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

Hello, and good morning to each of you. We appreciate your presence 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 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 could lead actual results to diverge 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 should not presume that anything said during this call will still hold true at a future point. We assume no duty to revise any information covered on today's call. At this point I'll hand the call to Vera Bradley CEO, Jackie Ardrey. Jackie?

Thanks, Mark. Morning, everyone — appreciate you being on the call today. Let me open with a few remarks about the quarter. We feel good about wrapping up the initial 12 months of our turnaround story. We've moved the organization in the right direction toward a promising future, and we handled both the ongoing business and the turnaround work through Project Restoration well, which should start paying off next year. Our teams stayed careful with gross margin and expenses in Q4, just as they had earlier in the year. We have instilled greater rigor in the way we oversee gross margin and keep expenses in check — that approach is now embedded in our forward-looking DNA — and in addition to that rigor, our strategic priority centers on shoring up and expanding our revenue base. The most recent sales figures illustrate why transformation is needed in branding, product mix, and store settings — exactly the domains Project Restoration is addressing to position Vera Bradley, Inc. for sustained profitable growth over the long term. Following twelve months of foundational efforts, we are genuinely enthusiastic about the customer-facing modifications under Project Restoration that we will introduce during this year. During Q4, revenues for the Vera Bradley brand fell 6.1%, reflecting weak performance throughout all direct channels. Shuttered locations also dragged down sales. New product tie-ups and fresh categories like leather got a favorable reception from shoppers. Still, most buying behavior showed greater caution when it came to nonessential purchases, reflecting broader economic conditions. A notable positive development came in November, when we shifted our digital outlet away from limited-time flash sales and made it a permanent complement to our physical outlet locations. That change brought in first-time buyers and softened the impact of softer results within the outlet store business. Looking at indirect channels, our wholesale accounts took a careful approach to stocking up during Q4. Turning to Pura Vida, fourth-quarter revenue dropped 21.6% compared with the same period a year earlier, driven largely by lower e-commerce and wholesale figures, while outside marketing expenses continued to rise and returns on marketing spend remained difficult. During the quarter, our best performers were holiday gift offerings, including the yearly Advent box along with engraving-related items. Although at Pura Vida we're actively pursuing both revenue stabilization and better marketing effectiveness, the main thing we're focused on is operating the business in a way that delivers profitability. Because of that, we delivered significant improvement in operating margin compared with the prior year, both for Q4 and across the entire year. Anyone on this call certainly understands that a robust balance sheet is hugely important in the retail sector, and that's especially true for Vera Bradley now that Project Restoration is entering the implementation phase. We continue to make our already solid balance sheet even stronger, building up our cash position relative to last year while deliberately reducing inventory levels. We ended the fiscal year with total revenues of roughly $471 million. We posted GAAP net income of $7.8 million, which works out to $0.25 per diluted share — that's a swing back to profitability after a big loss the prior year. On a non-GAAP basis, stripping out charges, net income for the fiscal year came to $17.2 million, or 55% to $0.55 per diluted share. The main drivers behind this better profitability were how gross margin performed and tight control over expenses. Now let me turn to Project Restoration. A little more than a year ago, we began a deep-dive review of the consumer, brand, product, and channel pieces at both of our brands. Out of that work came our long-term strategic plan, Project Restoration, which goes after each of those four pillars. Through Project Restoration, we are putting sensible, targeted steps in place to stabilize revenue, and we remain dedicated to strict financial discipline. Our belief is that executing this wide-ranging, company-wide initiative will deliver profitable growth in the long run and build shareholder value. Over at Vera Bradley, Project New Day launches in the middle of July, marking the first tangible outcome of Project Restoration and a total break from where we stand today; among its components is the introduction of our new, elevated full-line branding and marketing, along with product, store design, and website. This undertaking was informed by consumer research and how the brand is currently perceived by both those who buy it and those who do not. We feel good about our ability to bring in new shoppers and keep the ones we already have, and we'll do that through product innovation and new marketing efforts designed to create joy and connection. There's broad appeal in our new assortment, which includes softer, higher quality fabrics and new styles made so they don't just look great — they feel great too. Now I want to give you more detail on how we're doing in each pillar. When it comes to the consumer, our focus is on rebuilding brand relevance, and we're targeting casual and feminine women between 35 and 54 who value fashion along with function. Because we're zeroing in on that 35-to-54-year-old, we went looking for data to understand where she shops and how she shops. We're applying this data to guide product design and development, and we'll keep leveraging it to reach new customers and pursue new partnerships, licensing deals, and collaborations to broaden our reach; we've established a multi-year 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 roll out new product and our refreshed brand vision mid-year; on the brand side, we're strategically promoting our distinctive and unique positioning as a feminine, fashionable brand that resonates with consumers on a deep emotional level. Vera Bradley is a strong brand with massive name recognition, and our goal is to strengthen it further by telling a fresh story about it. We are shifting where our marketing spend goes, putting additional dollars toward broader reach achieved with greater precision through the proper combination of media. More imaginative campaigns, wider digital exposure, more public relations activity, and inventive in-store programs will all be part of our efforts to spark interest and bring in new shoppers. There's also real excitement on our end about the celebrity we've brought on board — our Chief Joy Officer — whose identity we'll make public during the summer. Rather than concentrating on acquiring customers through individual channels, we keep steering toward an omni-channel approach so that our media delivers better results. When it comes to product, what we're doing is refocusing on the categories at our core — the items we excel at — through innovation and by expanding inside those core products. We're lifting up our colorful, feminine heritage and keeping it distinctive, while making it more trend-right and modern with refreshed prints, colors, styles, and designs. Strategic introductions of adjacent lifestyle items that make sense for our customers will keep coming. A strong brand with high brand recognition is an advantage we hold, and in the full-line accessory space we'll bring something new under a good, better, best halo model. Careful derivation of these changes followed extensive analysis of customer data. On this call, I want to focus on some of the areas that matter most to us right now — travel, bags, and those smaller items you'd carry inside a bag, like wallets and pouches. These give her a way to make her look her own and organize things in a way that fits her. Curating our products is how we respond to what customers want, and it's how we deliver better quality in the fabrics, the components, and the craftsmanship overall. We've upgraded the quality on the majority of our fabrics, but we're still just as committed to using more preferred fibers, and we haven't changed our retail pricing. So while the assortment may look different, it's still clearly Vera Bradley, and our existing customers will find the styles they already love, along with the colors, patterns, and quilting that set us apart.

The response we've gotten from wholesale accounts that checked out our new items at the Dallas, Atlanta, and New York markets has been overwhelmingly favorable. Leather is something I touched on a moment ago. Last fall marked the debut of our redesigned leather line, which includes bags, wallets, wristlets, and other accessories. Results for leather were solid, and the first assortment was largely cleared out. We've taken that momentum and put together a significant expansion under New Day. New made-for-outlet styles, prints, and collaborations are headed to our outlet stores and outlet website, plus select merchandise moved over from full-line stores across the Q3. Collaborations will forever matter when it comes to expressing our brand; partnerships with Disney, Hello Kitty, and Peanuts keep drawing a strong reaction, and those will carry on across every channel. Last, on the channel front, what we're constructing is a balanced footprint that draws a sharper distinction between our full-line and outlet assortments and experiences; we'll speed up our digital-first emphasis and online reach while keeping wholesale relationships brand right and looking into partnerships that can bring us new customers. A key priority is achieving growth in our e-commerce channels; we'll step up this digital-first emphasis and raise our online presence to feature more consumer-focused elements, storytelling, and personalized experiences. Our online shopping experience is getting better and the creative is being elevated, and for the very first time we're putting our outlet assortment online at VeraBradleyOutlet.com; we're also doing a deep dive into our real estate strategy. Malls account for 80% of our full-line fleet, and not all of them are A malls. Some locations are seeing traffic fall, so our strategy needs adjusting to optimize the fleet across both full-line and outlet stores. Opening new formats, moving into new markets, relocating stores where necessary, and deepening penetration in markets we already serve are all things we'll explore. Several expense discipline steps have already been taken to boost profitability at our full-line stores. New branding and an improved shopping experience will be rolled out across our entire existing full-line store fleet. A more modern, less cluttered, and easier-to-shop experience is what these stores will reflect, with new fixturing and lighting that lets the product shine. Our capital budget for the current year, $12 to 14 million, is three times what was spent last year, and these remodels account for much of that; beyond that, 2 full-line stores are planned to open this year and we're working to identify prudent, modest store expansion plans going forward. New full-line formats with an emphasis on lifestyle centers are also being explored. On top of that, we're taking a comprehensive approach to the trends in Vera Bradley's outlet channel; every aspect of the outlet operating model is under review for changes and improvements. Remember that the outlet channel is still highly profitable, and one new outlet store will open this year. Keeping wholesale relationships brand right matters, and we're actively engaging with new specialty retailers in places where we know our customers shop. As you can see, there's a lot going on at Vera Bradley. Let me now move on to Pura Vida, where our attention is going toward achieving profitability and striking the right balance between e-commerce, wholesale, and retail locations. Over the past two quarters, Pura Vida's revenue has fallen, mostly because digital media expenses rose, which brought in fewer new customers. We've spread our marketing dollars across more channels and are putting extra work into keeping existing customers, all while pushing ahead on every element of Project Restoration. When it comes to the consumer, our aim is getting sharper around the collegiate girl aged 18 to 24. Drawing on our latest research, we'll adjust our marketing approach so the brand appeals more to Gen Z; on the brand side, we're bringing our ethos back to living life to the fullest, featuring genuine moments, places, and faces in our campaigns, and keeping Gen Z squarely in our sights. We've become more data-driven, leveraging the comprehensive customer data platform we recently brought online to target customers and prospects more strategically, emphasizing acquisition but above all repeat purchases and retention. With this greatly improved customer reporting and stronger analytics, we've gotten better at diagnosing problems, and we're putting money into new tools for A/B testing and for enhancing both the site experience and conversion. On the product front, our emphasis is on creating distinctive, enjoyable, whimsical designs that remain affordable and accessible, leaning heavily into bracelets and jewelry along with other strategic adjacent categories. Around string bracelets plus our remaining jewelry and accessory lines, innovation will keep going. Our personalized bracelets — spanning Harper Charms, engravable pieces, and build-your-own options — are well liked and remain a substantial growth avenue. High-profile tie-ups such as Hello Kitty, Shark Week, and Harry Potter will keep being pursued, since they're perennial crowd-pleasers that draw new shoppers to the brand. The Pura Vida customer cares about social responsibility, and we support that with our charity program, which backs dozens of causes. Last, on the channel side, we remain intently focused on bringing e-commerce growth back, with more emphasis on repeat purchases and on expanding wholesale strategically. On top of that, because our retail stores have done well, we're hunting for additional store sites for this year and afterward. At least two more stores should open during this year. I'll now hand things to CFO Michael Schwindle for a look at the financial results. Michael?

Thanks, Jackie. Morning, everyone, and I appreciate you being here. Before we get to questions, I want to walk through some Q4 and full-year highlights; to keep things clear, all figures I'm going over today are non-GAAP and leave out the charges detailed in today's press release. A full breakdown of what's excluded from non-GAAP numbers, along with a GAAP-to-non-GAAP reconciliation, is available in that release as well. Starting with Q4, consolidated net revenues came in at $133.3 million versus $147.1 million a year ago. Consolidated net income was $3.5 million, or $0.11 per diluted share, compared with a net loss of $1 million, or $0.03 per diluted share, last year. This year's Q4 had 14 weeks, while the prior-year Q4 had 13 weeks. The full year, fiscal 2024, had 53 weeks, versus 52 weeks in the previous fiscal year. Comparable sales that Jackie and I discussed on this call were figured using 13 weeks for each Q4 and 52 weeks for each fiscal year. That extra week added roughly $6 million in net revenues and lifted earnings per share by about $0.01 for both this year's Q4 and the fiscal 2024 year. In this year's Q4, Vera Bradley direct segment revenues were $93 million, down 6.6% from $99.5 million in the prior-year Q4. Comparable sales fell 10% year over year, mostly because of softness in the outlet and full-line channels. Total revenues also took a hit from store closures during the last 12 months, including eight full-line stores and one outlet store, though we did open three outlet stores in that same 12-month period. Vera Bradley indirect segment revenues were $16.1 million, down 3.7% from $16.7 million in the prior-year Q4. That decline was mainly tied to lower sales to certain specialty partners and key accounts. Pura Vida segment revenues were $24.2 million, down 21.6% from $30.9 million in the prior-year Q4, chiefly because of drops in e-commerce and wholesale sales. Q4 gross margin was $69.6 million, or 52.3% of net revenues, versus $60.7 million, or 41.3% of net revenues. The current-year gross margin rate versus the prior-year rate benefited from lower year-over-year inventory reserve charges, reduced inbound and outbound freight expense, lower supply chain costs, and sell-through of inventory that had previously been reserved, partly offset by more promotional activity. Prior-year gross margin took a significant hit from inventory reserve charges and elevated inbound and outbound freight expense, plus overhead costs. SG&A expenses in Q4 were $65.7 million, or 49.3% of net revenues, compared with $64.4 million, or 43.8% of net revenues, in the prior-year Q4. Vera Bradley's current-year non-GAAP SG&A expenses came in above the prior-year quarter, mainly because of incremental marketing expenses during the quarter, partly offset by savings from company-wide cost reduction initiatives. For the fourth quarter, our consolidated operating income came to $4.1 million, which works out to 3.1% of net revenues. That compares with a consolidated net operating loss of $3.5 million in the prior year, or 2.4% of net revenues. Moving on to the full year, our consolidated net revenues reached $470.8 million, versus $500 million a year ago. Consolidated net income was $17.2 million, or $0.55 per diluted share, against a net loss of $3.2 million, or $0.10 per diluted share, last year. In the Vera Bradley direct segment, revenues for the current fiscal year came in at $309.9 million, down 5.6% from $328.2 million the prior year. Comparable sales fell 7.1% for the year. Vera Bradley indirect segment revenues for the fiscal year were $73.8 million, up 0.7% from $73.3 million a year earlier, mainly due to higher orders from certain key accounts, partly offset by lower revenues from certain specialty partners. Pura Vida segment revenues for the current year were $87.1 million, an 11.5% decline from $98.4 million the prior year, driven by decreases in e-commerce and wholesale sales, partly offset by retail store sales growth. Gross margin for the current fiscal year was $256.4 million, or 54.5% of net revenues, versus $240.5 million, or 48.1% of net revenues, last year. The current year gross profit rate, relative to the prior year, benefited again from year-over-year inventory reserve charges, lower inbound and outbound freight expense year over year, reduced supply chain costs, and sell-through of inventory that had previously been reserved, partly offset by more promotional activity. SG&A expense for the fiscal year was $234.7 million, or 49.9% of net revenues, compared with $245.3 million, or 49.1% of net revenues, the prior year. The decrease in current year expenses came from company-wide cost reduction initiatives. For the fiscal year, the company's consolidated operating income was $22.6 million, or 4.8% of net revenues, versus a consolidated operating loss of $4.4 million, or 0.9% of net revenues, the prior year. Turning now to the balance sheet. Our cash and cash equivalents at fiscal year-end were $77.3 million, compared with $46.6 million at the close of the last fiscal year. At year-end, we still had no borrowings on our $75 million ABL facility. Total inventory at fiscal year-end was $118.3 million, versus $142.3 million last year. We've taken strategic steps to bring inventory levels down and believe we're appropriately positioned heading into spring and as we get ready for our new product launches in July; during fiscal 2024, we bought roughly 360,000 shares of common stock at an average price of $6.10 per share, for a total of about $2.2 million. $25.5 million is left under our $50 million repurchase authorization, which expires in December 2024. Now, turning to our guidance for fiscal 2025, our estimates for fiscal 2025 rest on current macroeconomic trends and expectations as we start to reveal the results of Project Restoration and the mid-year launch of New Day. Because of how the timing fell, we anticipate that revenue will still face some pressure during the first two quarters of this fiscal year, while sales and profitability should show better trends in the latter half. We plan to keep capitalizing on chances to improve gross margin, and we will control our cost structure carefully. Just to remind everyone, every piece of forward-looking guidance we give is on a Non-GAAP basis. Looking at the whole of fiscal 2025, our expectation is consolidated net revenues between $460 million and $480 million. Again, as a reminder, net revenues came to $470.8 million in fiscal 2024. For the Vera Bradley brand, we expect sales to increase by low single digits this year, with growth speeding up in the back half as we roll out new products, branding, and marketing; for the Pura Vida brand, we anticipate a sales decline in the mid-teen range as we keep running that business for profitability by tackling marketing efficiencies that are affecting e-commerce sales, which will be partly offset by higher retail sales. We also project consolidated gross margin between 54% and 55%, against 54.5% in fiscal 2024. The fiscal 2025 gross profit rate should be roughly flat versus last year, thanks to product margin gains and reduced supply chain costs, offset by higher shipping costs. Consolidated SG&A expense should come in somewhere between $229 million and $239 million, against $234.7 million a year ago. On a year-over-year basis, SG&A expenses should be about flat versus last year, reflecting added marketing investments tied to the New Day launch, offset by expense cuts across the company and lower Pura Vida expenses. That brings us to anticipated consolidated operating income of $21 million to $24.5 million, against $22.6 million in fiscal 2024, together with diluted earnings per share of $0.54 to $0.62, against $0.55 last year. We also anticipate net capital spending of roughly $12 million to $14 million, versus $3.8 million last year. That spending reflects investments in new and remodeled stores, along with technology and logistics improvements. Consequently, we anticipate free cash flow of about $10 million in fiscal 2025, against $44.2 million in fiscal 2024. That wraps up our formal remarks. Sherry, we would like to open the call for questions.

Good morning.

Morning, Joe.

So Jackie, you mentioned that both brands will see quite a few shifts during calendar year 2024. You've spent 18 months in your role at this point. Michael has been here roughly a year now. Project Restoration has been discussed for about a year, give or take. Is the difficulty of fixing that situation simply far larger than what you initially expected, or are there certain developments taking place that have required a fairly lengthy stretch of time before you could fully grasp them, so that you could land on the adjustments you laid out today?

Joe, that's an excellent question. The brief response is no. Regarding our work to reverse the trajectory of this business, we are completely where we should be. A very lengthy product life cycle was the initial matter we truly needed to address. I've been in this seat for around 15 months, and our product life cycle runs about 18 months. Once you settle into the role and then bring aboard the staff capable of executing transformation at this scale, we're genuinely positioned where we ought to be when it comes to rolling all of this out midway through the year. Beyond that, I'd add that this represents a substantial shift, and it's the single thing that, across the years, a great many people who track the brand would point to, since there have been numerous initiatives at Vera Bradley in particular that we've carried out. This effort is unlike those. What Project Restoration lays out is an extremely wide-ranging undertaking. It isn't merely a single piece of the pillar — it's the whole pillar. This qualified as a larger undertaking, and so I anticipate seeing that midway through the year, when we introduce New Day for Vera Bradley, we will observe some genuinely strong outcomes. Turning to the Pura Vida side, the problems there are distinct, certainly distinct. We're witnessing additional outside pressures that have genuinely led us to conclude, "You know what? This is a business we intend to run for profitability." That's what we did this year. We did it across the year, and we did it across the quarter. In my view, our plans remain fully where they should be.

All right, I appreciate that, thank you. During today's remarks, you mentioned enhancing fabric quality while keeping the retail price the same. Does that affect margin at all, or have you reached a stage where improving the fabrics without changing the price won't hurt margins?

That's a wonderful question as well, and we more or less figured it would come up today. Honestly, it is. The brief response is no. Our expectation is actually that product margins will be roughly flat or slightly improved. The reason is a shift in mix, certainly, that's one factor, and a second factor is simply the designs we've managed to create into, well, into styles capable of showcasing the fabrics, the new and better fabrics we're working with using less make.

All right, thanks. You brought up as well, you know, that new full-line concept that centers on lifestyle locations. I wanted to ask if you might explain what you were referring to there, or what you mean by it.

It's essentially the option besides the formats we have inside malls, and those make up most of our fleet right now. We'd want to shift that balance and have a bit more presence in lifestyle centers. You know, spots that are shopping centers anchored by Whole Foods and spots where she goes constantly. You know, all of this really revolves around, for Vera Bradley, revolves around the customer and grasping where she shops, not just from the angle of a specialty or lifestyle retailer, but where she heads each day, and how do we simply put ourselves more into the front of her mind and consideration set.

All right, if I could, just one more. Fiscal 2025, according to the guidance you've provided today, looks like it will essentially mirror 2024 financially. I'm curious — what do you believe, or what do you foresee, could happen that would allow 2025 to deliver a stronger financial result than 2024?

Michael, would you like to handle that?

I'll start things off. The main factor, I believe, would be how customers respond once New Day is out there. We're keeping our expectations quite careful and disciplined, making sure the organization stays focused on execution. If consumer response clearly exceeds what we projected, that would naturally mean stronger results too. Beyond that, as I said in my forward-looking remarks, we expect some lingering macroeconomic pressure. Throughout 2024 — we discussed this on earlier calls — traffic patterns declined sequentially across the bulk of the year, and that carried into Q4, which I think shows up in many other retailers' results released during the past week or two. We keep expecting a share of that to weigh on 2025; so should that outlook improve, then naturally a rising tide lifts all boats there as well.

Wonderful. Thanks for fielding my inquiries, and I'm eager to see what an intriguing 2025 brings.

Appreciate it, Joe.

Thanks, Joe.

Good morning.