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

Hello everybody, and welcome — thanks so much for being with us on today's call. A number of the things we say while delivering our prepared remarks and answering your questions could count as 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, and those could make actual results come out materially different from what we anticipate. For a discussion of the known risks and uncertainties, please look at today's press release along with the company's most recent Form 10-K filed with the SEC. Investors shouldn't assume that what gets said during the call will still hold true at a later point. We're not taking on any obligation to update any information discussed on today's call. Now I'll hand the call over to Vera Bradley's CEO, Jackie Ardrey. Jackie?

Thank you, Mark. Good morning, all, and we appreciate you being with us on this call. During the second quarter's later portion, as we talked about during our previous call, we introduced the first stage of Project Restoration across our brand stores along with the verabradley.com site. This marked a reintroduction to the public of our iconic Vera Bradley brand, rooted in a refreshed vision and positioning as our company pivots toward a promising future focused on sustainable, long-term profitable growth. That first stage was intended to lift and set apart both the product assortment and the positioning from what our outlet channels offer, bring in new shoppers, and drive a greater proportion of sales at full price. I'm really proud of what the team pulled off in such a short amount of time, and the marketing campaigns we launched were extremely effective. For this launch, we targeted a consumer who's younger and has more money, and we managed to gain traction with that group, largely without discounting. On top of that, our refreshed brand marketing and merchandise are bringing in partnerships with new retailers, including Urban Outfitters, which just launched this month. Collections at the top of the pyramid, like leather and oxford canvas, performed particularly well with existing customers, even though retails were higher. Once we launched, the number of transactions per brand channel rose 9.3% versus the same period a year earlier, which shows more selling at full price and a move toward higher-tier products. While plenty of aspects of the rollout pleased us, the results overall let us down, and they show that the macro pressures on consumers from the first quarter have carried over, along with certain factors we can influence. At Pura Vida, digital media acquisition expenses remain high, which kept us from putting more money into growing the customer base. Our Indirect channel also stayed careful during the early portion of the second quarter, since traffic at specialty and destination stores for our partners started out lower. Turning to our second-quarter results: net revenues came in at $110.8 million, down 13.5% year over year, while non-GAAP net income was $3.9 million, or $0.13 per diluted share. Those figures fell short of what we had anticipated internally, and they mainly speak to a difficult consumer environment, one in which shoppers remain highly selective about discretionary purchases. Breaking things down by segment for the quarter, Vera Bradley Direct brought in $72.2 million in revenues at a 19.1% operating margin, Vera Bradley Indirect generated $21.8 million in revenues at a 22.8% operating margin, and Pura Vida posted $16.8 million in revenues at a 4.1% operating margin. We have faith in where we're steering this company, and we stay dedicated to the main priorities of Project Restoration, which include: First, bringing back Vera Bradley's brand relevancy, deliberately promoting our distinctive and unique standing as a feminine fashionable brand that forms deep emotional bonds with consumers; second, going after casual and feminine women aged 35 to 54 who appreciate style along with practicality; third, embracing our beautifully reworked product range for today's consumer and what she needs while keeping the pieces that traditionally define Vera Bradley; and fourth, creating a well-balanced multichannel framework that lets shoppers buy whenever, wherever and however they prefer to shop with us. I'll address those main priorities shortly. Given our first half results and how the third quarter has begun, we are now sensibly approaching the second half through a far more cautious perspective. Our overall outlook captures the pressures and trends we've observed and encountered up to the midpoint of this year, and we anticipate they will persist for the rest of the year. Michael will provide some specifics on that in a few minutes. Still, let me be clear that we have faith in where we're steering this company and in the key wins during the quarter, which have carried into the third quarter so far and confirm for us that we're heading the right way for long-term health. Things are taking longer than we anticipated, but we believe we're headed in the right direction. Our efforts to restore the brand are already in motion, and throughout the fall and holiday season we'll remain agile and adaptable as we pursue our goal of encouraging people to be daring in what they chase and exceptional in how they express themselves. That said, we entered the back half of the year financially strong, with zero debt and $44 million in cash on hand, which gives us the flexibility to navigate a consumer landscape that keeps shifting. Over the next several years, we're committed to strengthening our financial standing through operational enhancements, and Michael will share additional details on those as well. Our management of SG&A this quarter was excellent — we're more than $6 million below last year across both brands, and that's even after the planned additional marketing spending at Vera Bradley. Before I go further, I want to express my appreciation to everyone across Vera Bradley for the effort and commitment they showed in the run-up to and during the rollout of Project Restoration, and for how steadfastly they've supported our brands and the people who buy from us. Unlocking joy and sparking conversation through color and artistry that lift people up — that's what we're here to do, and our teams have pursued it with real enthusiasm. We recognize plenty of work still lies in front of us, so we're keeping a close ear on both newly acquired and long-standing customers — hearing them out, making tweaks, and moving quickly and skillfully so that every brand interaction lands on an emotional level. Let me take you through some further details about Project Restoration at Vera Bradley. On July 11, we launched the first stage of the Vera Bradley transformation, meant to give the company new energy and restore how relevant the brand feels. That covers new merchandise, a redesigned logo, remodeled stores, a better online shopping experience, and a new marketing effort featuring Zooey Deschanel as our brand ambassador. Four pillars supported this transformation work: product, brand, customer and channel. One thing to note: the outlet portion of this effort arrived in late August. Although it hasn't changed sales patterns in the outlet store channel yet, our vboutlet.com site is doing quite well. Our brand channel's updated lineup features upgraded textiles and technical fabrics — cotton gabardine, oxford canvas, and genuine full-grain leather among them — offered in fresh takes on shapes taken from our best-selling heritage styles. While these pieces have been given a refined, tasteful touch, they continue to honor the traditions and signature details that have always been associated with Vera Bradley. I'm happy to report that strong performance came from the upper end of our good-better-best pricing structure, particularly with shoppers who already owned our products and those we've won back. Leather items, plus solid hues and on-trend fashion shades like bronze green and pumice stone, all performed well — clear evidence that both our established buyers and first-time customers are attracted to silhouettes and colors that follow current trends. While the majority of the enhancements we made to our products have drawn favorable responses, a few useful comments came in about specific style modifications—for instance, people asked for straps that are longer and wider, more pockets, and zipper closures. That input is something we appreciate, and we have updated our assortment in time for the holiday and spring seasons. Ensuring that customers, whether new or returning, can discover items they like with the features they require is important to us.

Additionally, feedback reached us that our print assortment was reduced excessively, particularly within cotton, and we intend to fix this across forthcoming seasons. Lastly, the number of fresh collaborations during Q2 declined compared with the prior year, yet these will remain a component of what we offer across every channel. Deliveries of our new Mickey items, in the brand channel as well as outlets, earned a terrific response from shoppers, and fans may anticipate beloved characters alongside new properties arriving during holiday and beyond. To support our brand and customer pillars, we carried out numerous initiatives and approaches. Within that framework, Vera Bradley brought on actress, musician and entrepreneur Zooey Deschanel as the face of the brand's fall creative campaign, reaching billboards, print and digital platforms; we witnessed robust sales of Zooey's hand-picked favorites, among them the Astoria shoulder bag, the Springbrook sling crossbody and the Miramar Weekender. The bulk of these initiatives centered on boosting awareness, relevancy and exposure among our target customer group. Early on, we've observed excellent momentum, since customers we've acquired fall inside our desired age target while carrying higher household income. The rate at which we're acquiring these customers is at first slower than anticipated, though progress keeps happening. Zooey appears in our holiday campaigns, and we eagerly await how our new prints and giftable items, debuting next month, are received. Examining our different channels, the first signals emerged within our Indirect business, where we felt especially good about on-the-floor selling among our top-tier wholesale accounts, covering specialty stores, department stores and airports. We've been particularly thrilled by our August 27 Vera Bradley limited-edition launch collection done in collaboration with Urban Outfitters. That partnership has begun wonderfully and will grow considerably for holiday, across both stores and online. We're likewise talking with additional retailers and licensing partners who've shown keen interest in our rebranding, and I'm eager to share our progress with you next quarter. I'll now move on to Pura Vida. At Pura Vida, we keep shifting our long-term emphasis toward generating profitability via cost control and gross margin expansion, all while balancing the e-commerce business against wholesale and suitable retail store expansion. We stay dedicated to honing our attention on 18- to 24-year-olds and re-centering how our brand expresses living life to the fullest. We keep diversifying where our marketing dollars go and focus our work on retaining and reactivating customers. On product, our attention is shifting toward core categories such as bracelets and jewelry. Our Harper Charms program is doing nicely and remains a growth opportunity; we're also still pursuing product partnerships with licenses including Harry Potter, Disney, Shark Week and others. Our Stretch program keeps performing strongly in bracelets and anklets, and we'll build on those wins. On channel, our ongoing emphasis stays on profitable e-commerce sales together with retail. Things are going nicely across our store fleet, and we're particularly enthusiastic about the new spot at Disney Springs, set to launch toward the end of this month. At this point I'll hand things over to Michael Schwindle, our CFO, so he can walk through the financial results. Michael?

Thanks, Jackie. Morning, everyone, and thanks for being with us; in a few minutes we'll take your questions, but before that, I want to walk through a few highlights from the quarter and then briefly go over our updated guidance for the year. Just so it's clear, every figure I mention today is non-GAAP and leaves out the charges described in today's press release. Full details on what's excluded from the non-GAAP figures, plus a reconciliation of GAAP to non-GAAP figures, are available in that release; during the second quarter, our consolidated revenues came to $110.8 million, versus $128.2 million in last year's second quarter. Net income for the second quarter was $3.9 million, or $0.13 per diluted share, compared with net income of $10.2 million a year ago, or $0.33 per diluted share. Turning to segment results, Vera Bradley Direct segment revenues in this year's second quarter were $72.2 million, down roughly 16% from $85.7 million in last year's second quarter. Comparable sales fell about 11%, and total revenues year-over-year also took a hit from 5 store closures, 1 store opening, and the shift of the annual outlet sale out of last year's second quarter into this year's first quarter. Vera Bradley Indirect segment revenues were $21.8 million, up 25% from $17.4 million in last year's second quarter; that gain stemmed mainly from new assortment purchasing by our Indirect partners, plus liquidations of older assortment tied to Project Restoration. As Jackie mentioned earlier, we're quite happy with many parts of our Indirect business this quarter; for instance, our comparable Indirect partner accounts saw a mid-single-digit rise in orders and also had meaningful, or average order size, increases; we've also seen strong business development, reflected in the success of Urban Outfitters that Jackie brought up just a few minutes ago, along with others still in the pipeline. Pura Vida segment revenues were $16.8 million, down 33% from $25.1 million in last year's second quarter, driven mostly by lower e-commerce and wholesale revenues. As a reminder, our key focus for Pura Vida has been, and remains, running the business for profitability rather than just revenue growth. With digital marketing costs climbing quickly starting in late third quarter last year, the Pura Vida team is concentrating on marketing efficiency and on diversifying digital marketing. Non-GAAP first quarter gross margin was $56.4 million, or 50.9% of net revenues, versus $72 million, or 56.2% of net revenues, a year earlier. Gross margin fell year-over-year because of more liquidation sales and heavier promotional activity, especially in our outlets. Non-GAAP SG&A expense was $52.2 million, or 47.1% of net revenues, compared with $58.3 million, or 45.5% of net revenues, in last year's second quarter. Expenses for the current quarter came in below last year's comparable period, driven mainly by initiatives aimed at cutting costs, plus a decrease in variable-related expenses tied to softer sales volumes. We keep looking closely across every part of our organization for chances to improve both processes and costs, and our teams are growing more diligent and focused when it comes to managing costs. For the second quarter, non-GAAP consolidated operating income came to $4.3 million, which equals 3.9% of net revenues, versus operating income of $14 million, or 10.9% of net revenues, a year earlier. Let's move on now to the balance sheet. Cash and cash equivalents at quarter end added up to $44.1 million, against $48.5 million at the close of last year's second quarter. Once again, at quarter end we carried no borrowings against our $75 million ABL facility. Inventory at quarter end reached $133 million in total, a decline of almost 5% from $139.3 million at the close of last year's second quarter. Beyond structural adjustments to how we merchandise and source, we keep taking strategic steps to bring inventory levels down, all with the goal of bettering both product flow and product quality. Our teams in merchandising, merchandise planning, sourcing and design especially have achieved considerable progress in reshaping how we approach acquiring inventory as well as managing it. These efforts have had a meaningful effect on our capacity to steer through this year and will keep generating improvements going forward. Also during the second quarter, we bought back roughly $9.5 million in common stock, about 1.4 million shares, at an average price of $7.01, which lifted the total repurchase over the 6 months to roughly $15.9 million. As the quarter closed, roughly $9.6 million was left under our $50 million repurchase authorization, which runs out in December of 2024. Last, I want to walk through our updated guidance for fiscal 2025. Keep in mind that all forward-looking guidance is presented on a non-GAAP basis. For context, please also note that this year consists of 52 weeks, whereas the prior year as reported had 53 weeks. Given our first half results and ongoing macro uncertainty, we are prudently assuming recent business trends persist through the remainder of this year. We have been actively weighing a range of responses to the environment and are speeding up several operational changes across the organization, which will simplify our cost structure and boost our flexibility and responsiveness. A number of these changes are already producing savings and effectiveness during the current fiscal year, while others will keep producing savings and effectiveness in years ahead as well; for the entire fiscal 2025 year, we anticipate consolidated net revenues of about $410 million. Vera Bradley overall sales for the year to go are projected to fall in the low teen range, with some sequential improvement in Q4 versus Q3, fueled by opening 6 new Vera Bradley outlet stores and 1 new Vera Bradley brand store in Q4. For the Vera Bradley Indirect segment, we anticipate a sales drop in the low single-digit range, with Q3 coming in softer and Q4 stronger, which will partly make up for it. At Pura Vida, we're looking at a mid teen range decline in sales, with Q3 performing much like Q2 did relative to last year, but in Q4, as the business laps prior results, the rate of decline should be in the single-digit range — a range decline — due to the marketing efficiency issues from last year and the launch of the new Disney Springs store. For the full year, we expect consolidated gross margin around 53%, versus 54.5% in fiscal '24. The gross margin rate decrease comes from a higher promotional cadence in our Direct segments, plus more liquidation sales so far this year, though this is partly offset by improvements in product costs and lower supply chain costs; we anticipate these patterns will hold fairly evenly over the rest of the year. Consolidated SG&A expense should be about $215 million, compared to $234.7 million in fiscal 2024. The reductions in SG&A expense versus last year are expected to stem from lower variable costs, as well as ongoing structural cost cuts, and they'll be concentrated heavily in the fourth quarter. As I mentioned a short while ago, we keep evaluating our business processes and standards, and we're dedicated to getting the overall cost structure of the organization to the right size; over time, this will create a new, lower baseline that business growth can leverage more effectively going forward. All of this should lead to consolidated operating income of roughly $3 million, versus $22.6 million in the fiscal 2024 year, and diluted earnings per share of about $0.10 per share, compared to $0.54 per share last year on a 52-week basis. We also anticipate net capital spending of about $13 million, versus $3.8 million last year; this level of spending reflects investments tied to new and remodeled stores, as well as technology and logistics enhancements. To finish up the guidance, we expect ongoing progress on disciplined inventory management, as I said earlier, so that end of year inventory should be roughly 5% below last year's year-end level, which at that point had dropped about 17% from the year before. Consequently, we expect an end-of-year cash balance of about $50 million, which takes into account these guidance comments and the share buyback activity I mentioned earlier. That wraps up our formal remarks. So Rob, could you please open up the line for questions?

I've got just a few quick questions. During the first quarter call, you pointed out weakness among consumers, especially those with lower incomes, and that hurt the outlet channel. Is that pretty much the same picture you're seeing so far in the third quarter? Or has it become more evenly distributed across every income bracket? Then, Jackie, I realize you said you'd share additional information during the third quarter call, but could you perhaps give us a bit more on a few of those new wholesale partners you've spotted and are hoping to join forces with down the road?

Of course. That's a wonderful question. To begin with, regarding your question about the lower-income shopper and whether this is spread across every tier or focused, I'd say we don't disclose granular specifics regarding our consumer tiers. However, I have previously said that our outlet channels, which have truly been the most pressured this year, are heavily indexed toward a lower-income shopper, and that is where the softness shows up. So that certainly answers your first question. As for the partners we're considering — honestly, we're mostly examining how we might appeal to targets that genuinely line up with our customer acquisition targets. So it's premature to say anything at this point. But what I'd like you to remember is that there's tremendous interest unlike anything we've really witnessed at this level, driven by all the new marketing and Zooey and everything we've done with the rebranding. So we've absolutely observed far more interest, we're holding many more conversations, and the way our Urban Outfitters partnership succeeded and grew into holiday, I think, shows well how we remain confident about the path we're taking this business and how Project Restoration is genuinely underpinning where we're headed, even though, admittedly, as I noted in my comments, it's happening a bit slower than we'd intended.

Looking at the cash flow statement, free cash flow came in negative during the first half, and you expect to finish marginally positive. So you're confident about generating free cash flow in the back half. Staying on the first half, the largest movement I notice involves inventories, which used $15 million this year versus being a $3 million source a year ago. Could you give us more detail there?

Yes, certainly. As everyone has heard us discuss many times, a piece of Project Restoration involves the new assortments being introduced into the brand channels. Given how that timing worked out, it basically produced an overlap spanning a couple of — a few months here. On top of that, we had a considerable volume of in-transit inventories crossing the water to get ready for the fall season too. So there's somewhat of a timing matter. As I said in my earlier comments, we still anticipate — we were 5% below last year on inventories even with that in-transit matter, and through the close of this year we anticipate remaining 5% below. Q3 could appear somewhat different purely because of a timing matter. But once the year ends, we anticipate being 5% below last year. I'm genuinely happy with what the team accomplished, and that's in the context of the revised guidance too. So our teams have performed extremely well in responding to the environment, doing it very productively and maintaining our capacity to maneuver and flex as we look ahead.

Therefore, perhaps we can view inventories as a major potential source of cash during the latter half of the year, since they consumed cash during the first half. Would that be accurate?

Yes, that's accurate. I believe there are multiple matters we have discussed extensively, including all the various initiatives and efforts we have been pursuing. Until this call, we had not mentioned some of the work we have been doing regarding our inventory, our sourcing, and our buying practices; so I think this serves as an illustration of one such matter that we have been addressing behind the scenes amid everything else, aware that we must build a very strong and solid organization to carry this business into the future. Thus, we are genuinely pleased with the efforts the teams have made in that regard.

All right, that's useful. And conditions are tough. You acknowledged that right at the start, yet your plan for capital expenditures remains the same, which is a positive sign; so this is a year of investment and it stays a year of investment. Now, you noted in your Q1 release that you also had additional marketing investment. Is that still planned? Or are you being somewhat more careful with what you spend on marketing given the current climate?

I'll begin, and Jackie, feel free to jump in with anything extra. Yes, this is a year of investment across many areas of the business, as you pointed out, CapEx and marketing too. So we are holding some elevated marketing for the Vera Bradley brand in Q2, and we'll keep that going for the remainder of this year. A large portion of this relates to brand awareness and boosting brand awareness along with transactional activity, but there's — it remains a year of investment.