Vera Bradley, Inc. Q2 FY2024 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley Second 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. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mark Dely, Vera Bradley's Chief Administrative Officer.

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 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 for 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 over the call to Vera Bradley's CEO, Jackie Ardrey.

Thank you, Mark. Good morning, and thank you for joining us on today's call. We are very pleased with the meaningful year-over-year improvement in second quarter earnings driven by significant gross margin expansion and successful company-wide expense reduction efforts. As a company, we are doing a better job of being attentive to our cost structure and are being very intentional on how we invest our dollars to drive long term profitable growth. Our transformational efforts continue to bear fruit, and I'd like to thank all of our associates across the country for their contributions to this very important work. During the quarter, we carefully managed our debt-free balance sheet, adding to our cash position while continuing to strategically improve our inventory position. One of our key goals this year is to stabilize revenues. We are continuing to make progress on that front with second quarter consolidated revenues of $128.2 million, only modestly below last year. Total second quarter revenues for the Vera Bradley brand were down 1.2% from last year. Vera Bradley direct revenue declines resulted from store closures over the last year while we saw a small comparable store gain in our full-line stores. The successful return of the Vera Bradley annual outlet sale offset weakness in our factory outlet stores in addition to compensating for the elimination of one online outlet sale during the quarter. The remainder of our e-commerce sales continued to perform well. Lastly, Vera Bradley indirect revenues were up slightly to last year. Pura Vida year-over-year sales declined 3.6%, primarily related to a shortfall in wholesale revenues, which we believe should improve in the second half of the year. We are realizing the benefits of changes in our performance-based marketing program. In general, at both brands, customers have responded enthusiastically to our collaborations and product offerings when they are innovative and trend right while being more selective in their discretionary spending in light of the current macro environment. We continue to make meaningful progress on Project Restoration focusing on four key pillars of the business for each brand: Consumer, Brand, Product, and Channel. Through the first half of fiscal 2024, we have progressed as expected. We believe execution of Project Restoration will drive long-term profitable growth and deliver value to our shareholders. Let me give you a bit more detail on Project Restoration's four key pillars and some of the initiatives we currently have underway. First, at Vera Bradley, for the Consumer, we are focusing on restoring brand relevancy, targeting casual and feminine 35 to 54-year-old women who value both fashion and function. For the Brand, we are working to strategically market our distinctive and unique position as a feminine fashionable brand that connects with consumers on a deep emotional level. For the Product, we are refocusing on core categories and items we are best at, by continually innovating and expanding within our core products. Over the next 12 months, we will elevate our colorful feminine heritage, keeping it distinctive but more trend relevant through updated print and design. And we will continue to enter into strategic adjacent lifestyle item introductions that make sense for our customers. Our performance fabrics, Featherweight, Performance Twill, ReActive, and Ultralight are trending well with the core customer being younger with a higher household income. This remains a big opportunity for us, both now and in our plans for future transformation. Patterns will always be our signature, but coordinating solids continue to be a key opportunity for us as well. We will expand our solid offerings this fall, including the reintroduction of a small collection of leather goods next month. Product collaborations are an important part of our brand expression. Our first Hello Kitty collaboration launched in June was a great success, and we are also seeing strong customer response from our much-anticipated Peanuts collection launched just this month. We are especially thrilled about our NFL collection introduced in August just in time for football season. Our product innovation and new pipeline is robust for next year, and I look forward to sharing more details in the months to come. Lastly, for the channel, we are accelerating our digital-first focus and online presence, building a balanced footprint that more clearly differentiates full-line from factory outlet stores and targeting 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. We are taking a comprehensive approach to reversing the trends in Vera Bradley's factory outlet channel through a thorough multipronged approach, including potential pricing adjustments and targeted marketing initiatives aimed at driving traffic and average order size. Now turning to Pura Vida. For the consumer, we are sharpening our focus on 18 to 24-year-old young women, the original target audience of the brand. For the brand, we have recentered our brand ethos on living life to the fullest. Our marketing today authentically shares real moments, places, and faces. Our Live Free campaign launched in June accentuated travel, adventure, friendship, and freedom and created engagement and excitement in our customer base. The campaign included a nationwide tour to adventurous U.S. destinations by several social media influencers and customers. We are utilizing our newly launched comprehensive customer data platform to more strategically target customers and potential customers with a deep focus on retention. Additionally, we have seen improved marketing efficiency this year at both brands. For the product, we are focusing on delivering unique fun, playful designs that are affordable and accessible with a key emphasis on bracelets and jewelry as well as other strategic adjacent categories. Our new summer collection, featuring both string and metal jewelry, has resonated with our customers. We recently launched our men's collection with some items selling out quickly. This collection still targets our core customer, who ultimately is purchasing these items for the men in her life. Our custom bracelets from Harper charms to engravable items to building your own bracelets are working and continue to be a growth opportunity. We will continue to pursue high-profile collaborations like Hello Kitty, Shark Week, and Harry Potter that are always fan favorites and bring new customers to the brand. Additionally, for both brands, we have terrific holiday gifting programs in place. Finally, for the channel, we have a strong focus on driving e-commerce growth and strategic expansion of wholesale by pursuing strategic partnerships and expanding larger existing accounts. We are beginning to refine and develop an expansion plan for our existing store model in both brands. To gain both operational and strategic efficiency, we moved the Pura Vida store operations under the Vera Bradley team during the quarter. We are taking actions to stabilize and then steadily grow Pura Vida's revenues and to reverse the trends in Vera Bradley's factory outlet channel. Our team is focused on 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. Now let me turn the call over to CFO, Michael Schwindle, to review the financial results.

Thanks, Jackie, and good morning, everyone. Let me start with a few highlights from our second quarter. For clarity, all the numbers I mention today are non-GAAP and exclude the charges outlined in today's press release. For a detailed list of items excluded from the non-GAAP numbers and a reconciliation of GAAP to non-GAAP, please refer to today's release. Our second quarter consolidated net revenues were $128.2 million, compared to $130.4 million in the same quarter last year. Consolidated net income was $10.2 million or $0.33 per diluted share, compared to $2.4 million or $0.08 per diluted share from last year. Vera Bradley Direct segment revenues were $85.7 million, a 1.5% decrease from $87 million last year. We permanently closed 19 full-line and two factory outlet stores and opened three factory outlet stores in the last 12 months. Our comparable sales dropped 5.3%, mainly due to weakness in the factory outlet channel mentioned by Jackie earlier. This year, the direct segment revenues also included sales from the Vera Bradley annual outlet sale, which was not held last year. Vera Bradley Indirect segment revenues grew to $17.4 million, a 0.2% increase over $17.3 million last year. Pura Vida segment revenues amounted to $25.1 million, a 3.6% decrease from $26 million the previous year, driven by a decline in wholesale sales and a modest drop in e-commerce sales, somewhat offset by new store growth leading to non-comparable retail store sales. The second quarter gross margin was $72 million or 56.2% of net revenues, compared to $67.8 million or 52% of net revenues last year. This year's gross margin rate benefitted from lower year-over-year inbound and outbound freight expenses and the sell-through of previously reserved inventory, partially offset by increased promotional activity. As a reminder, the prior year gross margin was significantly affected by high inbound and outbound freight expenses as well as a deleverage of our revenue costs. SG&A expenses were $58.3 million or 45.5% of net revenues, down from $64 million or 49.1% of net revenues the previous year. This decrease reflects the early stages of our company-wide cost reduction initiatives across various areas. The second quarter consolidated operating income was $14 million or 10.9% of net revenues compared to $3.9 million or 3% last year. Turning to the balance sheet, our quarterly cash and cash equivalents reached $48.5 million compared to $38.3 million at the end of last year's second quarter. We still have no borrowings on our $75 million ABL facility. After the quarter-end, we finalized the renegotiation of our ABL agreement. The changes will convert the interest calculation from LIBOR to SOFR and enhance our future ability to expand ABL if necessary. We are confident that our access to liquidity and capital is adequate for our needs in the foreseeable future. Our inventory stood at $139.3 million at the quarter's end, down from $179.6 million at the end of last year's second quarter. We have implemented strategic actions to lower our inventory levels and believe we are well-positioned entering the fall selling season. During the quarter, we repurchased about 120,000 shares at an average price of $5.16 per share, totaling around $683,000. We have $26.3 million remaining under the $50 million share repurchase authorization, which expires in December 2024. As Jackie mentioned earlier, we are very pleased with our performance year-to-date and our progress on the transformation. I would also like to thank all of our associates for their hard work and commitment to these efforts. Looking ahead, based on our performance in the first half, our ongoing initiatives, and current macroeconomic trends, we are updating certain elements of our guidance for the fiscal year. Our forward-looking guidance is on a non-GAAP basis. We now project consolidated net revenues of between $490 million and $500 million for the year, compared to $500 million last year. We also expect a consolidated gross margin rate between 53% and 53.8%, up from 51.4% in the previous year. This year’s gross margin rate is anticipated to benefit from lower year-over-year freight expenses, cost reduction initiatives, and the sell-through of previously reserved inventory, but will be partially offset by increased promotional activity. Consolidated SG&A expenses are expected to be between $237 million and $243 million, compared to $245.3 million last year. The decrease in SG&A expenses is driven by our company-wide cost reduction initiatives, which are partially offset by restoring long-term incentive compensation to more normalized levels and incremental marketing investment aimed at accelerating customer file growth. This leads to an anticipated consolidated operating income of $24 million to $28 million compared to $12.3 million last year, and a diluted earnings per share of $0.57 to $0.65 as opposed to $0.24 last year. We also expect net capital spending to be around $5 million this year, down from $8.2 million last year, reflecting investments in new Vera Bradley outlet stores as well as technology and logistics enhancements. Consequently, our free cash flow is expected to be between $40 million and $45 million, compared to cash usage of $21.7 million last year. That wraps up our formal remarks. I would now like to open the call to questions.

Thank you. And our first question comes from Nick Gomes with NOBLE Capital. Your line is open.

It's Joe Gomes this morning. Congrats on the quarter and thanks for taking my questions. So I wanted to start out. Last quarter, you mentioned and this quarter about programs to drive traffic and increase the average basket size, and I was wondering if you could just give us a little more color on some of the types of programs that you're working on and what the early days you're seeing out of those programs and where you think you might see that further in the second half of this year.

Sure. Thanks, Joe, for your question. Overall, we were seeing a definite issue with traffic, particularly to our outlet stores earlier in the quarter, and there's a multipronged marketing approach that we've taken that includes paid media in all different ways that we're testing. That's part of the program. So it's paid media, it's mall takeovers, and it's other opportunities that we have, just non-traditional media forms that we're testing and really taking a very cautious but thorough approach to testing and learning what is driving traffic in which market. We started out with a fairly small test and expanded it. We've expanded it twice now, and we're continuing to do that, carefully evaluating what programs are working for which markets.

Great. Thanks for that. Could you provide more details on how the collaborations with Disney, Hello Kitty, and the NFL are progressing?

Sure. We're very pleased with the results of these collaboration efforts, especially Hello Kitty, which really resonated with both existing and new customers in the quarter, and NFL is also performing well. So it will continue to be a key part of our strategy now and for the future.

Okay. One last one for me, if I may, and I'll get back in queue. You did talk a little bit about the Pura Vida stores and how you put them under the Vera Bradley retail management now. I know you had said in the past you wanted to take a step back and evaluate the stores before committing to opening new stores. It's now been another quarter. Where are you in that process or thinking about opening new Pura Vida stores?

Hi, Joe. This is Michael. Thanks for the questions. Really good one. We've been monitoring, especially during the summer season, which is particularly important for the Pura Vida brand. We have been very pleased with the stores we have in place. We opened one in Myrtle Beach last year that has done very well, and the other stores continue to perform very well. We've seen some nice increases as well. So we're looking at our options now as we round out the summer season and we go into the fall as we start to think about next year.

Okay. Great. Thanks for that. I’ll get back in the queue.

Thank you.

Thanks.

Next, we go to the line of Eric Beder with SCC Research. Please go ahead.

Good morning.

Good morning, Eric.

Good morning, Eric.

I have a quick question. You are continuing to reduce inventory levels aggressively. Are we at a normalized level now? Is this how we should think about it moving forward, or are there other opportunities to further reduce inventory and increase productivity?

Thanks, Eric. I think as we look at the inventory and the productivity of the inventory, there are still a lot of opportunities we see in our inventory position. But at the same time, we're also thinking about that in context to next year's rollout of new lines in some of our areas. So we're taking a relatively cautious approach. There's also a little bit of a 'do no harm' perspective; we have to make sure we don't reduce any inventories in a way that is dysfunctional or harmful in the longer term. So we're being very conservative and judicious about that, but I think we have some opportunities as we look forward.

When you look at the Vera Bradley stores, one of the things you've implemented is kind of set pricing for a specific silhouette that changed a little bit during each month. What's been the response to that piece? I know it's kind of simplified the shopping experience, and if that's something we're going to see more of, maybe potentially in the outlet stores also?

So we've done this both in full-line and outlet stores. We started it with just a style spotlight in the full-line stores, and we've extended it to outlet stores as well. We're definitely monitoring the success. It really depends on the item and the price point. But the strategy is sound, and you will likely see us continue to use this pricing strategy for the rest of the year.

You and your team have been there for less than nine months. How far along do you think the stores and online are to what you would envision it to be and when should we, as investors and analysts and shoppers, think about, hey, this store completely encompasses what new management thinks? How should we think about that timeline?

That’s a great question. As I remarked earlier today, we were able to affect some of the product lines that you'll start to see mostly in full-line, but at a fairly minimal level this fall. You'll see the introduction of leather, and you'll see some more solid options, maybe not quite as much in outlet. But you'll see a gradual shift over the next couple of months until mid-next year when really the culmination of all our efforts and our supply chain timeline catches up to what we ultimately think is our go-forward result of Project Restoration.

Great. Good luck for the holiday season.

Thanks, Eric.

This concludes today's question-and-answer session. We'll now turn the floor to Jackie Ardrey for any additional or closing remarks.

Before I close, I would like to thank all of our associates once again for their collaboration and support of Project Restoration, for being resourceful and innovative and for embracing the mindset of diligent expense management. 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 are excited about the opportunities for both brands. We are also committed to returning both of our brands to profitable growth and generating strong cash flow through Project Restoration. This should deliver value to our shareholders over the long-term. Thank you for joining us today, and we look forward to sharing our progress with you on our third quarter call on December 6.

This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at any time.