Earnings Call Transcript - VRA Q4 2023

Operator, Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley Fourth Quarter and Fiscal Year-end 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 Mark Dely, Vera Bradley’s Chief Administrative Officer. Please go ahead.

Mark Dely, 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 and the company’s most recent Form 10-K 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, Jacquie Ardrey. Jacquie?

Jacqueline Ardrey, CEO

Thank you, Mark. Good morning and thank you for joining us on today’s call. We focused on driving revenues in the fourth quarter through targeted strategic promotions on seasonal giftable and key items. As a result, total company fourth quarter revenues outperformed our guidance, although gross margins remained under pressure. Diligent expense control enabled us to deliver fourth quarter non-GAAP diluted earnings per share of $0.16, which was nearly flat with last year. In the fourth quarter, sales trends at both Vera Bradley and Pura Vida improved over prior quarters, with Vera Bradley total sales down just 1% and Pura Vida sales down less than 5% on a year-over-year basis. For the fourth consecutive quarter, the Vera Bradley Indirect Channel experienced year-over-year revenue growth. Targeted customer retention efforts led to increased Vera Bradley e-commerce revenues, while Full-Line and Factory store revenues continued to be negatively affected by traffic levels, although trends improved throughout the quarter. At Pura Vida, e-commerce trends improved over previous quarters due to strategic promotions; however, overall challenges continued to persist in our social and digital media effectiveness coupled with rising digital media costs. And, we experienced a year-over-year sales decline in our wholesale channel. On the plus side, Pura Vida Full-Line retail stores continued to perform ahead of our expectations, and they drove improved e-commerce traffic and revenues in their markets. We also took the opportunity in the fourth quarter to reset and appropriately position the Pura Vida business for the future, by recording goodwill and trade name impairments and necessary inventory write-offs. We ended the fiscal year with consolidated revenues of $500 million, which exceeded our guidance. During the year, we began to see stabilization in our supply chain, diligently controlled our expenses, and carefully managed our cash. During the fourth quarter, we meaningfully reduced our year-end inventory levels from the third quarter. Although fiscal 2023 had its challenges, we took actions and laid the groundwork to position the Company for the future. In mid 2022, we collaboratively identified $25 million in annualized cost-reduction initiatives and efficiency processes. The expense savings were derived across various areas of the Company, including payroll reductions, retail store efficiencies, marketing expenses, information technology contracts and projects, professional services, and logistics and operational costs. Many of the savings were realized in fiscal 2023. In January 2023, we further streamlined our corporate structure by eliminating the positions of Vera Bradley Brand President, Chief Creative Officer, and Chief Revenue Officer, and by adding the position of Chief Marketing Officer, designed to drive additional annual cost savings of approximately $2 million, add more focus on marketing and merchandising, and position the Company to deliver steady top and bottom-line growth. These decisions were made in order to right-size our leadership team and cost structure for the size of our business, to address the continuing challenging macro environment, and to best position us to achieve our long-term strategic plans. Subsequent to the end of fiscal 2023, in January 2023, we acquired the remaining 25% interest in Pura Vida from founders Griffin Thall and Paul Goodman for $10 million. We continued to make investments in customer data science, business analytics, and pricing optimization, allowing us to collect and analyze data and make fact-based decisions to more efficiently run our business. At the Vera Bradley brand, we expanded our robust product innovation pipeline, including launching our Featherweight Collection; continued another year of product collaborations, with iconic brands like Disney, Harry Potter, and Crocs; and also expanded our cozy, sleep, and outerwear collections. We continued to strengthen and rationalize our store base. We opened five new Factory stores and closed 19 underperforming Full-Line stores and one Factory store, ending the fiscal year with 51 Full-Line and 79 Factory locations. We also continued to expand options for customers to shop, like enhancing our presence in third-party marketplaces, including Amazon and adding boutiques in select high-traffic airports. At the Pura Vida brand, we entered into several high-profile product collaborations, with brands such as Hello Kitty, Disney, and Harry Potter, and expanded our product offerings by launching our demi-fine collection and expanding our assortment of engravable jewelry, all designed to bring new customers to our brand. We focused on building a more diverse, innovative, effective, and performance-based marketing program to drive Pura Vida e-commerce sales. We began the process of implementing a comprehensive customer data platform to build a single, coherent, complete view of each Pura Vida customer so that we can better target and personalize marketing and become less reliant on third-party marketing. This project is scheduled for completion this spring. We continued to engage our micro influencers, significantly expanded our TikTok presence, launched impactful ads on connected TV, optimized SMS, and aggressively explored other methods to effectively reach our customers. We also opened three new Pura Vida Full-Line stores during the year, bringing our Full-Line store count to four, which collectively are exceeding our expectations. These four stores are playing a role in driving new customer acquisition as we continue to diversify our marketing platforms, and they demonstrate the power a retail presence can have in driving digital sales, omni-channel loyalty, and spending. Now, let me turn the call over to John to review the financial results. John?

John Enwright, CFO

Thanks, Jacquie, and good morning. I’d like to highlight a few key points for the fiscal year. The figures I will present today are non-GAAP and exclude charges outlined in today's release. For detailed information on the items excluded from the non-GAAP numbers and a reconciliation of GAAP to non-GAAP, please refer to today's press release. Consolidated net revenues reached $500 million for fiscal 2023, down from $540.5 million in fiscal 2022. Consolidated net income was $7.6 million or $0.24 per diluted share, compared to $19.7 million or $0.57 per diluted share last year. Vera Bradley direct segment revenues were $328.2 million this year, a 7.5% decline from $354.9 million in the previous year. Comparable sales decreased by 9.5%. Vera Bradley Indirect segment revenues totaled $73.3 million, an 11.1% increase over last year's $66 million, driven by growth in certain key account orders. Pura Vida segment revenues amounted to $98.4 million, a 17.7% decline from $119.6 million in the previous year. Pura Vida's e-commerce revenues suffered due to declining effectiveness in social and digital media, rising digital media costs, and a decrease in sales to wholesale accounts. This year's gross profit was $257.2 million, or 51.4% of net revenues, compared to $287.9 million, or 53.3% of net revenues last year. The current year's gross margin was negatively impacted by increased freight expenses and higher promotional activity, although slightly mitigated by price increases. SG&A expenses totaled $245.3 million, or 49.1% of net revenues, compared to $258.8 million, or 47.9% of net revenues in the prior year. This year's expenses were lower due to cost reduction initiatives and a decrease in variable expenses linked to reduced sales volume. For the fiscal year, consolidated operating profit was $12.3 million, or 2.5% of net revenues, down from $30.1 million, or 5.6% of net revenues last year. Now, turning to the balance sheet, year-end cash and cash equivalents were $46.6 million, down from $88.4 million at the previous fiscal year's end. We had no borrowings on our $75 million credit facility at the fiscal year-end. Total inventory for the fiscal year was $142.3 million, compared to $144.9 million at the end of the previous fiscal year. The decrease in inventory is mainly due to adjustments related to excess and discounted inventory, partially offset by increased logistics costs. Inventories were $36 million lower than at the end of the third fiscal quarter. During fiscal 2023, we repurchased 18.1 million of common stock, which amounts to about 2.8 million shares at an average price of $6.40. We plan to maintain a conservative cash approach, especially given the current volatility. Now, let's discuss our outlook for 2024. We are providing estimates for the full year based on current macroeconomic trends. We expect the macroeconomic environment to remain unpredictable, and this year to be a rebuilding year for both of our brands. However, we aim to seize gross margin improvement opportunities and manage our expenses carefully. While we are not providing detailed guidance for the first fiscal quarter of 2024, we anticipate revenues and diluted loss per share to be roughly consistent with the prior year. The first quarter will focus on stabilizing the business, and we hope to build momentum as the year advances. All forward-looking guidance is non-GAAP. For fiscal 2024, we expect total revenues to be between $490 million and $510 million, while revenues were $500 million in fiscal 2023. Revenues for both Vera Bradley and Pura Vida are expected to remain approximately flat year-over-year. We anticipate a gross margin of 52.6% to 53.6%, compared to 51.4% last year, with the increase primarily due to reduced inbound freight costs, though offset by overhead costs related to inventory purchases. SG&A expenses are expected to range from $241 million to $251 million, compared to $245.3 million last year, with changes driven by adjustments to incentive compensation and company-wide cost reduction efforts. We expect consolidated operating income of between $17.3 million and $21.7 million, up from $12.3 million last year, and anticipate free cash flow of $25 million to $30 million, contrasting with a cash usage of $21.7 million in fiscal 2023. Diluted EPS is projected at $0.40 to $0.50 based on 31 million diluted shares outstanding and an effective tax rate of about 28%, compared to diluted EPS of $0.24 last year. Net capital spending is estimated at approximately $5 million, down from $8.2 million in the previous year, reflecting investments in new Vera Bradley Factory stores and enhancements in technology and logistics. Now, I'll turn the call back over to Jacquie for further insights on our future strategies. Jacquie?

Jacqueline Ardrey, CEO

Thanks, John. At both our Vera Bradley and Pura Vida brands, we are embarking on Project Restoration and will focus on four key pillars: consumer, brand, product, and channel, to drive long-term top and bottom-line growth. First, at Vera Bradley. Regarding the consumer, we will focus on restoring brand relevancy, targeting the casual and feminine 35 to 54-year-old women who not only value fashion and style, but also function. With this strategy, we will also inspire and retain our loyal customers outside of this age group. As we think about our brand, we will strategically market our distinctive and unique positioning as a colorful, feminine fashionable brand that connects the customer on a deep emotional level. We will refocus on core product categories and items we are best at, by innovating and expanding within our core products. We will elevate our colorful feminine heritage, keeping it distinctive but more trend relevant through updated print and design. We will innovate into strategic adjacent lifestyle item introductions that make sense for our customers. And we will continue to pursue collaborations and partnerships that align with our target customers. From a channel perspective, we will accelerate our digital-first focus and online presence through a mix of brand storytelling and product messaging. We will build a balanced footprint that more clearly differentiates Full-Line from Factory stores through differentiated patterns and colors, product functionality, sustainably sourced fabrics and pricing. And we will target new or strengthen existing relationships with strategically aligned wholesale partners. At Pura Vida, on the consumer front, we will sharpen our focus on the carefree 18 to 24-year-old collegiate girl, who both those younger and older aspire to be. Our target customer is free-spirited, a trendsetter and focused on living her best life. Pura Vida jewelry is a way of expressing herself and fits her personality. We will refresh our brand image with a focus on showing what living free looks and feels like, showing real places, real moments and real faces that are authentic, diverse and inclusive. We will re-center our brand ethos on 'living life to the fullest' as well as Pura Vida’s commitment to supporting charities and social responsibility. We will focus on delivering unique, fun, playful product designs that are affordable and accessible. We will continue to deepen our expertise and innovate in our hero core category of string bracelets, as well as other jewelry items. And we will opportunistically explore additional close-in adjacent categories that make sense for our business and our customers. As we look at channel distribution, we will have a strong focus on restoring e-commerce growth, utilizing our new comprehensive customer data platform to strategically target and personalize marketing. We will drive strategic growth of wholesale by pursuing larger, more strategic partnerships and expansion of our larger existing accounts. In addition, we will refine our store model to further drive top and bottom line growth, pausing new store growth this year to determine how big our store base should be and what infrastructure is needed to support that base. To support growth and development of our two brands on a corporate basis, we will continue to make strategic investments in the right talent to help drive the transformation and diligently manage our supply chain, gross margin, SG&A expenses and cash flow. This year by focusing on stabilizing sales, gross margin expansion and expense control, we believe we can increase year-over-year operating income by at least 40% and EPS by at least 65%. We are in the process of more fully developing our strategic plans, I will share with you more details along with long-term financial targets later this year. Operator, we will now open up the call to questions.

Operator, Operator

Thank you so much. While we wait, we'll go with our first question, Eric Beder from SCC Research. Please go ahead.

Eric Beder, Analyst

Good morning.

John Enwright, CFO

Hey, Eric.

Jacqueline Ardrey, CEO

Good morning.

Eric Beder, Analyst

Could you discuss how far along you are on the $25 million reduction in expenses and how much of that we should expect to see incrementally this year?

John Enwright, CFO

So the majority of the initial $25 million we actually saw in fiscal '23. As Jacquie kind of alluded to near the end of her prepared remarks, we are looking at additional opportunities. So that's why we gave the expense range of the $241 to $251 to offset some of the incremental costs that were built into our budget associated with normalizing incentive compensation. But we think there's additional opportunities that we're going after we just haven't identified them fully and executed them. That's why we gave that range.

Eric Beder, Analyst

Okay. I know you mentioned a pause on Pura Vida store openings. What should we expect regarding store openings and closures for the Vera Bradley chain this year?

John Enwright, CFO

Yes, so we have three identified Factory stores that we're going to open in regards to closures for Full-Line. We're working towards minimizing this number, but right now we're probably close to about 10 that we're going to plan to close. It could be a little bit more or a little bit less than that. But we're working with landlords to see if we can work through some rent negotiations, and to continue to move those stores out from a closure perspective as we look at fixing some of the products or improving some of the products that we sell through our full-price brand. So we're actively having conversations with some of our major landlords to reduce that number. But you can probably think of it from a model perspective, Eric, about 10.

Eric Beder, Analyst

Okay. And in terms of, I guess, the Vera Bradley product, you mentioned adjacencies, you mentioned trying to kind of get it so be more focused, what should we be thinking as we go to the stores in terms of what the product mix and the category should be doing?

Jacqueline Ardrey, CEO

In the short term, you likely won't see significant changes. We are currently adapting our product development timeline based on sales and customer data as swiftly as possible. It’s still early for major shifts, as we want to ensure we have the right data to inform our decisions regarding product adjacencies. The current situation may evolve, but we're focused on gathering all necessary data before making any decisions. Therefore, it's premature to speculate on potential differences moving forward. However, you can expect a more targeted approach in our product offerings, as we aim to enhance the shopping experience in our stores and clarify what is essential for the Vera Bradley brand.

Eric Beder, Analyst

What are your thoughts on collaborations for both Pura Vida and Vera Bradley? I know that the Harry Potter collaboration for Pura Vida has ended, but you have continued to see collaborations with the products. What criteria will guide your future partnerships for Pura Vida, and how can they enhance relevance for your customers? Thank you.

Jacqueline Ardrey, CEO

Yes, that's a great question, Eric. Right now, we are focused on ensuring that our future partnerships truly resonate with our target customers. We are analyzing data to understand how our customers interacted with previous collaborations and the long-term value those customers provided. This analysis will inform our future product lineup.

Eric Beder, Analyst

Okay. Congrats and good luck with the rest of the year.

John Enwright, CFO

Thanks, Eric.

Jacqueline Ardrey, CEO

Thank you.

Operator, Operator

Thank you. And our next question comes from Joe Gomes from Noble Capital.

Joe Gomes, Analyst

Good morning, and thanks for taking the questions.

Jacqueline Ardrey, CEO

Good morning.

John Enwright, CFO

Thank you, Joe.

Joe Gomes, Analyst

I wanted to follow up on the question regarding Vera Bradley and the store openings and closings. In the past, you mentioned that the Full Line stores attract customers with higher household incomes compared to the Factory stores. However, if you cut 10 Full Line stores, that's a 20% decrease this year alone. Are you noticing those higher income customers shifting to the Factory stores? How are you drawing those customers to the Factory stores, and what measures are you taking to retain that higher income demographic?

Jacqueline Ardrey, CEO

Yes, I think that's a great question. And I think the short answer to that is that we're really relying on e-commerce to help fill that gap and to identify the customers that we want at the demographic that's appealing for our brand and, again, that's how we'll be able to more effectively target those customers.

Joe Gomes, Analyst

Okay, pardon me. You mentioned the focus on core categories. One of the things you introduced towards the end of last year was your footwear line. Is that considered a core category, and how did the footwear line perform in the fourth quarter?

Jacqueline Ardrey, CEO

So footwear was a product expansion that we were very excited about and continue to be excited about. Our spring footwear has started off very strong. So again, we're going to look at all of these programs in relationship not only to sales but to really identifying in a targeted way, what is happening with the customer and how it's driving her value over time. So that's analysis that's happening right now.

Joe Gomes, Analyst

Okay. And maybe switch over to Pura Vida for a second. You mentioned there one of the challenges in the quarter was your wholesale account. Maybe you could just give us a little more color detail of what is happening on the wholesale side over Pura Vida and what we're looking to do to see that line, that segment turn back up for Pura Vida as opposed to going down.

Jacqueline Ardrey, CEO

Sure. I think in Q4, we definitely saw some hesitancy in our retail partners just due to the macroeconomic environment and people just holding their open to buy dollars tightly. And that definitely had an impact on Pura Vida, much more than it did on Vera Bradley. But we did see early in the quarter that that was the case at Vera Bradley as well. What we've seen since then is a little more positivity from our retail partners. So we've definitely seen that pipeline increase since the beginning of the year.

Joe Gomes, Analyst

That's good news. And one last one, for me. Great job on the inventory levels. Seeing what the projections are for fiscal '24, John, are you looking for additional leverage there on the inventory being able to reduce that even more from where you are? Do you think that where we are today is year-end is a good level?

John Enwright, CFO

No, I think we're going to continue to look for opportunities to reduce debt levels to improve our turn. So as we built out the cash flow associated, the free cash flow associated with next year's guidance, we expect inventory levels to drop from where it is today.

Joe Gomes, Analyst

Okay, great. Thanks for that. I'll get back in queue. Thank you.

Jacqueline Ardrey, CEO

Thank you.

Operator, Operator

With that, I'd like to turn the call over to Jacquie for any closing remarks.

Jacqueline Ardrey, CEO

Thank you. We are committed to returning Vera Bradley and Pura Vida to profitable growth and generating strong cash flow as a company, which I believe will deliver value to our shareholders over the long term. Since joining the company in November, I'm more convinced than ever that both brands have enormous potential. And I'm very excited about the future of Vera Bradley, Inc. We have a portfolio of two iconic lifestyle brands, multigenerational customers with remarkable loyalty and devotion, impressive brand recognition, a solid balance sheet, and extraordinary culture. We have some heavy lifting to do in fiscal 2024, but I'm confident that we will emerge a stronger company. I want to thank our associates for their commitment to driving change in all they do to make our company a great place to work. We are proud to once again be recognized by Forbes as one of the best midsize employers in America. Thank you for joining us today and we look forward to sharing our progress with you in the quarters ahead.

Operator, Operator

Thank you. Ladies and gentlemen, that does conclude today's conference. We appreciate your participation. Have a wonderful day.