from certain one-time occurrences. Could you possibly separate what the figure would look like excluding those one-time occurrences? Alternatively, what actions do you believe we can take in the near term to sort of turn around that trend back to what we observed earlier in the year?

Yes, excellent question. So during August and September, we were genuinely up against promotional efforts that we chose not to replicate this year. That, along with a stronger emphasis on the brand's profitability, led us to reduce certain marketing expenses across those 2 months; consequently, the initial 2 months of the quarter proved notably tougher. After that, October was stronger. So we keep assessing what amount of spending is appropriate to fuel customer acquisition; on the other hand, our physical locations delivered solid results during Q3 at Pura Vida. They additionally benefited from generating further customer acquisition. So we are examining that closely to guide our strategies for the coming year.

All right. Excellent. I have one final question regarding the inventory. Once again, excellent work on that front. But excuse me, it dropped by roughly another $10 million compared to the prior quarter, so I'm just curious, do you believe there is actually additional room to reduce it on the inventory side? Or have we reached a point where we will likely need this as, ideally, we start to see sales increase?

Yes. Joe, I believe multiple factors are at work when we consider inventory, particularly as you approach the close of the year and looking further ahead. First, we still anticipate inventory being down 10% to 15% year-over-year by the time the year ends. There could be a slight delay — well, I'll describe it as a delay and a shift, because the Chinese New Year falls right around our fiscal year-end, whereas typically there is roughly a week of gap between our year-end and Chinese New Year, which impacts the importing of products and the scheduling of that. So — however, we continue to expect a 10% to 15% decrease from — on a year-over-year comparison. As we look ahead to the following year, we will give more detailed guidance for that year, but opportunities remain in how we manage inventory. They will be somewhat obscured next year simply because of the product transition tied to Project Restoration, which is set to arrive midyear. So I anticipate that we will keep seeing gains in our operations along with some gains in the total inventory level, but additional guidance will be provided on our upcoming call.

Nice work on the third quarter. There are a few items I'd like to get into. The first one is the indirect sales channel and the chance to do more indirect and wholesale business, I suppose. This marks the second quarter in a row where it's risen compared to the same period a year ago, following a lengthy stretch of decreases. What's behind that — are you finding that additional customers are interested in carrying the product? Or is it that existing customers are purchasing larger volumes? What are you observing when it comes to the indirect channel? And you mentioned it for both Pura Vida and the Vera Bradley brand, saying it's pushing that forward as a favorable factor.