Vera Bradley, Inc. Q2 FY2022 Earnings Call

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley second quarter conference call. 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 Mr. Mark Dely, Vera Bradley’s Chief Administrative Officer. Please go ahead.

Good morning and welcome everyone. We’d like to thank you for joining us for Vera Bradley’s earnings call. Some of the statements made during our prepared remarks and 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 a 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 will now turn the call over to Vera Bradley’s CEO, Rob Wallstrom. Rob?

Thank you Mark. Good morning everyone, and thank you for joining us on today’s call. John Enwright, our CFO, also joins me today. We posted consolidated year-over-year second quarter revenue increase of nearly 12%. On a comp basis, Vera Bradley was essentially back to its pre-pandemic fiscal 2020 second quarter revenue level and Pura Vida was up nearly 7% over the second quarter of fiscal 2020. Second quarter Vera Bradley brand revenues continued to improve as customers responded to product innovation, stores were fully operational, and sales of travel-related products rebounded despite anniversarying exceptionally strong mask sales from the prior year. However, we experienced two major factors that negatively impacted our results. First, the Apple iOS 14.5 update negatively affected Pura Vida revenues, primarily due to the impact it had on the effectiveness of Facebook and Instagram advertising. The Facebook and Instagram platforms have been our primary marketing vehicles to drive sales, and Pura Vida has maintained a market-leading position, consistently ranking as the number one engaged brand in the jewelry category on Instagram. Our team is working diligently to quickly diversify a portion of our marketing resources to other platforms, and consequently, we began to see Pura Vida DTC sales volume build momentum throughout the balance of the second quarter and into the beginning of the third. We expect Pura Vida revenues will return to a 15% to 20% growth rate in the second half of the year. Second, like much of the industry, Vera Bradley continued to experience supply chain challenges and significantly increased freight and tariff expenses that put meaningful pressure on gross margin in the quarter. We expect these pressures to continue for the moderate term, but we were able to diligently manage our SG&A expenses, and our balance sheet and cash flow remain strong. With our strong first quarter performance, fiscal 2022 is off to a solid start with year-to-date earnings well ahead of last year and ahead of where we were in fiscal 2020 pre-pandemic. We realize we will continue to face certain headwinds and uncertainties for the balance of the year, but we also know that both our lifestyle brands have significant long-term growth opportunities well beyond their core product categories. We are on track and remain committed to our vision to be a purpose-driven, multi-lifestyle brand high-growth company. Now let me turn the call over to John to discuss the financials.

Thanks, Rob and good morning. Let me go over a few highlights for the second quarter. The numbers I will discuss today are all non-GAAP. For complete details 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 $147 million for the current year second quarter, an increase of 11.6% over $131.8 million in the prior year second quarter. Prior year revenues were adversely affected by temporary store closings and reduced store hours related to COVID-19. Although they were also substantially benefited by mask sales. For the current year second quarter, Vera Bradley Incorporated consolidated net income totaled $9.5 million or $0.28 per diluted share compared to net income in the prior year of $10.9 million or $0.32 per diluted share. Current year’s second quarter Vera Bradley direct segment revenues totaled $97.1 million, a 19.6% increase over $81.2 million in the prior year’s second quarter. Since the company stores were temporarily closed for a portion of the prior year second quarter, comparable store sales calculation is not pertinent. On an apples-to-apples basis, comparable sales were nearly flat, down just 1.3% for the second quarter of fiscal 2020. Vera Bradley in indirect segment revenues totaled $16.8 million, a 5.1% decrease from $17.7 million in the prior year’s second quarter, reflecting reduction in orders primarily related to mass sales, partially offset by a rebound in key account orders and other product categories that were negatively impacted by COVID-19 in the prior year. Pura Vida’s segment revenues totaled $33.1 million, a 0.8% increase over $32.8 million in the prior year. Second quarter consolidated gross profit totaled $80.4 million or 54.6% of net revenues compared to $79.6 million or 60.4% of net revenues in the prior year. Keep in mind that in the prior year, we expanded our year-over-year gross margin by approximately 300 basis points due to the sales of cotton masks, which was not replicated this year. The current year rate was negatively impacted by higher costs for inbound and outbound freight expenses. In addition, the lower margin rate reflects higher tariffs from previously duty-free countries where we source products whose GSP duty status expired at the beginning of the year. As has happened numerous times in the past, we believe Congress will retroactively reinstate the duty status of tariffs that have been assessed so far this year. On average, this is negatively impacting us by approximately $1 million per quarter. Consolidated SG&A expense totaled $68 million, or 46.2% of net revenues for the current year second quarter, compared to $58.6 million, or 44.5% of net revenues in the prior year. As expected, our current year SG&A expenses were higher than the prior year, primarily due to expense reductions related to COVID-19 last year. Our second quarter consolidated operating income totaled $13.4 million, or 9.1% of net revenues compared to $21.1 million or 16% of net revenues in the prior year. Let me talk about our forward outlook. The retail environment continues to be uncertain, and future financial performance is difficult to predict. We are updating our estimates for fiscal 2022 based on our second quarter performance, current business trends, and consideration of certain macro industry and economic conditions that could impact the company's sales and gross margin performance for the balance of the year. We are continuing to see volume and traffic increases over prior year levels and expect to control our operating expenses. However, like many retailers, we are facing supply chain headwinds, including manufacturing delays, extended transit times, and substantial projected inbound and outbound freight expense increases. Keep in mind that all forward-looking guidance numbers are non-GAAP. While we are not providing quarterly guidance, let me give some directional commentary on the third quarter. We expect year-over-year revenues to increase by high single digits for the Vera Bradley brand and by over 20% for Pura Vida. We also expect continued gross margin pressure related to ongoing supply chain challenges and incremental freight expenses as well as a GSP issue. We are forecasting the GSP savings to flow through the P&L in the fourth quarter, but the third quarter margin will continue to be under pressure until GSP is renewed by Congress. For fiscal 2022, we have updated our annual expectation as follows: Consolidated net revenues of $550 million to $565 million, net revenues totaled $468.3 million in fiscal 2021. Free cash flow between $50 million to $55 million compared to $15 million last year. Consolidated gross profit percentage of 54.6% to 55.3% compared to 57% in fiscal 2021. The expected rate decline relates to an abatement in mass penetration this year, coupled with ongoing supply chain challenges and a substantial increase in freight costs. The retroactive reinstatement of GSP is included in the current year gross margin estimate. Consolidated SG&A expense of $260 million to $266 million compared to $233 million in fiscal 2021. The expected SG&A increase is primarily related to Vera Bradley stores being opened for the full year, non-comparable compensation and Cares Act savings in fiscal 2021, and general variable increases associated with higher sales expectations. Consolidated operating income of $40 million to $46 million compared to $34 million in fiscal 2021. Consolidated diluted EPS of $0.80 to $0.95 based on diluted weighted average shares outstanding of $34.6 million and an effective tax rate of approximately 21%. Diluted EPS totaled $0.63 last year. Net capital spending of approximately $8 million to $10 million compared to $5.7 million in the prior year, reflecting investments associated with new factory locations and technology and logistic enhancements. Now let me turn to the balance sheet. Cash, cash equivalents, and investments at quarter end totaled $76.5 million compared to $77.1 million at the end of last year’s second quarter, and $65.5 million at last fiscal year end. We had no borrowings on our $75 million ABL credit facility at quarter end. Total quarter inventory was $148 million, compared to $136.2 million at the end of the second quarter last year. Quarter-end inventory was higher than prior, primarily due to incremental Pura Vida inventory. We expect year-over-year inventory should be down by approximately 5% by the end of fiscal 2022. Rob?

Thanks John. As a reminder for fiscal 2022, the four key growth drivers for our company are: one, driving our digital-first strategy by evolving the digital distribution of our products and further refining and utilizing digital experiences to serve our customers. Two, enhancing our product innovation pipeline, collaborations, and category extensions to attract new customers and increase share of wallet with existing customers. Three, building our community through marketing and by creating an impactful positive brand movement that enhances lives and deepens our customers' brand loyalty; and four, evolving our distribution channels by focusing on future growth opportunities and addressing the changing retail environment in the consumer marketplace. Let's begin with Vera Bradley. As I mentioned at the end of the last quarter, we were looking forward to continuing the recovery of our travel and campus segments of the business in the second quarter. Research indicated that nearly three quarters of Americans plan to travel this summer alone and sales of our travel products have indeed been robust, exceeding our 2019 levels. On the other hand, although the overall back-to-school market has been strong, sales for non-accessory elements did not return to pre-pandemic levels. Similarly, at Vera Bradley, we saw growth in our back-to-campus business over 2020, but sales did not exceed the 2019 levels. Like many in the industry, we faced supply chain disruptions that caused delivery delays throughout the quarter. We have experienced on average delays of about 30 days before a full assortment of goods was available for each of our product launches. Unfortunately, we do not expect this situation to improve in the fall season. We are working diligently to mitigate the situation as best as we can but expect shipping delays and freight expense increases to continue for the near future. On the product front, we continue to be excited about our innovation pipeline and the development of new fabric offerings, which are important to not only increase the share of wallet with our existing customers but to attract new customers to Vera Bradley. We remain very optimistic about our new recycled cotton collection and look forward to offering new coat, new solid color seasonally, solid galaxy gray purple and red will launch this fall. We will offer Navy in the spring and we will expand our black styles next summer. Our partnership with Lana Condor during the launch of the Cotton Reimagined collection helped bring a younger and more diverse customer to the brand. We continue to build on the momentum in our other alternate fabrications like performance twill and our factory-exclusive ultralight collection. We're constantly researching and innovating to bring our customers more eco-friendly options and we are committed to updating 100% of our fabrics to more sustainable alternatives by 2025. We had another exciting quarter for product collaborations. Our classic accessories outdoor collection of furniture covers, seating and lounge covers, accent pillows, umbrellas, and rugs launched in June. In addition to being available on verabradley.com, classicaccessories.com and select Vera Bradley stores, this collection can also be purchased online through leading retailers such as Wayfair, Amazon, Lowe’s, and Home Depot. We launched the always popular Disney and Harry Potter mini collections during the quarter. In the marketing area, the substantial investments we have made in data science, business analytics, and customer data capture in the past continue to pay off and are reflected in our marketing efforts and results. As expected, our customer count continues to grow. Our customer journey-centered activations and customer-level personalized messaging are meaningfully engaging new customers and aiding in the reactivation of past customers across our full line and factory stores. We are driving more engagement on social media, specifically, we are employing more user-generated content, have grown our influencer and investor programs, continue to enhance our social storytelling, and have expanded social selling. We are expanding our TikTok engagement, continuing to grow this platform to strengthen our Gen Z customer acquisition. These tactics, along with our quality media placements, continue to drive brand awareness with year-over-year media impressions up over 200%, fueled by our Cotton Reimagined campaign with Lana Condor, summer travel collections, back-to-school essentials, and collaborations. We are proud that our marketing efforts are increasingly reflective of our commitment to a more diverse and inclusive audience. We are honored to continually amplify our VB Cares mission. In August, we entered the third consecutive year of partnership with Blessings in a Backpack to support the nonprofit's mission of providing food to millions of elementary school children across America who might otherwise go hungry. To date, with the help of our customers, we have donated over $750,000 to the organization. This month, the Vera Bradley Foundation for Breast Cancer begins its series of annual fundraising events to support the groundbreaking research being conducted at the Vera Bradley Foundation Center for Breast Cancer Research at Indiana University School of Medicine in Indianapolis. Today, the foundation has contributed over $36 million to the Foundation Center for breast cancer research. Our digital business has become a larger portion of our revenue over time, and stores continue to support this omni-channel strategy. We want our customers to have a seamless shopping experience. Digital sales are typically higher in the markets where we have our retail presence, and the average omni-channel customer spends over three times more than the single-channel customer. Many customers have missed in-person interactions, and many are seeking shared experiences. We continue to focus on enhancing and reinventing the customer experience in our full-line stores and certain digital shopping perks that gained popularity during the pandemic have remained popular, like appointment selling, buy online pick up in store, and curbside pickup. We are continuing to improve the profitability of our full-line fleet by focusing on our highest potential stores, optimizing and localizing our services, and rationalizing our existing portfolio through select closures. We have closed three full-line stores so far this year, and expect to close up to two more this fiscal year, which would bring our total full-line closings to 44 since the beginning of fiscal 2018. We have opened four new factory stores so far this year and expect to open two more by the end of October. During the quarter, we fully implemented Afterpay across all Vera Bradley channels, allowing customers to pay for their purchases in installments, gaining higher units per transaction and increased sales. We are also now excited to have distribution of Vera Bradley on Target Plus marketplace, which is great exposure for our brand. And as sustainability and resale continue to gain traction, so does our partnership with thredUP which launched earlier this year. Now let's switch to Pura Vida. Even though Pura Vida’s business temporarily slowed in the second quarter due to the iOS update, we believe we are positioned to generate 15% to 20% revenue growth for the second half of the year, driven by our new product launches, wholesale growth, the marketing initiatives and adjustments we have put into place, and our new store openings. One of the critical initiatives we completed during the quarter was our Project Novus ERP integration at Pura Vida, which unified our technology platform company-wide, allowing for enhanced capabilities in sourcing, customer service, CRM, data analytics, and accounting among other areas. This critical infrastructure enhancement has strategically positioned Pura Vida for future growth. Innovation of Pura Vida continues to be key to our growth. In addition to continually adding new designs and elements to our jewelry collections, we have also diversified well beyond jewelry. We are truly building a lifestyle brand. A great example of the extension of the Pura Vida lifestyle was the launch of our apparel collection of tees and hoodies in April. So far, the top styles have been Pura Vida logos, tie-dyes, and surf graphics. Now we are broadening our size ranges, styles, and logos. We believe this is a significant revenue opportunity going forward. We launched backpacks in May and last month, we introduced our fun, affordable accessory collection. Items like apparel, backpacks, and hats not only appeal to our existing customers but are driving new customers to the Pura Vida brand. In July, we collaborated with Disney on an exciting launch of Disney-themed jewelry and hair accessories, which Pura Vida and Disney enthusiasts equally love. This fun collection has brought new fans to our brand. We have been pleased with the response to date, with a few other high-profile product collaborations and licensing partnerships that will launch this fall. Stay tuned. We worked with popular lifestyle influencers during the quarter to launch a style pack that generated strong volume and appealed to a broader age demographic. Just last month, we introduced our jewelry collection with influencer Madison Bailey, which is appealing to a more diverse customer. As mentioned earlier, the recent Apple update impacted Pura Vida e-commerce revenues since we have historically relied on various platforms like Facebook and Instagram to reach our potential customers to drive sales. Our team has worked diligently to dive deeper into customer analytics and diversify a portion of our marketing resources to other platforms like TikTok, podcasts, and YouTube. As a result, we began to see Pura Vida DTC sales volume build throughout the second quarter and into the beginning of the third quarter. Since its inception, Pura Vida has demonstrated expertise in engaging customers, building loyalty, and introducing new devotees into the Pura Vida lifestyle. We're continually focused on looking for new ways to creatively engage our customers, drive new customers to our brand, design more inclusive marketing, and generate more efficiency in paid advertising. On the distribution front, our first Pura Vida store opened in San Diego's Westfield UTC mall in mid-August and is off to a great start, surpassing our initial plans. The store is allowing us to showcase the Pura Vida lifestyle with a full array of existing products and new product innovations, receive invaluable customer feedback, and host influencer events. From the brand's social media follower count alone, we know how loved Pura Vida is. However, we saw another level of the brand's power by the overwhelming response from Pura Vida’s community of enthusiasts, as they experienced the Pura Vida lifestyle in person at the store. We saw lines up to three hours for most of the opening day. The feedback and sales have been beyond our expectations. We certainly believe there are opportunities to expand the Pura Vida store concept to other locations. We are also thrilled that we have rolled out Pura Vida shop-in-shops in 23 Vera Bradley full-line locations featuring a full assortment of jewelry items, and the Pura Vida charity bracelet program has been rolled out in all Vera Bradley full-line and factory locations. We have been very pleased with the results thus far. Our wholesale growth remains strong, as we continue to add new wholesale partners. We've added over 250 new accounts so far this year, which has exceeded our expectations, and now Dillard's will be joining Nordstrom as a Pura Vida department store distributor. We continue to significantly expand our presence in existing retailers with larger in-store presentations, and we are experiencing solid growth in core product categories with our wholesalers. Our current wholesale accounts, on average, have placed larger and more frequent orders than in fiscal 2020, as many have experienced a strong resurgence in traffic. In summary, we continue to drive our digital-first strategy. We have made strategic shifts and investments to pivot us to a digital-first company, evolving into a customer-centric, data-driven, technology-enabled, and digitally focused enterprise, which allows us to effectively engage with our customers and offer a seamless shopping experience. Second quarter e-commerce sales grew over 20% over fiscal 2020. Over one-third of our consolidated revenues are now generated from e-commerce sales. Excluding our factory stores, over half of our total sales are driven by e-commerce. We are continuing to enhance our product innovation pipeline, collaborations, and category extensions, as evidenced at Vera Bradley by the launch of our Cotton Reimagined collection, the introduction of other alternative fabrics, our commitment to sustainability, countless product collaborations, and the continual newness and excitement in Pura Vida’s jewelry collections, as well as expanding into the new Pura Vida lifestyle categories such as apparel, backpacks, and accessories. We are building on our community through marketing. Vera Bradley continues to engage and grow its customer base through analytics, social media, and VB Cares efforts. Pura Vida has demonstrated expertise in engaging customers, building loyalty, and introducing new devotees into the Pura Vida lifestyle via Instagram, TikTok, and Podcasts. In evolving our distribution channels, we are continually looking for new ways to reach our customers and to reinvent the shopping experience from our verabradley.com website redesign to partnering with thredUP to the opening of our first-ever Pura Vida store. Operator, we will now open up the call to questions.

Thank you. And we'll go first to Mark Altschwager with Baird.

Great. Thank you. Good morning and thanks for taking my question. Just to start out, John, I apologize if I missed it. But can you give us some color on the Vera Bradley e-commerce sales in Q2 just the growth rates versus 2019?

Just a second, because I don't remember, off the top of my head. So, if you want to go to the next question, I'll get that information for you.

Okay. Sounds great. With respect to back-to-school, just any more detail on how the season progressed through August. We've heard other brands talk about the potential for an elongated season this year. Just wondering if you're seeing any indications of that? And then separately, any indications that the delta variant is affecting the trajectory of the recovery in your travel categories?

Yes, Mark, I could take that. I think first of all, from back-to-school, we also expect that there will be a more elongated back-to-school season. And again, we've seen growth over last year for sure in the back-to-school categories. But we just haven't got back up to the 2019 levels, which seems to be what we're seeing in the rest of the market in terms of kind of these accessories in non-tech categories. Regarding the delta variant, what has been interesting is we saw traffic continuing to improve quarter, I mean month-after-month throughout the quarter. When we got to mid-July, you saw that improvement slow. And it's kind of stabilized as we've moved through August. So there's been a softening of the upward trajectory. But still overall, we still think the consumer's strong. In terms of the travel category, we're still seeing a lot of travel happening out there. So we haven't seen a major suppression in the travel category yet. So we're watching it closely. But at this point we're still hopeful that the travel category will continue to be solid as we move through the year.

And Mark, regarding your question regarding e-commerce compared to 2020 results in the second quarter, it's up approximately about 40%. And when you compare it to last year, it's down about 30%. But don't forget last year there was a significant mass selling that went through that channel.

Right. Okay. Thank you. Then any detail you can share on AUR trends that you're seeing. And then I think the company effectively took some price increases a couple of years ago to offset impacted tariffs. Wondering if you see opportunities to raise price today to offset some of these freight pressures and general inflation in AUC?

Yes. In regards to AUR trends, we are seeing AUR go up. So we are definitely seeing some benefit associated with that. In regards to kind of price increase, we are having conversations internally to talk about kind of what and if we can take some price increases and what product categories we should take those price increases internally to pass through some of the challenges we're seeing in the supply chain.

Yes. So we anticipate doing price increases. We just want to make sure that we're surgical in how we approach it. So, more information will come on that in the following quarters.

Okay. Make sense. Thanks for all the detail. I'll hop back in the queue.

Thanks, Mark.

We'll go next to Eric Beder with SCC Research.

Sure. Good morning, guys.

Good morning.

Could you talk about longer-term what we should be thinking about in terms of the Vera Bradley store base? And let's talk about that first.

We continue to see an opportunity to close some underperforming full-line stores while still believing there is potential for growth in the factory channel. Although we plan to reduce the number of full-line stores, we are also exploring opportunities to open new locations for Vera Bradley. While we will be closing some current full-line stores, our goal is to find opportunities to establish new ones in specific areas.

And I know that you have a lot of cash right now. What are your thoughts in terms of acquisitions, buybacks, and utilization of the capital?

Yes. Currently, we are focused on discussions related to mergers and acquisitions, and both Rob and I are engaging in meetings about this. Our main priority is identifying how we might best utilize our capital. There is also a chance to discuss with the board the optimal use of our cash. We have an open program for share repurchases, and if we decide it's the right move, we have approximately $30 million available for share repurchases for the rest of this year if we find that it aligns with our strategy.

Okay, guys. Good luck in the backup.

Thank you, Eric.

We'll go next to Oliver Chen with Cowen.

Hi. Thank you. Hi, Rob, hi John.

Hi, Oliver.

Regarding the IDFA changes in iOS, what are your views on the potential developments in pursuing other platforms? Do you see any risks associated with this industry-wide challenge? Additionally, concerning freight and tariffs, why did the situation turn out to be worse than anticipated? What do you identify as the risk factors moving forward, particularly if this is a broader industry issue? I'm a bit surprised it was more severe than expected, yet there are reasons for this as well. Thank you.

I'll address the second part of your question, and Rob will cover the first part. Regarding the freight and tariffs being worse than we anticipated, we initially expected the GSP renewal to occur in the first half of the year. However, there has been little progress in Washington D.C. while a couple of bills are being discussed in the House and Senate, and there is no agreement yet. We believe that GSP will eventually pass and be retroactive, but we expected it to happen by now. Therefore, we are anticipating it will pass by the end of the fourth quarter. As for freight expenses, we originally thought the issues would primarily occur during the summer months, with some relief approaching the peak season. Unfortunately, that relief has not materialized. There have been COVID spikes in some of our factories, causing closures, and others are facing delivery challenges. Additionally, there have been port closures in Asia, leading to longer lead times for shipments to the U.S. The dwell time at the L.A. Long Beach port has returned to levels seen in February, and there are ongoing difficulties in warehouses and rail transport. All these challenges have compounded, and while we expected some improvement at the beginning of the year and even at the start of the second quarter, we no longer see that happening this year. We anticipate these challenges could extend into next year, potentially lasting the entire year.

And I think from an expense standpoint, one of the challenges we have, Oliver, is it's been difficult. We've moved some of our products to air, and our product with the lower AUR and higher volume size and moving it via air is a very expensive alternative. So, we're trying to really work through the complexity of what we move to air and what we leave on boats to manage through that process. But that's why I think there's been a higher flow-through of that expense than we anticipated. We did not anticipate using air as predominantly as we have at this point. On the Apple piece in terms of what's going on there, I think one thing that we're seeing with Pura Vida is, first, they've always been good at migrating their marketing platforms. They were strong on Facebook. They became the dominant force on Instagram. They're moving now into TikTok. So they're doing a nice job of migrating and continuing to evolve. They're starting to lean into podcasts and other areas like YouTube, to continue to diversify. The second thing that we want to do is help them get even stronger data analytics, leverage some of the learnings that we've been able to have over Vera Bradley to look at some traditional marketing channels in addition to kind of the forward digital channels and have a broader base. As we begin to do that, and start leveraging their SMS, email, some of the just digital advertising, Google Search, and SEO maximization, we think there are some opportunities for them to have a broader marketing platform. We are seeing those early steps begin to pay off as the business momentum is recovering as it moves through the second quarter into the third quarter. And the only thing I would add to that is as we continue to open stores, we only have one store for Pura Vida. But as we continue to open stores, we'll have more opportunity from first-party marketing because we'll have more information about the customer.

Okay. That's really helpful. So related to the trends you're seeing, the inventory positions, if you could brief us on those at both brands, Vera Bradley and Pura Vida? And how are you feeling with that inventory and back-to-school period versus a holiday? Thank you.

From a Pura Vida standpoint, inventory levels are currently higher than we would prefer. Last year, we faced production challenges, leading us to carry excess inventory. However, we are making progress in addressing that. Pura Vida is well-prepared for the holiday season with sufficient inventory to meet any anticipated sales growth. In contrast, Vera Bradley's inventory is relatively flat to slightly down compared to last year. We do have some gaps in inventory, and as we work to secure product for the holiday, we are considering airfreight to ensure timely availability. Overall, Vera Bradley's inventory situation is acceptable, but we must prioritize certain categories to ensure they arrive on time for holiday sales.

Okay. And what about store traffic more generally? Does it continue to be volatile? And how are you thinking about it longer term versus the traffic indoor sales per square foot productivity levels versus 2019?

Yes. So, from a traffic perspective, it's been fairly consistent overall if you think about the first two quarters in aggregate. But we saw a slowing down near the end of July in both the factory and full-line business. They both slowed down as the delta variant became a little bit more ramping. In August, we've seen it kind of go back to where it was prior to that. So, I think generally speaking, I think we would see traffic at the same levels as it’s been for the hopefully for the full part of this year, be fairly consistent down from where it was kind of call it to be at Q2 and Q1 from the end of the year. If you think about kind of a sales per square foot, the hope would be as we move into next year as the vaccination rates continue to get up and as people continue to feel more comfortable. We would hope from a factory perspective that we get back to a more normalized sales per square foot and that kind of will be able to generate the same level of sales that we were back in 2019. As we evolve from a full-line perspective, what we're selling and the productivity at a store, we would hope we can get back to that level as well.

Thank you. And lastly, on the merchandise margins and promotional environment. What are you seeing now in terms of average retail trends, full price selling? And also how might you expect the holiday to proceed as it can be a little different than that environment? Thank you.

So, from a promotional perspective, we are fairly consistent with where we were last year. That our intention is to stay fairly consistent in both brands. So, we would expect margins to be fairly consistent with where we were last year. I don't remember the second part of your question, Oliver?

The promotional environment and how you might plan for the holiday period as well?

Yes. So I don't see any significant adjustment from our current plans from a holiday perspective in either brand. I think we're well-positioned from an inventory as I said from our Pura Vida perspective. As we look at Vera Bradley, how to think about as we bring in new launches and as we bring in new category of products. If we need to be less promotional depending on where inventory sits.

Okay. Thank you very much. Best regards.

Thanks, Oliver.

Thanks, Oliver.

We'll go next to Steve Marotta with CLK & Associates.

Good morning, Rob and John. Rob, is it possible for Pura Vida to effectively get back on to Facebook and Instagram with workarounds? And if so, how long would that take?

For clarity, both platforms remain significant for advertising. However, the ability to target individual customers has become less effective due to recent changes, resulting in lower returns on advertising investment and overall conversion reach. The teams are actively working on refining the models, and we believe they will improve over time. Nonetheless, we recognize the importance of complementing our strong Instagram and Facebook marketing with other advertising methods to diversify our marketing strategy.

I see. And John, can you quantify airfreight in the first half and the second half?

Yes. From a dollar perspective, I won't get that. But ultimately, we're going to see more significant dollars work through the P&L in the second half of the year versus the first half of the year.

Okay. Fair enough. Thank you. I'll take everything else offline. Thank you.

Thanks, Steve.

We'll go next to Dana Telsey with Telsey Group.

Hi. Good morning, everyone. As you think about change with the Apple iOS platform shift, what are the markers that you're looking for to show that it’s improving? Or do you just have to transition to something else and just never expected to get back to the levels that it had been?

I think there's a couple of things, Dana. First of all, what are we watching? I mean, what we're really watching is kind of a combination on those two platforms. What is the conversion from the advertising? What is the reach? What is the customer acquisition cost and the return on ad spend, the kind of metrics that we're watching. When we're seeing some improvement in those, we do not anticipate getting back to the heights of that, and we do believe that it becomes more important that we diversify our marketing spend. So it will continue to be the dominant source of marketing for Pura Vida, but we expect to have more diversification as we move forward.

Got it. With the optimal diversification you're seeking, what percentage are you aiming for and when do you expect to reach it?

We are currently determining the optimal amount for our advertising spend. So far in this quarter, we have reduced our advertising expenditures on Facebook and Instagram by over 10%. We anticipate that this decrease will likely continue as we enter the fourth quarter. We will need to monitor how effective our efforts are with the new algorithms on these platforms and how well other advertising channels perform. While we do not have a specific target at this moment, we expect that by next year, less than 75% of our total advertising spend will go to Instagram and Facebook.

Got it. And then lastly, just on you mentioned that you're testing the Shop-in-Shop, the Pura Vida and Vera Bradley test. What are you learning from that? Would you go forward? Is it bringing in a different customer than Vera?

Right now, what we're finding is that our customers engaging with that, what we and we just back up. What we did in most of our stores is did the charity bracelet program. And what that is doing is engaging our current Vera Bradley customers coming in. They're not necessarily coming in for the bracelet, but when they're in our stores they're seeing it, picking up incremental sales. In our factory stores, we're doing a combination of the full-priced charity bracelet program, which has been very successful even in our factory stores, as well as adding in some liquidation product which has also worked. So I wouldn't say that it is much a new customer acquisition opportunity as a wallet builder in our current Vera Bradley stores, which we think is just again, a good sign.

Got it. Thank you.

Thanks Dana.

And we'll go next Oliver Chen with Cowen.

Hi, again. I had another question about supply chain. So as you think longer term, do the factories that you're seeing now give you an impression that you should change your supply chain or not in terms of what you look to do? And on your details on factory closures, which regions does that affect most, and what percentage of your supplies from those regions? Thanks.

So, in regards to the factories and what we're thinking of, right. So, what we are looking at is our opportunity for other country of origin opportunities to think about versus Southeast Asia. So we're definitely looking into that. Some of the challenges, but still the vast majority of our product likely will still come from Southeast Asia, even if we were to move it. So some of the associated with the freight and just a delivery and what's happening kind of here in the ports as well as kind of on the rail yards and warehouses, I think will just take some time to clean up. I don't see a significant change around that. We've looked at opportunities to move from different ports to see if that would speed up our ability to get the products here. And it is really wouldn't. All ports are challenged right now. So we are assessing opportunities for changes in country origin to see if we can speed up some of the factories. But that’s really a long lead. That's not going to be a fix from a material perspective next year, something we’ll have to look at from a more strategic perspective. Some of the countries that were closed were Vietnam, Indonesia. And so, Vietnam is a fairly significant portion of you call it kind of mid-teens from a factory perspective kind of where we get our product. So that being closed for up to two to five weeks has kind of made it more challenging just to hit our delivery dates. Indonesia was closed for a couple weeks, and that's becoming a bigger part of our production facilities. As we've moved our production out of Myanmar, a lot of that is moving into Indonesia. And over time it will be probably one of the larger countries for us. And again that was only closed for a few weeks, so the more critical one was Vietnam.

And I think one thing that we've been able to do across Vera Bradley for a while and beginning to do at Pura Vida is just have a flexible supply chain. When we have shops that hit, for example, we had significant production in Myanmar which we moved out into other countries, and we continue to just be flexible. That's part of the reason why we're moving more into Indonesia. As John says, over the years ahead we think there'll still be adjustments in the supply chain as we continue to work.

Thanks for those details. Very helpful. And Rob, as you think about air freight, what is your general framework for which products would be more suitable for that expensive mode and why?

Yes. First of all, the number one factor is those products that are super time-sensitive. So, giving an example of that could be something like a holiday pattern. We would hate for a holiday pattern to be four or six weeks late and really condense the holiday selling season. The good news is that most of our product has a more seasonless point of view. And so those are the things that we're not accelerating. But if there's a really important marketing initiative or something that's hyper-seasonal, those are the areas that we're looking at. We obviously look more towards things that take up a little less cubic space. But even in some of those cases we might have to bring some of those larger products in via air if it's time-sensitive from a fabrication or a launch standpoint.

Okay, great. Thank you very much.

Thanks, Oliver.

And there are no further questions in the queue. At this time, I'd like to turn the conference back over to Mr. Rob Wallstrom for any closing remarks.

Thank you. We have an extraordinary culture and outstanding team, loyal customers, and a clear vision to be a purpose-driven multi-lifestyle brand high-growth company. Our strong cash position, debt-free balance sheet, and capacity to generate free cash flow will allow us to continue to invest in our two powerful brands and seek out prudent acquisitions of other comfortable, affordable, purpose-driven brands over time. This year, we expect to deliver double-digit revenue growth over both fiscal 2021 and 2020, post healthy operating income growth over the prior two years and generate free cash flow of over $50 million. We have an exciting future ahead, and we believe we have the opportunity to create value for all of our stakeholders. I would like to thank the Vera Bradley, Pura Vida, and corporate teams for their resourcefulness, tenacity, and extraordinary work, as we accomplish so much while continuing to navigate through this challenging environment. Thank you for your time and interest in Vera Bradley Inc. We hope you can join us for our third quarter call on December 8th.

And that concludes today's conference. Thank you for your participation. You may now disconnect.