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

Hello everybody, and welcome on this fine morning. Thank you for being with us on today's call. Certain remarks we make while delivering our prepared comments, as well as in answering your questions, might qualify as forward-looking statements, offered under and within the scope of the Safe Harbor protections contained in the Private Securities litigation reform act of 1995, as amended. Those forward-looking statements carry both known and unknown risks along with uncertainties, which could lead actual results to diverge materially from what we anticipate. For a look at the known risks and uncertainties, please consult today's press release together with the company's latest Form 10-K submitted to the SEC. Investors ought not to presume that anything said while this call is underway will still hold true afterward. Updating any information covered during today's call is not something we are obligated to do. At this point I'll hand things over to Vera Bradley's CEO, Jackie Ardrey. Jackie?

Thank you, Mark. Morning, everybody, and I appreciate you being with us on this call. Our third quarter proved very difficult, since we were still in the initial phases of Project Restoration — that strategic effort aimed at reshaping how we operate and shifting where the Vera Bradley brand sits in the market. Responding to what customers told us, we've made significant changes to both our product mix and our value offering. Given that today's shoppers care most about value, additional work lies ahead of us along this repositioning path, and I'll get into that in a bit. One thing I'm happy to share is that we're noticing consistent momentum from a number of green shoots that appeared late in Q3, and those have carried over into Q4 so far. We've made modest tweaks to how we run promotions so that our value proposition comes across better, and the results are improving, yet our dedication to building shareholder value stays firm, achieved through stronger brand resonance and cutting back on revenue with thin margins. Thanks to the debut of our holiday collections late in the third quarter along with the deliberate promotional changes we carried out, we saw a steady positive trend across most of our Vera Bradley direct-to-consumer channels. Customers are responding enthusiastically to heritage prints, to products at key giftable price points, and to ongoing strength in higher-priced items such as leather. During the quarter, our scores for brand awareness and equity improved noticeably, and we kept expanding our audience among younger shoppers and households earning more. Acknowledging that our value proposition needed attention, in November we decided strategically to put out select value-priced offers in order to sustain shopper engagement in both our branded and outlet channels. I'm delighted to say the reaction was robust, with revenue coming in slightly above forecast from the Black Friday weekend through the week of Cyber Monday, and at better margins, since discount levels in every channel stayed under what they were a year earlier. Standout products during the early holiday stretch included solid sales from our Wicked collection, Disney IP, and important items priced below $50 meant for gifting. Let me change direction and take a moment on the planned, dramatic cutback of non-go-forward clearance units from our branded channels. We'd anticipated those clearance unit sales would move smoothly into our outlet channels. That didn't happen, so we took a meaningful sales hit in Q3. Just so we're clear, those items come with steep markdowns and slim margins, and they're not a reflection of what we're doing to reposition. The clearance category will partially replenish over the next several quarters, but because we've cut back on total SKUs and become more disciplined about what we buy, we'll be able to generate significantly better profitability from those clearance products while still moving forward with our brand repositioning. At Vera Bradley, gross margin was up 80 basis points in Q3, helped by a reduced mix of liquidation and clearance. Importantly, we remain committed to creating shareholder value through elevating the brand and continuing to cut low-margin revenue, and that's reflected in our Q4 guidance — Michael will take you through it shortly. Now let's turn to Pura Vida. During Q3, one standout moment came from the successful debut of our Disney Springs location, and it has gotten off to a very strong beginning. Within our Pura Vida store fleet, we keep seeing performance that exceeds expectations, though elevated costs for acquiring customers online remain a headwind for the e-commerce channel. Now I'd like to go into greater depth about where we stand on project restoration for Vera Bradley. A number of key wins in our brand metrics have me especially encouraged, among them our first gain in awareness since 2021, which shows a 700 basis point lift in our Ipsos data. On top of that, we've made solid gains in the brand attributes tied to equity-building and being seen as stylish, colorful and fun. We're also getting encouraging results from our customer acquisition work. In our target demographic — customers between 35 and 54 years old — we've recorded a rise of 9 percentage points, and among higher income customer acquisition there's an increase of 7 points. That confirms our strategy of reaching a more broad and affluent customer base is working. Now, looking at how our direct channel performed, the results vary by channel. Our e-commerce business is beating stores, and our online outlet is doing especially well. Although traffic and conversion remain challenging in our branded channels, the strides we're making in product and pricing strategy give us encouragement. Across channels, we're succeeding in putting lower discounts into practice. Last, when it comes to our outlet stores, we continue testing multiple pricing and merchandise initiatives aimed at lifting traffic and conversion. Within our product assortment, heritage prints have been received strongly and key price point gifts have performed well. We've also identified and addressed several opportunities related to style execution. We made changes based on what customers told us, and most of those will be on the market by early February. These updates involve adjustments to strap lengths, pocket configurations and closure types — modifications that will serve new and existing customers better. When it comes to our transformation work around the channel pillar, we delivered strong results in Q3 with Urban Outfitters. For the holiday period, our partnership grew substantially, both in stores and online, and we continue to see solid selling momentum. The most exciting part for me is the promising conversations we're having with many brands across categories about future partnerships. That opens up a great chance to bring new customers to the new and improved Vera Bradley offering. We've also put significant effort into reshaping our inventory sourcing, procurement, and management approach — a coordinated effort that brings together multiple teams across the company. I'm very pleased with how much this team has accomplished in such a short window, yielding a leaner SKU mix, stricter inventory discipline, and better material sourcing that let us respond fast to what consumers told us, as I noted before. As we look at the remainder of the year, a few encouraging signs are starting to show, but we remain cautious about our forecast because of the wider market conditions. We keep running the company with rigorous financial oversight, staying free of debt and concentrating on making operations better; to wrap up, I want to recognize that although this stretch of change is difficult, our confidence holds that Project Restoration is the correct route ahead for Vera Bradley's long-term strength and market position. Evidence supporting our strategy comes from the improving direction of our trend line business, brand scores that keep climbing, the wider group of consumers we now reach, and fresh inbound curiosity about brand right collaborations. Each of us stays committed to bringing the company back to sustained profitable growth and building value for our shareholders. Last, I want to express gratitude to our skilled teams throughout the organization for their dedication to our brands, and to one another, through this period of transformation, and to wish everyone a happy holiday. At this point I'll hand the call over to Michael Schwindle, our CFO, so he can walk through our financial results in detail.

Thanks, Jackie. Good morning to all of you, and I appreciate you being here with us. In just a few minutes I'll turn things over for questions, but before that, we'll go through what we delivered this quarter and also take a brief look at the revised outlook we've provided for the year. Just so we're all on the same page, every figure I mention today is non-GAAP and leaves out the charges described in the press release issued today. You can find full information about what's excluded from those non-GAAP figures, along with a reconciliation between GAAP and non-GAAP, in that same release. Turning to the third quarter, our consolidated revenues came to $80.6 million, down from $115 million during last year's third quarter. Our net loss for the third quarter was $7.5 million, or $0.27 per diluted share, versus net income of $6.1 million a year ago, or $0.19 per diluted share. Looking at how each segment performed, Vera Bradley Direct brought in $52.5 million in revenues for this year's third quarter, which represents a 27% drop from the $72.3 million recorded in last year's third quarter. Comparable sales fell by the same 27%, with the outlet channel hit hardest, continuing the same difficulties we've seen in earlier quarters. Year-over-year total revenues also took a hit from five store closures. During the quarter we did bring five new outlet stores online, and four of them launched just two days prior to the quarter's end. Two additional outlet stores began operating roughly two weeks into our fourth quarter. Although the contribution from those late-quarter openings during the third quarter was minimal, we're quite happy with how our new outlet stores have been selling so far, and we're excited about building on that success in the years ahead. Vera Bradley Indirect generated $18 million in revenues, which is a 28% decline from the $25 million posted in the same period a year ago. That drop stemmed mainly from fewer specialty and key account orders, along with lower liquidation sales. Segment revenues also felt the effect of roughly $1.2 million in orders we had expected that ran into a minor shipping delay as the third quarter ended, though that will work in favor of the fourth quarter. Pura Vida's revenues reached $10.1 million, down 42.9% from $17.7 million during last year's third quarter, driven largely by lower e-commerce and wholesale revenues, with new retail stores partially making up for that. As we've mentioned on earlier calls, after digital marketing costs started climbing sharply late in last year's third quarter, the Pura Vida team has stayed committed to improving marketing efficiency and broadening its digital marketing mix. Non-GAAP gross margin for the third quarter came to $43.6 million, or 54.1% of net revenues, compared with $63 million, or 54.8% of net revenues, a year earlier. The decline in margin rate year-over-year came from extra promotional activity at Pura Vida, while Vera Bradley saw its margin rate improve by 80 basis points relative to last year, as Jackie explained earlier. On a non-GAAP basis, SG&A came in at $51 million, which equals 63.2% of net revenues, versus $55.1 million, or 48% of net revenues, in the third quarter a year ago. Expenses for the quarter fell 7.4% year over year, driven mainly by initiatives to cut costs as well as some decrease in variable-related expenses resulting from lower sales volume. We keep looking closely across our organization for process and cost opportunities, and our teams are growing more diligent and focused when it comes to managing costs. For the third quarter, our GAAP consolidated operating loss was $7.2 million, or 9% of net revenues, against operating income of $8 million, or 7% of net revenues, a year earlier; now let's move to the balance sheet. Cash and cash equivalents at quarter end came to $13.7 million, versus $52.3 million at the close of last year's third quarter. At quarter end, we still had no borrowings outstanding under our $75 million ABL facility. Inventory at quarter end totaled $131.3 million, compared with $129.1 million at the close of last year's third quarter. Now, versus prior years, we experienced an acceleration of roughly $10 million in inventory receipts, shifting from the fourth quarter into the third quarter, which pushed inventory higher and cash lower relative to the prior year, though this will unwind in our fourth quarter. We've been sharply focused on redefining the way we handle inventory acquisition and management, and we keep taking strategic steps in our merchandising and processes to enhance both product flow and quality. As Jackie mentioned earlier, we're very pleased with how much progress our merchandising, planning, and sourcing teams have made in driving these changes. These efforts have already made a meaningful difference in our ability to navigate this year, and they will keep driving improvements as well as lower inventory levels going forward. Also during the third quarter, we bought back roughly $5.3 million of common stock, about 1 million shares, at an average price of $5.50. That takes the total repurchase for the nine months to date to approximately $21.2 million. At quarter end, roughly $4.4 million remained under our $50 million repurchase authorization, which expires this month. In anticipation of that expiration, our Board of Directors has approved an extra $30 million repurchase authorization, which begins when the current authorization expires and runs for three years. Right now the company has no plans to purchase under the 2024 share repurchase program, but it expects to use the newly-approved share repurchase authorization in the future, subject to market conditions as well as the company's cash position. Lastly, I'd like to walk through our revised guidance for fiscal 2025. As a reminder, all of our forward-looking guidance is on a non-GAAP basis. And for context, please keep in mind that the current year is a 52-week year, while the prior year as reported consisted of 53 weeks. Given where the business stands right now, with ongoing uncertainty around the macro picture and consumer spending, plus how long it will take before project restoration pays off, we're running the company with a cautious approach for the rest of this year. We've been looking hard at a range of ways to respond to the environment and are weighing several operational adjustments across the organization that would both make our cost structure leaner and boost our flexibility and responsiveness. For all of fiscal 2025, our expectation is consolidated net revenues of about $385 million. Vera Bradley's total sales for the year ahead should fall in the mid-teen range, which is a sequential gain in Q4 versus Q3. As Jackie mentioned, we're still seeing gains in a number of areas within the Vera Bradley business, including our digital channels, though we anticipate comparable stores will keep trending as they have, and so will Pura Vida, with new store growth in both brands offsetting some of that. Gross margin for the year should come in around 52.5%, versus 54.5% in fiscal 2024. The rate decline stems from a heavier promotional cadence in our Direct segments during the first half, plus more liquidation sales so far this year, partly offset by better product costs and reduced supply chain expenses. Consolidated SG&A expenses should land near $213 million, down from $234.7 million in fiscal 2024. Those year-over-year SG&A reductions come from ongoing structural cost cuts throughout many parts of our business, together with lower variable costs. All of this should produce a consolidated operating loss of roughly $9 million, against operating income of $22.2 million in fiscal 2024 on a 52-week basis, and an EPS loss of about $0.25 per share versus $0.54 per share of EPS income a year ago on a 52-week basis. We also anticipate net capital spending of about $13 million, compared with $3.8 million a year ago; that spend covers investments tied to new and remodeled stores, plus technology and logistics improvements. Keep in mind, this spending level marks a high watermark related to project restoration, together with the new store development I mentioned earlier. To finish up our guidance; we expect to keep making progress on disciplined inventory management, so that our inventory at year end should be 5% below the level at the end of last year, which itself had fallen 17% from the year before; measured in units, our year-end inventory should be roughly 10% under last year. Consequently, we expect cash at year end of about $35 million, which accounts for these guidance comments as well as the share buyback activity I referenced earlier. That wraps up our prepared formal remarks. Operator, would you please open the line for questions?

Morning. I'd like to spend a moment on new store locations and your sense of how that part of the business is developing, and I'm aware the full-price shop in Natick just launched. As you proceed with Project Restoration, what's the right way for us to frame that ahead?

Thanks, Eric — that's a good one. When it comes to opening stores, we've identified chances inside the national outlet fleets, largely those of Tanger and Simon, to keep growing our footprint in those centers. The outlets we've launched sit within Simon Premium's outlet portfolio, and we believe there's strong alignment as they keep pushing to innovate across their centers, so those possibilities have us quite enthusiastic. That leaves us feeling quite positive. On the branded store side, we're openly taking a very careful approach. A chance to come back to Natick appeared, we viewed it as an excellent one, and we proceeded to reoccupy that location. So it will be interesting to watch how shoppers connect with us again in that market — around Boston.

Eric, building on what we discussed earlier today, I'd like to expand a bit more on the operational enhancements we're going after throughout the portfolio. That definitely takes in our store perspective; so as these new locations come online, we're examining a few different operating approaches that we believe will assist us in lifting performance.

All right. And whenever you examine — I realize we are still early on with Project Restoration. Whenever you examine, say, the winning parts and the losing parts, what's the right way for us to think about it as we rise above it here? Does the newer customer spend in a different way compared with the prior customer, and does the gap between one offset the other? What does that roughly look like? And I suppose the other thing I'd ask is, in what way do collaborations function within the new world? Clearly, you had Wicked, it arrived, you completed a Disney collaboration following Project Restoration. What's the right way for us to think about that as a possible driver of traffic and driver of margin moving forward? Thank you.