Vera Bradley, Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley First Quarter Conference Call for Fiscal 2024. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference call is being recorded. I would now like to turn the call over to Mark DeLike. Vera Bradley's Chief Administrative Officer. Please go ahead.

Good morning and welcome, everyone. We'd like to thank you for joining us for today's call. Some of the statements made during our prepared remarks in response to your questions may constitute forward-looking statements made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect. Please refer to today's press release and the company's most recent Form 10-K filed with the SEC for discussion of known risks and uncertainties. Investors should not assume that the statements made during the call will remain operative at a later time. We undertake no obligation to update any information discussed on today's call. I would now like to turn the call over to Vera Bradley's CEO, Jackie Ardrey. Jackie?

Thank you, Mark. Good morning, and thank you for joining us on today's call. Today I'm joined by both John Enright, our departing CFO, and Michael Schwindel, our newly appointed CFO. Before we begin, I want to express my sincere thanks to John for his nine years of service to Vera Bradley and his many contributions to our company, and we wish him all the best in the future. And we welcome Michael Schwindel to our team, who joined the company on May 8th. He is a retail industry veteran with over 30 years of experience, including more than 15 years in CFO roles, delivering strong results through profit improvement and by providing innovative solutions. For the three years prior to joining our company, he served as CFO for accessory and jewelry retailer Claire's. Previously, he held CFO roles at specialty retailers Fleet Farm, Payless Shoe Source, Perry and David, and Musician's Friend, as well as other key financial roles at Home Depot and Limited Brands. You'll hear from both John and Michael later in today's call. Now, let me turn to the quarter. We are very pleased that meaningful growth margin expansion and diligent expense control led to a significant year-over-year improvement in bottom-line performance for the first quarter. On the revenue side, Vera Bradley factory stores experienced challenging traffic trends in March and April that led to weaker than expected performance for the quarter. This was partially offset, however, by several positive highlights in other areas of our business. First, we delivered our first positive quarterly revenue performance in five quarters at Pura Vida, primarily driven by non-comparable retail store sales. We also saw improved year-over-year sales trends in both our Pura Vida wholesale and e-commerce channels. Second, we delivered strong Vera Bradley e-commerce performance and solid Vera Bradley full-line store revenues. Vera Bradley indirect revenues declined as expected due to a non-recurring key account order that took place in last year's first quarter, but the underlying business remains healthy. We are building a collaborative team with the mindset of generating long-term revenue increases, expanding gross margin, and ensuring strong financial discipline and cost control, which we expect will drive long-term profitable growth. The team is working hard and taking strategic, proactive steps to steadily grow Pura Vida's revenues and to reverse the trends in Vera Bradley's factory channel through the expansion of successfully tested, targeted, targeted marketing programs designed to drive traffic and average order size. At Pura Vida, we have a solid organizational structure in place with newly promoted general manager, Sujay Shah, leading the team with heightened discipline and focus on day-to-day execution and driving business results. Sujay was Pura Vida's former VP of Finance and is leading the team to return the e-commerce business to growth through utilization of the newly launched comprehensive customer data platform, diversification of the marketing program, improving site navigation, and focusing on customer retention. On the product front, our custom bracelet program and new friendship packs are a big focus and are working, and we will continue to pursue high-profile collaborations like Sanrio, Harper Charms, and Crumble Cookies that are always fan favorites. The hard work on project restoration began in the first quarter, which is focused on four key pillars of the business for each brand, consumer, brand, product, and channel, to drive the long-term profitable growth we expect. To support project restoration and lay the foundation for our success, we made additional corporate changes and announced incremental cost reductions, including the elimination of approximately 25 corporate positions as part of an overall plan to further right-size the expense structure of the company. Of course, Michael Schwindel's track record of driving profitable growth, along with his passion for retail and operational excellence, will be instrumental as the company executes project restoration. We also made several organizational changes in the marketing, e-commerce, product design, and product development areas that flattened and streamlined the organizational structure to improve execution, make faster decisions, and provide support for the four pillars of project restoration. These most recent organizational changes and non-payroll expense reductions are expected to produce annualized savings of approximately $12 million on top of our fiscal 2023 cost reductions. Let me give you a bit more detail on project restoration's four key pillars and some of the initiatives we currently have underway. At Vera Bradley, For the consumer, we will focus on restoring brand relevancy, targeting casual and feminine 35- to 54-year-old women who value both fashion and function. For the brand, we will strategically market our distinctive and unique position as a feminine, fashionable brand that connects with consumers on a deep emotional level. For product, we will refocus on core categories and items we are best at, by innovating and expanding within our core products like travel and back to campus. We will elevate our colorful, feminine heritage, keeping it distinctive but more trend relevant through updated print and design. We will also innovate into strategic adjacent lifestyle item introductions that make sense for our customers. As part of this, travel and travel accessories perform strongly across all channels in the first quarter. and the travel category will continue to be a key focus of our go-forward assortment. Additionally, our performance fabrics are trending well across all channels, with a core customer being younger with a higher household income. This remains a big opportunity for us. Patterns will always be our signature, but coordinating solids continue to be a key opportunity for us as well. We will expand our solid collection this fall, including our foray back into a small collection of leather goods. Finally, product collaborations are still an important part of our brand expression. Our Winnie the Pooh capsule was a huge success. Our first Hello Kitty collaboration was just launched this month, and our NFL collection will be launched in August, just in time for football season. And then finally, for Channel, We will accelerate our digital first focus and online presence, build a balanced footprint that more clearly differentiates full line from factory stores, and target and or strengthen relationships with strategically aligned wholesale partners. As part of this, our recent site rebranding and navigation changes have been successful in reducing bounce rate and driving conversion and sales. So turning to Pura Vida, For the consumer, we will sharpen our focus on the carefree 18 to 24-year-old girl who both those younger and older aspire to be. For the brand, we will recenter our brand ethos on living life to the fullest with marketing authentically sharing real moments, places, and faces. Our Live Free campaign launched this month and will accentuate travel, adventure, friendship, and freedom, and will create engagement and excitement in our customer base for the entire summer. For product, we will focus on delivering unique, fun, playful designs that are affordable and accessible with a dominant emphasis on bracelets and jewelry as well as other strategic adjacent categories. Some great examples of this are our new summer collection and our Harper Charms collection, which are both resonating with our customers. And then finally for channel, We will have a strong focus on restoring e-commerce growth, which I just talked about, and growth of wholesale by pursuing larger, more strategic partnerships and expanding larger existing accounts and refining our existing store model. Now, let me turn the call over to John to review the financial results. John?

Thanks, Jackie, and good morning. Let me go over a few highlights for the first quarter. The numbers I will discuss today are all non-GAAP and exclude the charges outlined in today's release. For complete detail of items excluded from the non-GAAP numbers, as well as a reconciliation of GAAP to non-GAAP numbers, please reference today's press release. Consolidated net revenues totaled $94.4 million compared to $98.5 million in the prior year first quarter. The consolidated net loss totaled $2.6 million, or nine cents per diluted share, compared to $6 million or $0.18 per diluted share last year. Vero Bradley direct segment revenues totaled $58.9 million, a 4.4% decrease from $61.6 million in the prior year. Comparable sales declined 3.3%, primarily due to weakness in the factory channel Jackie noted earlier. Vero Bradley indirect segment revenues totaled $15.4 million, a 9.4% decrease from $17 million last year. Prior year revenues reflected a large one-time key account order that was not repeated this year. Pure Vita segment revenues totaled $20.1 million, a 1.2% increase over $19.8 million in the prior year first quarter, primarily driven by non-comparable retail store sales. First quarter gross margin totaled $51.7 million, or 54.8% of net revenues compared to $52.5 million, or 53.3% of net revenues in the prior year. The current year gross margin rate was favorably impacted by lower year-over-year inbound and outbound freight expense and the sell-through of previously reserved inventory, partially offset by an increase in promotional activity. SG&A expenses totaled $55.6 million, or 58.9% of net revenues, compared to $59.4 million, or 60.3% of net revenues in the prior year. Current year expenses were lower than the prior year, primarily due to cost reduction initiatives and the reduction in variable-related expenses related to lower sales volumes. The company's first quarter consolidated operating loss totaled $3.5 million, or 3.7% of net revenues, compared to $6.7 million, or 6.8% of net revenues in the prior year. Let's turn to the balance sheet. Quarter end cash and cash equivalents totaled 25.3 million compared to 46.6 million at fiscal year end. We had no borrowings on our 75 million credit facility at quarter end. Total quarter end inventory was 142.7 million compared to 161.8 million at the end of the first quarter last year. During the quarter, we purchased 128,100 shares at an average price of $5.71 per share for an aggregate amount of approximately $732,000. $27 million remains under the $50 million repurchase authorization that expires in December 2024. Now, let me turn the call over to Michael to talk about the company's fiscal 2024 outlook.

Thanks, John, and good morning, everyone. Based on the first quarter performance, as both Jackie and John have discussed, as well as our initiatives underway, and the macro environment trends and expectations, we are revising our guidance for this fiscal year. As a result, all of our forward-looking guidance, or as a reminder rather, all of our forward-looking guidance is on a non-GAAP basis. For fiscal 2024, our updated guidance is as follows. We expect total revenues of $490 to $510 million. As a reminder, revenues total $500 million in fiscal 2023, and we expect both Vera Bradley and Pura Vida revenues to be approximately flat on a year-over-year basis. We also expect gross margin rates of between 52.8% and 53.8%, which compares to 51.4% for last year. Our fiscal 2024 gross margin rate is expected to be favorably impacted by lower year-over-year freight expenses, cost reduction initiatives, and the sell-through of previously reserved inventory, which will be partially offset by an increase in promotional activity. Our SG&A expenses are expected to be between 237 and 247 million, compared to 245.3 million last year. The expected year-over-year decline in SG&A expense is being driven by company-wide cost reduction initiatives, partially offset by restoring incentive compensation to more normalized levels, and incremental marketing investment intended to accelerate customer file growth. This results in anticipated consolidated operating income of $24 to $28 million compared to $12.3 million last year and diluted EPS of $0.57 to $0.67 based on diluted weighted average shares outstanding of $30.7 million and an effective tax rate of approximately 28%. Our diluted EPS totaled 24 cents last year. We also expect net capital spending of approximately $5 million compared to $8.2 million last year, which reflects investments associated with new Vera Bradley factory stores, as well as technology and logistics enhancements. And as a result, our free cash flow is anticipated to be between $35 million and $40 million compared to a cash usage of $21.7 million in fiscal 2023. So with that, operator, we'd like to open up the call to questions.

Well, thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 if you would like to signal with questions. And our first question today comes from Joe Gomez with Noble Capital.

Good morning, and thanks for taking my questions. Hey, Joe. Good morning, Joe. Good morning. So I want to start off. You talked about some lower traffic levels at Vera Bradley, I think, in March and April. Maybe you could give us a little more color or detail as to what was behind that.

Sure, Joe. So first I want to say that the traffic challenges were limited really to the factory channel, and they were primarily in March, I think, where we were seeing some other retailers report similar slowdowns. And what we've done in this quarter is really look at some marketing programs to drive more traffic to those factory stores and that's part of the reinvestment that we're going to make for the rest of the year is really we had some successful test results from some of those programs to help increase in targeted markets and we're going to continue to deploy those programs. But again, it was really just limited to the factory channel. Our full-line traffic was strong throughout the quarter.

And Joe, all I would add on to that, and I think Jackie did a good job, is to say that to the point where March was really kind of the toughest month in the quarter, and we saw it rebound a little. It was still down in April, but we saw it rebound in April better than March. And then in May, we've seen kind of that continued progression.

Okay, and I don't know if you talked about this before or not, you know, maybe kind of give us a little bit size as to what that non-recurring account order last year was, just so we can kind of get a better idea of the year-over-year ex-VAT performance.

Yeah, so Indirect would have been down about 2%, excluding that one-time sale.

last year for the uh key account order so it was you know it was a little bit over a million dollars okay great and then one more if i may and i'll pass it along um you know michael you congrats on joining the team uh you know you you've been there now a little over a month early days kind of maybe give us your first impressions and you know what are you kind of laying out as what your initial short-term goals would be here. Thank you.

Thank you, Joe. I appreciate the question. Hey, with my days and days of experience, as Jackie and others heard me say, this is a tremendous brand. It's got a great, solid foundation here, great customer base, great brand recognition. that gives a tremendous foundation from which to build upon. And so Jackie and I have talked a lot about that. I'm very excited about that. Obviously, initially, there's a lot to learn here around all the different channels of the business as well as with the Pura Vida brand. And so I'm a bit vertical on the learning curve, as you might imagine, as I'm trying to digest and understand all of that. In the meantime, I've already been engaged pretty deeply in a lot of the cost initiatives that Jackie referred to earlier, making sure that we've got good controls around that and making sure we have good visibility to delivering those initiatives, as well as gathering additional understanding of the different areas of the business. I think one of the advantages, I have been around lots of different retail organizations. I've had a lot of different operational experiences of our my 35 years, and that makes it a little bit faster kind of running start for me to jump into different areas of operations and other things to kind of have a solid foundation at the onset and then look for the opportunities in business.

Great. Thanks for that. I look forward to working with you going into the future. Thanks for taking the questions again.

I do as well. Thank you.

Thanks, Joe.

Thanks, Joe.

And once again, if you would like to signal with questions, please press star 1 on your touchtone telephone. Again, that is star 1. And our next question will come from Eric Better with SCC Research.

Good morning. Congratulations on the quarter. Thanks, Eric. Thank you. Thanks, Eric. How should we be, you know, I know that you have this new management team join us. It's a little bit tough in the near term to really change the product mix and flows. Obviously, you've done a great job of controlling what you can control on the expense side. Now, when should we be thinking that we'll see, like, what you, Jackie, or team envision the stores to fully be? Is that back half of this year, or is that really into next year?

That's a great question, Eric. As you said, it's tough to change a product trajectory quickly, but I think the team has done a great job of really getting in and dissecting what's working and what's not working, especially as it relates to our future customer target. One of the things we learned that I talked about today is just the balance of solids and prints in our assortment and looking at the fabrics that we currently offer, who they attract in terms of a customer level and a price point level. So you'll definitely see some product mix changes at the back half of the year, and then it will steadily increase as we get closer to the middle of next year.

Okay, that makes sense. How should we be thinking about stores? Obviously, the Pure Via store openings that have happened last year helped. Historically, we've been closing full-price stores, opening outlets. What should we be thinking about this year and, I guess, longer term?

Yes, another great question, Eric. And I have to say that we are deep in that work. That's part of the channel pillar of project restoration for both brands. Our Pura Vida stores are working pretty well. But it's really about right now pausing to be sure that we can deliver the right strategic plan for the business. So that's the only reason that we haven't continued opening Pura Vida stores. But I think you'll hear more from us you know, by the end of the year about our plans for stores. But it's just really important that, again, right now we're focusing on the health of the overall portfolio and making sure that we're making the right strategic decisions for store openings for both brands. Sure.

And last question, Ray. What should we be thinking about in terms of inventory flows? Obviously, Q1, you brought the inventories down significantly. Is there opportunities to continue that throughout the rest of the year? Thank you.

Hey, Eric. This is Michael. I'll jump in on that and Jackie can add some more color. As you noted, we have seen some pretty good reductions on a year-over-year basis. It's roughly flat with the end of the year. We do expect to continue to see a downward trajectory in our overall inventory through the end of the year, something in the probably down 10-ish, maybe a little bit more than 10-ish percent by the time we get to the end of the year.

And just a little color on that, the company has been engaged in an exercise around the SKU reduction, it's called the SOAR project, and that has really contributed to kind of cutting off the tail of some of our unproductive inventory, and that's really contributing to some of the declines that you've seen. We're continuing that work, and really, I think you'll see the continued evidence, as Michael mentioned, within the rest of the year of those reductions.

Great. Good luck for the rest of the year. Thank you. Thanks, Eric. Thank you.

Thank you. That does conclude the question and answer session. I'll now turn the conference back over to Jackie Argery for closing remarks.

Thank you. In closing, we're committed to returning both of our brands to healthy top and bottom line growth and generating strong cash flow through project restoration. which I believe will deliver value to our shareholders over the long term. This year, by focusing on stabilizing sales, expanding gross margin, and controlling expenses, we believe we can, at a minimum, nearly double year-over-year operating income and more than double EPS. We have an exciting future ahead. Thank you for joining us today, and we look forward to sharing our progress with you on our second quarter call on August 30th.