Earnings Call Transcript - VRA Q3 2024

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 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'll now turn the call over to Vera Bradley's CEO, Jackie Ardrey. Jackie?

Jackie Ardrey, CEO

Thank you, Mark. Good morning and thank you for joining us on today's call. Our efforts continue on Project Restoration as our associates across the Company work together to position Vera Bradley Inc. for long-term profitable growth. We are very pleased with the meaningful progress we have made so far. Year-over-year, third quarter non-GAAP income was essentially flat as we delivered solid gross margin expansion and carefully managed our expenses despite sales challenges. Total third quarter revenues for the Vera Bradley brand decreased 5% from last year. Vera Bradley direct revenue declines primarily resulted from continued weakness in the outlet store channel and the impact of store closures. Year-over-year, Vera Bradley indirect revenues were up compared to last year. Pura Vida year-over-year sales decreased 18.3% with declines in both wholesale and e-commerce revenues as prior year sales were driven by significantly higher levels of marketing spend along with increased liquidation and clearance activity. Store sales remain strong. With our diligent expense management and focus on profitability, Pura Vida year-over-year third quarter operating income improved. At both brands, customers have responded to our latest iconic product collaborations and to our new innovative and on-trend product offerings even as they have been more careful with their discretionary spending in the current macro environment. We continue to diligently manage our debt-free balance sheet, adding to our year-over-year cash position while strategically lowering our inventory levels. Strength in this area is important in navigating an uncertain retail environment as well as in supporting our Project Restoration initiatives. Presently, we are taking targeted and prudent actions to stabilize revenues, and we remain focused on strong financial discipline in controlling what we can control as we react both strategically and tactically to current market conditions. Simultaneously, we have made meaningful progress and are right on track with our long-term strategic plan Project Restoration, focusing on four key pillars of the business for each brand: consumer, brand, product, and channel. We believe execution of Product Restoration will drive long-term profitable growth and deliver value to our shareholders. Let me give you an update on some of the initiatives we have underway related to Project Restoration. We will have additional updates in conjunction with our year-end earnings call with more rollout details in June. At Vera Bradley, for the consumer, we are focusing on restoring brand relevancy, targeting casual and feminine 35- to 54-year-old women who place prime importance on both fashion and function. We've created a multi-year customer file growth plan with a focus on this core consumer target, along with an appropriate level of marketing investment to acquire new customers as we launch new product and our refreshed brand vision next year. Our consumer research focused on this target audience, and we placed importance on her needs to inform product design and development. 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. Our marketing efforts this year have increased the number of reactivated customers. We are continuing to shift our focus from channel-specific customer acquisition to an omnichannel perspective for increased media effectiveness. Our updated brand vision and marketing strategy will roll out in the middle of next year. For the product, we are refocusing on core categories and items we are best at by continually innovating and expanding within our core products like travel and back to campus. By mid-next year, you will see how we have elevated 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 continue to trend well, appealing to our younger core customer with a higher household income. We believe performance fabrics are a strong opportunity for us. Patterns will always be our signature, but coordinating solids continue to be a key opportunity for us as well. We have and will continue to expand our solid offerings. As part of this, our revamped leather collection of bags, wallets, bracelets, and other accessories debuted in September. The simple clean lines, beautiful designs, and exceptional functionality have been well received by our customers, and we expect to expand our collection going forward. Customers purchasing leather spent seven times more than their full-price purchasing counterparts in the third quarter. Product collaborations will always be an important part of our brand expression. We continue to see strong responses from Disney to Hello Kitty to Peanuts to our most recently launched Toy Story Collection. Stay tuned for more exciting collaborations next year. We are especially thrilled about our NFL collection introduced in August. We will expand to all NFL teams in fiscal 2025. For the holidays, we have a great gift-giving lineup of products featuring fan favorites and uniquely giftable items from bags to ornaments to our cozy collection, all at sharp price points. Holiday gifts also incorporate items from our favorite collaborations, including Hello Kitty, Peanuts, Disney, Toy Story, and Star Wars. For the channel, we are accelerating our digital-first focus and online presence, building a more balanced store footprint, and clearly differentiating the full-line assortment from our outlet assortment. We are also focused on improving full-line store profitability and have future growth plans for this channel, including remodels for existing stores in the first half of next year as well as the development of new formats. In addition, we are targeting relationships with strategically aligned wholesale partners. As part of this, our recent site rebranding and navigation changes have been successful in reducing bounce rates and driving conversions and sales. We will apply what we've learned from these changes to a full site rebrand in the middle of next year. We have taken steps via product, marketing, and expense discipline to improve the profitability of our full-line stores. We are in the process of identifying prudent, modest store expansion plans for next year and beyond. We also are taking a comprehensive approach to addressing the trends in Vera Bradley's outlet channel through a thorough multi-pronged approach, including targeted marketing tactics designed to drive traffic and conversion pricing adjustments and testing in-store contests. Now turning to Pura Vida. For the consumer, we are sharpening our focus on young women aged 18 to 24, the original target audience of the brand. For the brand, we have re-centered our brand philosophy on living life to the fullest. We have pivoted our marketing to authentically share real moments, places, and faces of our customers and enthusiasts. We are more analytical using our newly implemented comprehensive customer data platform to more strategically target customers and potential customers with a keen focus on both customer acquisition and retention. Our recent live free and college mobile tours were huge successes for customer engagement. 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. Innovation and newness are working. Our custom bracelets from Harper Charms to engravable items to building your own bracelets are popular and continue to be a big growth opportunity. We will continue to pursue high-profile collaborations like Hello Kitty, Shark Week, and Harry Potter, which are always fan favorites and bring new customers to the brand. We recently expanded our men's collection. This collection still targets our core customer, who purchases these items for the men in her life. Holiday gifting is a huge opportunity for us, and our offerings include special holiday bracelet packs, collectible ornaments, holiday-themed Harper Charms, and our very popular advent boxes. Social responsibility is important to the Pura Vida customer, and we support this through our charity program, which supports a number of charities, including mental health awareness, homes for our troops, Best Friends Animal Society, and the Trevor Project. For the channel, we have a strong focus on driving e-commerce growth and strategic expansion of wholesale by pursuing bigger, more strategic partnerships and expanding larger existing accounts. Also, we are beginning to refine and develop an expansion plan for our existing store model. Based on the success of our existing Pura Vida stores, we are in the process of identifying a handful of new Pura Vida store locations for 2024. We will have firmer plans to announce in March on our year-end call. To gain both operational and strategic efficiency, we moved the Pura Vida store operations under the Vera Bradley team earlier this year. We are taking actions to stabilize and then steadily grow Pura Vida's revenues and reverse the trends in Vera Bradley's outlet channel. Our team is focused on driving long-term revenue growth, improving gross margin, and ensuring strong financial discipline and cost control, all of 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. Michael?

Michael Schwindle, CFO

Thanks, Jackie, and good morning, everyone. I'll start with some details regarding our third quarter and then provide an updated guidance for the year. For clarity, the figures I'm discussing today are on a non-GAAP basis and exclude certain charges mentioned in today's press release. A detailed list of items excluded from the non-GAAP numbers, along with the reconciliation of GAAP to non-GAAP, can be found in the release. In the third quarter, our consolidated net revenues were $115 million, down from $124 million in the same period last year. Our consolidated net income amounted to $6.1 million, or $0.19 per diluted share, compared to $6.3 million, or $0.20 per diluted share, in the prior year. This year, third quarter Vera Bradley Direct segment revenues reached $72.3 million, representing a 9.7% decline from $80.1 million in the third quarter of the prior year. Comparable sales fell by 8.2% in the third quarter, primarily due to weakness in the outlet channel. Total revenues were also affected by store closures over the past year, including 15 full line and two outlet store closures. We opened three outlet stores during the last 12 months. Vera Bradley Indirect segment revenues reached $25 million, a 12% increase from $22.3 million in last year’s third quarter, driven by a significant one-time key account order that was not realized in the previous year. Pura Vida segment revenues were $17.7 million, an 18.3% decrease from $21.7 million in the prior year, influenced by a decline in sales to wholesale accounts and a drop in e-commerce sales, though this was partially offset by growth in retail store sales. The third-quarter gross margin totaled $63 million, or 54.8% of net revenues, compared to $65.6 million, or 52.9% of net revenues, in the previous year. The current year's gross profit rate benefited from lower year-over-year freight expenses, decreased supply chain costs, and the sell-through of previously reserved inventory, although this was somewhat countered by heightened promotional activity. In the prior year, gross profit was significantly impacted by high freight expenses and overhead cost deleverage. SG&A expenses were $55.1 million, or 48% of net revenues, compared to $57.6 million, or 46.4% of net revenues, in the previous year. This decrease reflects company-wide cost reduction initiatives across various organizational areas, though expense deleverage resulted from lower revenues. Consolidated operating income for the third quarter was $8 million, or 7% of net revenues, compared to $8.2 million, or 6.6% of net revenues, last year. Now turning to the balance sheet, our cash and cash equivalents at quarter-end were $52.3 million, compared to $25.2 million at the end of last year's third quarter. We continue to have no borrowings on our $75 million ABL facility. Inventory stood at $129.1 million at the end of the quarter, down from $178.3 million a year ago. We have implemented strategic actions to reduce our inventory levels and believe we are well positioned heading into the holiday season. During the quarter, we repurchased about 72,000 shares of common stock at an average price of $6.76 per share, totaling approximately $485,000. There remains $25.8 million under our $50 million share repurchase authorization, which expires in December 2024. Based on our performance in the first nine months of the year, along with our ongoing initiatives and current macroeconomic trends and expectations, we are updating certain components of our guidance for the fiscal year, including adjustments to our diluted EPS range. All of these figures are on a non-GAAP basis. We now anticipate consolidated net revenues of $472 million to $478 million, down from $500 million last year. We expect a consolidated gross margin percentage of 54% to 54.5%, compared to 51.4% in the previous year. This year's gross margin is projected to benefit from lower freight expenses, cost reduction initiatives, and the sell-through of previously held inventory, partially offset by increased promotional activity. Consolidated SG&A expenses are projected to be $232.5 million to $235.5 million, compared to $245.3 million last year. The decrease in SG&A expenses is driven by company-wide cost initiatives, offset somewhat by the restoration of short- and long-term incentive compensation to more typical levels and some additional marketing investments to foster long-term customer growth. This leads to expected consolidated operating income of $23.3 million to $25.9 million, up from $12.3 million last year, and diluted earnings per share of $0.56 to $0.62, compared to $0.24 last year. We also anticipate net capital expenditures of approximately $4 million for the year, compared to $8.2 million last year, reflecting investments related to Vera Bradley outlet stores and certain technology and logistics enhancements. Finally, our free cash flow is expected to be between $40 million and $43 million, contrasting with a cash usage of $21.7 million last year for the full year. That concludes our formal remarks, and we'd now like to open the call for questions.

Operator, Operator

And our first question comes from Joe Gomes with NOBLE Capital.

Joe Gomes, Analyst

So Jackie, and Michael, last time when we talked for the second quarter, your traffic had been down and you guys were taking some steps, including some paid media, mall takeovers, etc., to try and drive additional traffic. I was wondering if you can kind of give us what the takeaways so far are? And what else are you looking at to help drive traffic?

Jackie Ardrey, CEO

Yes. Thank you for your question, Joe. I have a couple of points to address. First, the marketing initiatives we implemented in Q3 successfully increased traffic and improved trends. However, they were not as effective in generating sales due to the conversion metrics. We conducted several tests and have adopted new strategies for Q4. We are continuously adjusting our marketing mix to identify what works best and leverage those successful elements.

Joe Gomes, Analyst

Okay. Maybe switching gears over to Pura Vida here. We started out the year at a pretty positive environment there. Sales were actually up year-over-year. But then they declined in the second quarter. This quarter, they climbed back to being nearly 20% down. I know some of it you talked about was due to some kind of one-time events. I don't know if you could break out what it would be outside of those one-time events? Or what do you think we can do here in the short term to kind of reverse that trend to what we saw earlier in the year?

Jackie Ardrey, CEO

Yes, that's a great question. So for August and September, we really were comping against some promotional activity that we did not repeat this year. That, combined with a better focus on profitability for the brand, really caused us to pull back some marketing spend in those two months. So, the first two months of the quarter were definitely more challenging. And then we had a better October. So, we're continually evaluating what's the right level of spend to drive customer acquisition. Now conversely, our retail stores did perform well in Q3 at Pura Vida. They also had the advantage of driving some more customer acquisition. So, we're looking at that very carefully to inform our plans for next year.

Joe Gomes, Analyst

Okay. Great. One last one for me on the inventory. Again, great job there. But pardon me, down basically another $10 million sequentially. Just wondering, is there really more there that you think you can take out on the inventory side? Are we kind of at a level where we're going to need this as hopefully, we see the sales begin to grow?

Michael Schwindle, CFO

Yes, Joe, there are several factors to consider regarding inventory as we approach the end of the year and look ahead. We still anticipate a year-over-year reduction of 10% to 15% in inventory by year-end. There might be some delays due to the timing of the Chinese New Year, which coincides with our year-end and typically introduces about a week’s lag in the importation of goods. Regardless, we expect that reduction to hold. For next year, we will give more specific guidance, but there are ongoing opportunities in our inventory management. These may be somewhat obscured next year due to product transitions related to project restoration, expected to take place midyear. I believe we will continue to see operational improvements and a better overall inventory level, with additional guidance to be provided in our next call.

Operator, Operator

And our next question comes from Eric Beder with SCC Research.

Eric Beder, Analyst

Congratulations on Q3. I want to discuss a few points. First, let's address the indirect sales channel and the potential for more indirect or wholesale opportunities. This marks the second consecutive quarter where we've seen year-over-year growth after a significant decline. What factors are contributing to this? Are you observing an increased demand for the product? Are you providing more product? What trends are you noticing in the indirect channel? You mentioned both Vera Bradley and the Vera Bradley brand as key drivers for this positive momentum moving forward.

Jackie Ardrey, CEO

Yes, it's a great question, Eric. There are a couple of things occurring in the indirect channel. We had some products for key accounts that were performing well, leading to reorders. Our business with Amazon remains strong. Additionally, in the third quarter, we took the opportunity to assess our inventories and identify areas for discounts or one-time orders to reduce unwanted inventory. These three factors played a significant role. However, our wholesale channel is quite sensitive to current customer trends, so when our partners experience increased traffic and sales, we benefit from that. We noticed this trend in both the third and second quarters.

Eric Beder, Analyst

Interesting. You mentioned leather as a more expensive item. Also, the customer who buys it spent a lot more in the store. When we think about going forward, these are items that are probably driving new customers, younger customers. Is there an opportunity to, a, continue to expand those pieces; and b, continue to drive higher pricing from them which can drive, I guess, better returns?

Jackie Ardrey, CEO

Yes. That's a great question too, Eric. And we were able to deliver this leather collection. It had kind of a truncated time period compared to our normal supply chain lead times. So, we got this in to test informed some of our leather expansion that we're planning to do next year, and we were really pleased with the results. A lot of it sold through fairly quickly. I would say from a new customer perspective, our existing customers were so excited to see this that we didn't really have as much opportunity to drive new customer acquisition from it because a lot of it was really sold through in the first three or four weeks. So, we're really looking forward to learning and continuing to grow that segment of our business. It used to be a very important part of our business.

Eric Beder, Analyst

Okay. Last question. Is there a 53rd week in your Q4? And how big is that if it is there?

Michael Schwindle, CFO

There is a 53rd week in this fiscal year. It's a relatively small amount of sales overall.

Eric Beder, Analyst

Okay. Congratulations again, and good luck into the holiday season.

Operator, Operator

And that does conclude the question-and-answer session. I'll now turn the conference back over to you.

Jackie Ardrey, CEO

Our entire team is dedicated to returning both Vera Bradley and Pura Vida to profitable growth and generating strong cash flow through Project Restoration. This should deliver value to our shareholders over the long term. We are right on track with our Project Restoration initiatives. This year, we have been diligently focusing on stabilizing sales, expanding gross margin, and controlling expenses. We believe this focus at a minimum should nearly double year-over-year operating income and more than double EPS. We are excited about the opportunities for both brands. Thank you for joining us today, and we look forward to sharing our progress with you on our year-end earnings call on March 13.

Operator, Operator

Thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.