Earnings Call
Vera Bradley, Inc. (VRA)
Earnings Call Transcript - VRA Q3 2021
Operator, Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley Third 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 Mark Dely, Vera Bradley’s Chief Administrative Officer.
Mark Dely, Chief Administrative Officer
Good morning, and welcome, everyone. I’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 the call. I will now turn it over to Vera Bradley’s CEO, Rob Wallstrom. Rob?
Rob Wallstrom, CEO
Thank you, Mark. Good morning, everyone, and thank you for joining us on today’s call. John Enwright, our CFO, also joins me today. Our quarterly results once again significantly exceeded last year’s earnings performance, as well as our expectations. We expanded our gross margin rate primarily through sales of cotton masks and controlled promotional activity, and we diligently managed our expenses achieving meaningful expense leverage. Our multi-brand strategy is proving to be powerful. Customers are changing the way they shop, and we have responded. Our digital competencies are becoming increasingly important especially in this quickly evolving environment. Somewhat fortuitously last year we acquired digitally-native Pura Vida and began working on critical Vera Bradley technology infrastructure and e-commerce site improvements necessary to position the company for future success. Those enhancements went live several months ago. Our consolidated e-commerce business was very strong in the third quarter, reflecting growth from both Vera Bradley and Pura Vida. Even as our stores were reopened during the third quarter, our Vera Bradley digital business grew nearly 50% year-over-year, and Pura Vida’s e-commerce sales grew over 17% for the quarter, despite disruptions in the supply chain. E-commerce sales comprised over a third of total sales for the quarter. By staying laser-focused on the customer and by controlling what we can control, we have proven we can drive strong results and position ourselves to emerge a stronger and more resilient company, despite facing ongoing headwinds. Our results were achieved through the innovation, teamwork, and determination of our entire organization. Even while working remotely, our teams have demonstrated flexibility in decision-making, created new products and marketing initiatives, and added efficiency to the organization. Our focus on cash management has driven us to think of creative ways to drive sales, expand margins and reduce expenses. Let me turn the call over to John to review the financial results. John?
John Enwright, CFO
Thanks Rob and good morning. Let me go over a few highlights for the third quarter. As a reminder, financial results have been consolidated to include the July 2019 Pura Vida acquisition. This is the first quarter since the acquisition that year-over-year quarters are comparable. The numbers I will discuss today are all non-GAAP. For a complete reconciliation of GAAP to non-GAAP numbers, please reference schedules attached to today’s press release. The current year non-GAAP third quarter income statement numbers exclude intangible asset and amortization. The non-GAAP income statement numbers for the prior year third quarter exclude the Pura Vida acquisition related charges and technology replatforming expenses. Consolidated net revenues totaled $124.8 million for the current year third quarter, compared to $127.5 million in the prior year third quarter. Excluding charges, Vera Bradley incorporated non-GAAP consolidated net income was $10.2 million or $0.30 per diluted share for the third quarter, compared to $6.9 million or $0.20 per diluted share last year. Vera Bradley direct segment revenues totaled $78.2 million, compared to $78.4 million in the prior year third quarter. E-commerce sales growth of 48.8% offset the 19.1% decline in comparable store sales for the quarter. Store traffic continues to be negatively impacted by the pandemic. The company closed 10 full line stores and opened six factory outlet stores in the last 12 months. Vera Bradley indirect segment revenues totaled $22.3 million, compared to $24.1 million in the prior year third quarter, reflecting a reduction in orders primarily related to the pandemic and in the number of specialty and department store accounts. Pura Vida segment revenues totaled $24.3 million, compared to $25 million in the prior year third quarter, a 17.2% growth in e-commerce sales nearly offset the sales to wholesale accounts, which were negatively affected by the pandemic. Third quarter consolidated gross profit totaled $73.8 million or 59.1% of net revenues, compared to $74.1 million or 58.1% of net revenues in the prior year on a non-GAAP basis. The company expanded its gross margin in the quarter primarily through sales of cotton masks and controlled promotional activity. On a non-GAAP basis, consolidated third quarter SG&A expense totaled $59.4 million or 47.6% of net revenues, compared to $64 million or 50.2% of net revenues. Current year SG&A expenses were lower than the prior year due to both temporary and permanent expense reductions related to the pandemic. On a non-GAAP basis, current year third quarter consolidated operating income totaled $14.4 million or 11.6%, compared to $10.1 million or 7.9% of net revenues last year. The uncertainties continuing related to COVID-19 make fourth quarter financial performance extremely difficult to predict. As a result, we are not providing forward looking guidance. For the fourth quarter, we believe our inventories are well-positioned, and marketing initiatives will drive traffic and sales. However, third quarter performance should not be considered a predictor of future performance. We are facing certain headwinds in the fourth quarter, including the continued impact of COVID-19 on store traffic and capacity limitations in stores. Net sales may not be as strong for the fourth quarter and freight is a fairly significant headwind for all retailers as consumers over-index to e-commerce. Shippers are applying surcharges to each package during peak season, and we have elected to absorb that cost and not pass it along to the consumer. Now let me turn to the balance sheet. Net capital spending for the third quarter and nine months totaled $900,000 and $5.2 million, respectively. Capital expenditures are expected to total between $6 million to $7 million for the year, primarily related to technology and logistic enhancements, as well as new factory stores. Cash, cash equivalents, and investments as of October 31, 2020, totaled $77.3 million, compared to $48.8 million at the end of last year’s third quarter. We have $30 million of borrowings outstanding on our $75 million credit facility at the end of the quarter. Quarter end inventory is $141.6 million, compared to $134 million at the end of the third quarter last year. Current year inventory was higher than the prior year, primarily due to receipts accelerated into the third quarter from the fourth quarter. We expect year-over-year inventory to be relatively flat at fiscal year-end. Rob?
Rob Wallstrom, CEO
Thanks, John. Now let’s shift to an update on our two brands. We believe the way that customers live and work has radically and permanently changed. Both Vera Bradley and Pura Vida are particularly well-suited with our purpose driven casual, comfortable and fun positioning that dovetails perfectly into this consumer shift. We remain focused on propelling both brands forward through innovation in product and marketing supported by state-of-the-art technology. Our new cloud-based technology platform is allowing us to respond to the rapidly changing environment and to harness customer data and feedback earlier and more instantaneously to drive this innovation. First, let me update you on Vera Bradley. Let’s start with product. I am very proud of the fabric and product innovation being driven by our talented design, creative, and product development teams. We have a robust fabric innovation pipeline in place to continually update our cotton collection, develop new fabric offerings, and build on our platform of sustainable fabrics. This pipeline is important to our existing customers and helps us attract new customers to the brand. Our full line offerings have performed well, and our recycled reactive collections continue to gain traction and are highly rated by our customers. The recent introduction of our ultra-light fabrication has been a popular addition to our factory stores. Stay tuned for more fabric innovation over the next 12 to 24 months. We also continue to introduce differentiated styles and silhouettes providing our customers beautiful solutions in all facets of our life. One key focus is our hands-free products like our sling backpacks and cross bodies as they have become increasingly important to our customers, particularly during the pandemic. Our long-term focus continues to be on building on our dominance in our three core franchise areas of youth, campus, every day, and travel. Our travel segment has held up relatively well during this period. Our products focus on soft travel items like our duffel and weekend collection for car trips or weekend getaways; it’s proving to be more resilient than the hard luggage market in general. We continue to innovate in travel. For example, we are launching our ReActive lay-flat travel backpack which takes our award-winning lay-flat functionality into our core backpack category. A great example of innovation has been our cotton masks, which once again drove meaningful revenue in gross margin dollars for us during the quarter. We have continued to improve our offerings with new features, styles, sizes, patterns, and solids, and we are happy to provide our customers and the communities we serve with much-needed personal protective equipment and provide a bit of our signature color and fun in the process. Mask sales softened as we progressed through the third quarter but still comprised approximately 10% of Vera Bradley’s total sales. While we expect the sales of masks will continue to decline in the fourth quarter and beyond, we are beginning to experience recovery in the core business which is offsetting the volume decline in the third quarter. Our trend in light colors and patterns continues to be important to our customers. Paisley remains our number one brand, but our customers are also drawn to our emotional novelty brands and smaller, soon-to-sell-out capsule collections. These always add excitement to our assortments and a sense of urgency for our customers to shop. Our Best in Show Dog Print launched in the third quarter and was a fan favorite, even surpassing last year’s wildly popular Cat’s Meow pattern. This holiday season comes with a focus on gifting and cozy, featuring a combination of festive and whimsical patterns like Merry Mischief in coordinating classics and neutral textures like our teddy fleece and cozy plaid. We are offering an expanded assortment with customer favorites like blankets, slippers, and cold weather accessories. We have expanded cozy into more apparel like loungewear robes, puffer jackets, and fleece. These items have sold out quickly. Our collaborations and strategic partnerships continue to engage existing and new customers, expand our reach, increase brand awareness, generate media attention, and provide opportunities for us to strategically test and ultimately enter new product categories. We are continually approached by well-known brands with collaboration and partnership opportunities, which speak to the strength and wide appeal of the Vera Bradley brand. In August, we launched our newest Disney collection on verabradley.com and our second annual collaboration with Clocks. In October, we introduced our signature masks and 1982 Backpacks in Target stores and on target.com. Earlier this month, we were able to replenish and add to our extraordinarily popular Vera Bradley plus Harry Potter collaboration which originally launched in July and sold out quickly. Look for more exciting collaborations in 2021. Let me switch to marketing and customer engagement. Our talented digital and marketing teams have transformed the way we communicate and engage with our customers and touch the communities we serve. As we focus on reinforcing our position as an ESG organization, we continue to strengthen our community support and charitable efforts under the umbrella of VB Cares, particularly through organizations that improve the lives of women and children. Even though we were unable to hold any large fundraising events this year through the generosity of our associates, customers, and other supporters, we were able to raise $1.4 million to support lifesaving research at the Vera Bradley Foundation Center for Breast Cancer Research at the Indiana University School of Medicine, bringing the total raised to-date in support of breast cancer research to $36 million. Additionally, we are continuing our yearlong support of other impactful organizations like New Hope Girls and Blessings in a Backpack. Another aspect of ESG and our VB Cares focus is caring for our associates. We are so thankful for all of our associates and are especially grateful to those that have served on the frontlines, ensuring our customers have safe and exceptional experiences day in and day out, especially during the pandemic. We were once again thrilled to award a quarterly bonus of up to $500 based on hours worked to each distribution center, store, and customer service associate for their continued contributions and devotion to Vera Bradley during this extraordinary time. Over the last two quarters, we have paid over $800,000 in well-deserved bonuses to our frontline associates. In the third quarter, we successfully launched our new verabradley.com site, which allowed us to improve our customer’s online buying experience and offer enhanced content to guide purchasing. We added a number of key site capabilities and have experienced a triple-digit improvement in revenue attributed to our search engine optimization. Our digital and marketing teams have been successful in accelerating digital and customer growth; our well-timed investments in customer data science, business analytics, and AI positioned us well as we have navigated through the pandemic, allowing us to collect, analyze data, and respond to customer changes and adjust marketing spend in an agile way. Using our data-centric program buying, we have significantly increased our paid media efficiency and revenue attributable to paid media during the quarter. We continue to see strong performance from our digital media optimization. Our return on ad spend in the quarter improved by double digits, led by campaigns like washable handbags and totes, which have resonated with customers as they manage through the pandemic. Earned media remains strong during the third quarter with over 3.3 billion impressions. We had exceptional media coverage of our mask effort supporting communities and healthcare workers, Breast Cancer Awareness Month, our foundation efforts, and our brand collaborations and partnerships. We rolled out customer journey-centered activations with high response rates, including a welcome journey for new Harry Potter customers and for mask purchasers new to our brand. Vera Bradley has always been a brand about connecting with people, and we continue to see best-in-the-industry engagement rates on Facebook and Instagram. Our second launch with our continued partnership with Disney in collaboration with Warner Brothers for Harry Potter gave our customers plenty to talk about in the quarter. This has helped our customers have a community to connect with in these difficult times and a way to find some fun and bright moments. This engagement has increased both followers and sales, with third-quarter revenue attributable to social media up triple digits year-over-year. Our store and wholesale teams continue to drive results through innovation and creativity. Although our digital business is becoming a larger portion of our revenues, both factory and full line stores continue to be an important part of our omnichannel strategy. We continue to focus on enhancing and reinventing the customer experience in both our full line and factory stores. While the pandemic and mandated capacity limits have challenged store traffic, we are using customer data to strengthen relationships by offering appointment shopping, particularly for our top customers, FaceTime and social selling, buy online, pickup in store, and curbside pickup. Appointment selling was very successful, generating nearly 10% of our full line revenues in the quarter. Our loyal customer retention at the end of the third quarter is actually better than it was at the same time last year. This is a testament to our new digital and data analytics programs. Our customers' love for the brand and our associates' devotion to our customers. We have created more excitement in six Vera Bradley full line stores by adding Pura Vida shop and shops after a successful test in Birmingham, Alabama. We will continue to leverage opportunities for both brands, and we will be rolling out a Vera Bradley plus Pura Vida Charity Bracelet program next year. In the factory stores, we are testing line-busting technology in several high traffic locations, offering customers the opportunity to scan the QR code and receive a text message about their time to return to the store. They may also scan a QR code to review our electronic log book and decide what they would like to buy while waiting in line. In the aggregate, our factory stores continue to outperform our full line stores compared to last year, as customers felt more comfortable shopping in outdoor centers than in closed malls. Our customer satisfaction scores are consistently industry-leading despite pandemic-related disruptions. We are striving to create a seamless shopping experience no matter where she chooses to shop. Our omnichannel customers are our most valuable, on average spending three times more than single-channel shoppers. We have opened six new factory stores and expanded and renovated one factory store this year. We continue to focus on improving the productivity of our full line stores. We have permanently closed seven full line stores so far this year and expect to close five more by year-end. This will bring our total full line closings to 38 since the beginning of fiscal 2018, and we expect to close approximately 10 additional locations next year. On the wholesale side of the business, Amazon is our highest volume and fastest-growing account. As Amazon continues to grow, we have put resources against this business to optimize our inventory, assortments, assure pricing integrity, and drive volume. Now let’s talk about Pura Vida. We remain excited about the potential of our Pura Vida brand. Pura Vida’s year-over-year third quarter e-commerce revenues grew over 17% despite significant supply chain disruptions that impacted sales early in the quarter. As inventory normalized, e-commerce growth substantially accelerated in the back half of the quarter. Using Vera Bradley’s global sourcing expertise, we have quickly strengthened Pura Vida’s supply chain, diversifying raw material sourcing and adding three additional production facilities in countries outside of El Salvador. Of course, total revenues were also affected by sales to the wholesale channel, which are beginning to recover as specialty stores reopen and start to reorder. During the third quarter, we were able to divert some wholesale inventory into our e-commerce channel. At Pura Vida, innovation in product is first and foremost. We continually introduce new styles of the Pura Vida signature core bracelets and style packs, and we have continued to add to our popular metal, mood, and semi-precious collections, which are at a higher price point than our traditional string bracelets. This category expansion and product diversification is working. In fact, nearly 50% of Pura Vida’s e-commerce business in the third quarter was comprised of jewelry categories other than the traditional string bracelets, underscoring the brand’s lifestyle appeal. Pura Vida’s fall launches were a success. Our celestial collection was a big winner once again, proving that beyond the bead styles resonate with our customers. Earrings and necklaces continued in popularity as we further expanded our above-the-keyboard offerings for those not only living but working from home. Personalization is a continuing popular trend. Customers can personalize their signature core bracelets by choosing the color combination or charm special to them. Our engravable collection launched earlier this year has taken off with customers loving the customization of bar necklaces, rings, or coin bracelets. We have expanded the styles of engravable planks, including those embellished with birthstones or zodiac signs, and we have added a thinner necklace where both sides can be customized with engraving. Pura Vida signature charity bracelets will always be an integral part of the Pura Vida lifestyle and continue to be a growing category as they are so special to our loyal cost-minded customers. We are continually adding to our popular charity charm bracelets that we introduced earlier this year and to our charity style packs that support many amazing causes that are cherished by our customers. We developed two styles for Suicide Prevention Month in September and partnered with Boarding for breast cancer, selling four styles for Breast Cancer Awareness Month in October. The expansion of the charm and style packs to our charity assortment is not only enabling us to increase our price points but also to increase total donations to these great causes. To date, Pura Vida has donated over $2.8 million to more than 200 charities. For holiday, we have an expanded offering of gift sets and fun advent calendars packed with 12 days of surprises, a super sparkly style pack from one of our most well-known influencers, Aspen Haggard, our bigger collection of engravable jewelry, and even more charms including Zodiac and Wildlife Charity styles. Pura Vida is continuing to expand on the distribution front. Earlier this year, we launched our Canada Shopify fulfillment capabilities and began wholesale distribution of our products in Europe to complement our existing e-commerce business and third-party fulfillment there. We already have many Pura Vida fans around the world, and this global expansion is allowing us to serve those customers and extend our reach to others. Although we are early in our international expansion, we believe there are more opportunities ahead. Our first Pura Vida retail store that was scheduled to open this year was delayed due to the pandemic. We expect to open this exciting retail concept in San Diego next year. Pura Vida is truly expert in engaging customers, building loyalty and introducing new devotees into the Pura Vida lifestyle. Our monthly bracelet and jewelry clubs, as well as our subscription programs, are all creative ways to connect our customers with our products and lifestyle, and cultivate loyalty. During the quarter, earned media was strong with healthy returns on spend, and Pura Vida doubled its estimates from last year to 1.2 million active subscribers, which drove meaningful revenue. On the marketing front, Pura Vida’s social media engagement is strong. Pura Vida remains one of the most highly engaged brands in the accessory space on social media, with over 2 million Instagram followers. Pura Vida is consistently listed as one of the most, if not the most, engaged jewelry brands on Instagram. A lot of Pura Vida’s marketing strategy and overall success is driven by its devoted group of brand ambassadors, close to 150,000 active micro-influencers. These passionate advocates help us spread the Pura Vida movement, showing their devotion to the brand while scoring perks along the way. For instance, our holiday collaboration with Aspen Haggard is generating excitement. We have several more exciting influencer product launches lined up in the months ahead. TikTok has taken off with 115,000 Pura Vida followers. TikTok features influencers on unboxing videos showing sneak peeks of new items, promoting giveaways, and giving tutorials. TikTok generates interest and followers with creative engaging content and drives sales by linking the Pura Vida online store and occasionally offering special promotional codes. Speaking of TikTok, we have moved the much-anticipated launch of the Pura Vida bracelet influencer style pack with the reigning queen of TikTok, Charli D’Amelio, to spring 2021 due to production delays. We want to ensure we have enough product to execute; we are sure it will be an incredibly successful launch. Charli's TikTok followers had grown by 20 million fans in just over three months to an astounding 100 million, and she has over 34 million Instagram followers. Her target demographic aligns perfectly with the Pura Vida brand, and we are thrilled with the upcoming partnership. We believe the strength of the Pura Vida business underscores the opportunity for discovering other small high-growth potential brands like Pura Vida with unique products and marketing positions that could become part of the Vera Bradley family brand. Now more than ever, I am confident that we are in the right space with our purpose-driven casual, comfortable, and fun lifestyle brands at both Vera Bradley and Pura Vida. Both brands have unique growth opportunities, particularly as our focus is on customers who live beyond the major city centers, and this customer base is growing as they migrate from big cities to smaller communities. We are positioned well for the future. Operator, we will now open up the call to questions.
Operator, Operator
Thank you. We will now take our first question from Oliver Chen of Cowen. Please go ahead, sir.
Oliver Chen, Analyst
Thanks so much everybody. Appreciate it. So the margins are really strong, but the direct was a little lighter than what we had modeled. What are you seeing in terms of the comp store sales and traffic trends? I am sure there’s a fair bit of volatility. How has inventory trended in that channel relative to your expectations?
Rob Wallstrom, CEO
Yeah. Thanks, Oliver. From a traffic perspective in the third quarter, we saw improvement obviously from the second quarter in both the factory and full line channels. Of course, factory was better than the full line channel. So we saw better traffic getting to our stores as we opened up our stores right in earnest in the back half of the third quarter. But from an inventory perspective, I think we are well positioned for both brands. Outside of the beginning of this third quarter, Pura Vida got back into inventory late in the quarter, and ultimately, I think accelerated their sales into the first part of the quarter was a little challenging from an inventory position perspective. Regarding stores at the Vera Bradley brand, we were well positioned in inventory for the full quarter.
Oliver Chen, Analyst
Okay. And as we think about the comp and model the comp, what are some dynamics that you saw on conversion versus check size in the quarter that we just had? Any thoughts going forward, will traffic continue to get better? Hopefully there’s added visibility on a reopening?
Rob Wallstrom, CEO
Yeah. So from a conversion perspective, conversion was definitely up in all channels, whether that is e-commerce or the full line, because individuals who came out to shop were really looking to buy. So we saw conversion increase. We also saw growth in the average dollar sale. People were buying a little bit more. However, we actually also saw the average unit retail go down a little bit based on the fact that our masks comprised a portion of the purchases, bringing that down. As we look into the fourth quarter, I think it’s going to be some challenges in the stores associated with capacity as all retailers deal with the capacity constraints in relation to COVID-19. But you know the hope as we move into next year would be that the vaccine rollout helps stores and malls open up to get traffic back to where we thought it would be as we entered into this year. But you can imagine factory stores are still showing people feeling a bit more comfortable going to outside malls.
Oliver Chen, Analyst
And then Pura Vida all the details and strategy are helpful. I know you called out supply chain in the wholesale as being factors. Could you elaborate on when those might have better visibility in terms of timing and improvement on those features of Pura Vida?
John Enwright, CFO
Yeah. So from a supply chain perspective, we have corrected some of the challenges that we had. Rob mentioned in his prepared remarks that we are now working with additional vendors to help support the supply chain so that we are not fully reliant on the El Salvador plant. Regarding wholesale, as our stores opened up, we anticipate seeing a correction from a wholesale perspective for Pura Vida.
Oliver Chen, Analyst
Okay. And Rob on product for fourth quarter and then next year, which products would you prioritize as most impactful to an outlook in terms of…?
Rob Wallstrom, CEO
In terms of what? Are you specifically regarding Pura Vida or Vera Bradley?
Oliver Chen, Analyst
Vera Bradley brand.
Rob Wallstrom, CEO
Yeah. With Vera Bradley, I think there’s a lot of innovation coming. So in the fourth quarter, everything around fleeces and home and cozy is really important at this time of year, along with all our holiday patterns. We see a strong trend in hands-free products becoming increasingly important as we move into the next year. And looking ahead, we will continue with our collaborations and fabric innovations across all categories. It’s interesting to see that our youth travel and everyday business are doing better than expected, as we anticipated more suppression in travel-related products. We have seen strength coming in as we approach next year, particularly with back-to-school.
Oliver Chen, Analyst
Thank you very much. Best of luck. Happy holidays.
Rob Wallstrom, CEO
Thanks, Oliver.
John Enwright, CFO
Thanks, Oliver.
Operator, Operator
Our next question comes from Mark Altschwager of Baird. Please go ahead.
Mark Altschwager, Analyst
Thanks. Good morning, everyone. Just following up on the fourth quarter for a moment, and you mentioned that sales might not be as strong in the fourth quarter versus the third quarter, understanding that the environment is tough to predict here. But can you expand upon that a bit? Is that primarily conservatism related to store capacity? I would think that continued sequential improvement might be possible. So maybe just talk a little more about the puts and takes there and how you are thinking about the holiday?
Rob Wallstrom, CEO
Yeah. The holiday season is definitely not like any other. Retail in general has shown that consumers are moving forward with their spending. We had a very strong start to November. We were feeling good. Black Friday numbers indicate a suppression in store traffic, so we will watch how that plays out over December. There are a couple of concerns going into the fourth quarter; the reduction in capacity in stores is causing some challenges that we did not see in the third quarter. Additionally, the e-commerce landscape poses its own challenges as businesses shift online. Shipping surcharges are a concern we have not encountered this year, which adds further pressure as we navigate this unique holiday season. Overall, we do not perceive any underlying weakness in consumer behavior; rather, it is about navigating the impacts of the pandemic during this holiday season.
Mark Altschwager, Analyst
Okay. That’s really helpful. Thank you. And then, on the marketing front, can you talk about how you are engaging with some of the new customers you have acquired through mask sales over the last couple of quarters? Are they coming back to purchase other categories? I guess what does that behavior look like in terms of repeat business as the last couple of months have progressed?
Rob Wallstrom, CEO
Yeah. It’s been very encouraging that both new customers from our mask business and those new to Harry Potter are responding positively. We have implemented marketing efforts to engage those customers in a more meaningful way, and we're seeing strong returns in terms of them coming back for additional purchases. We are optimistic about retaining the customers we have gained.
Mark Altschwager, Analyst
Got it. Got it. Thanks. And then, I guess, last one for me just bigger picture, Rob, you discussed this permanent shift in consumer behavior in a multiyear journey in terms of evolving what the store base looks like. But do you have any changes to how you are thinking about that in the medium-term, just in terms of stores versus digital? And for the outlook business specifically, is your approach evolving for online outlets relative to store outlet businesses?
Rob Wallstrom, CEO
In terms of overall strategy, we have been discussing reducing hours for our full line store fleet, and we expect to continue that next year. We'll monitor the mall development closely as we navigate the post-pandemic landscape. On the outlet front, we still see opportunity in the outlet channel, as customers are returning faster to the outlets than to enclosed malls. However, we remain cautious about moving the online outlet onto a digital platform, as we want to keep our off-price product highly accessible. Thus, our strategy remains primarily focused on brick-and-mortar for the outlet business.
Mark Altschwager, Analyst
Great. Thanks so much, and best of luck.
Rob Wallstrom, CEO
Thanks, Mark.
John Enwright, CFO
Thanks, Mark.
Operator, Operator
Our next question comes from Steve Marotta of CL King & Associates. Please go ahead.
Steve Marotta, Analyst
Good morning, Rob and John. As for the recent COVID hotspots, you mentioned it’s negatively affecting capacity in the stores. Is it having any effect on e-commerce activity in those areas? Are people moving to e-commerce or is there a pullback overall?
Rob Wallstrom, CEO
I think that overall, while we did see a slow down in store capacities, it wasn’t a one-to-one shift to e-commerce. e-Commerce has offset some of that slowdown, but as areas start to spike, we do see consumers pulling back, especially in the first few weeks during significant changes. Trends usually stabilize as people adapt.
John Enwright, CFO
And to add to Mark’s question, when store capacity decreases, it does not provide those customers with an outlet in e-commerce either.
Steve Marotta, Analyst
Okay. I understand. And Rob, could you provide a bit of your outlook for fiscal ’21? Not from a guidance standpoint, but looking at consumer trajectory once the vaccine opens the economy back up. What are your expectations regarding differing styles and how do you prepare for this transition?
Rob Wallstrom, CEO
I think during the first half of the year, we will continue navigating a dynamic environment. We hope to see some normalcy return by summer. Our expectations are that travel-related categories will bounce back significantly. The back-to-school season may also present opportunities with pent-up demand, particularly on the Vera Bradley and Pura Vida sides.
Steve Marotta, Analyst
That’s very helpful. Thank you.
Operator, Operator
Our next question is a follow-up from Oliver Chen of Cowen. Please go ahead.
Oliver Chen, Analyst
Hi. Thank you. A few more questions regarding shipping and what you are observing with shipping deadlines. Is that a limiter to some of the revenue growth? Have there been significant differences in cancellations and timing? Also, with the masks, how do you plan your inventories given their current significance?
Rob Wallstrom, CEO
Well, we have effectively managed through shipping deadlines and capacity. As you’ve seen, we secured our shipping capacity needs with UPS and have been managing effectively. We do not experience significant delays at this point. The surcharge does present an expense challenge. The concern is more about how consumers will behave post-shipping cut-off as many have transitioned to e-commerce. The question is, will they return to stores as they typically would? Regarding masks, we expect them to remain a relevant part of our business, especially into the first quarter, but how it evolves post that is unclear.
John Enwright, CFO
As for masks, we see them continuing to be an important sales component, but we are uncertain about how it will play out afterward.
Oliver Chen, Analyst
Yeah. And Rob regarding Amazon—what are some key guardrails you ensure to maintain? What are the opportunities of deepening that relationship?
Rob Wallstrom, CEO
Building a strategic partnership with Amazon is crucial. We've dedicated resources to ensure pricing integrity and prevent counterfeit products. By working closely with wholesale partners, we strengthen price stability, making quick decisions based on data management, which helps us effectively partner with Amazon. This also opens avenues for category penetration, giving us access to new customers searching categories applicable to our products.
Oliver Chen, Analyst
Thank you. And lastly, in terms of the promotional environment, how have you been seeing it, and how have your merchandise margins behaved against expectations?
John Enwright, CFO
With regards to merchandise margins, they are meeting our expectations. We haven’t been significantly more promotional during the third quarter; we have been controlling promotions. As we enter the fourth quarter, we are observing what others are doing to ensure we remain competitive while still pursuing full-price sales without reverting to old habits.
Oliver Chen, Analyst
Finally, you have been a pioneer with data and AI for personalization. What results have you seen from these initiatives?
Rob Wallstrom, CEO
We've observed significant consumer growth among the 25- to 40-year-old demographic, driven by targeted marketing efforts. As we diversify our customer base, leveraging algorithms for specificity is helping us improve returns and optimize marketing strategies.
John Enwright, CFO
The new customers from masks and the Harry Potter promotions are crucial to our growth and have resulted in repeat purchases that exceed averages, which has been encouraging.
Oliver Chen, Analyst
Thank you very much. Best regards.
Rob Wallstrom, CEO
Thanks, Oliver.
Operator, Operator
Our next question comes from Dana Telsey of Telsey Advisory Group. Please go ahead.
Dana Telsey, Analyst
Hi, good morning, everyone. Just wanted to get a little more color on Pura Vida. How are you thinking about the operating margins going forward in that business and also how you are planning for 2021? Additionally, when you look at your fixed cost structure now versus pre-COVID, how much leverage do you see impacting margins as the core business recovers from COVID?
Rob Wallstrom, CEO
With Pura Vida, we are still very excited about the growth opportunity in front of us. We believe that Pura Vida's operating margin can reach mid-to-high teens. So we feel encouraged about that segment. Regarding expenses, I’ll let John provide more detail.
John Enwright, CFO
From an expense perspective, we have fixed costs and saw savings in some areas during second and third quarters, which we may not see reflected in Q4. Some reductions were due to salary decreases and furloughing positions. As for core savings, we see it likely in the low single-digits as a permanent savings across total expenses going forward.
Dana Telsey, Analyst
Got it. And regarding the partnership with Disney, what’s coming up that we should note on our calendars?
Rob Wallstrom, CEO
While we have not set official launch dates for upcoming releases, we have a robust pipeline planned, including character releases and continuing collaborations with Disney and Harry Potter. Look forward to exciting announcements next year.
Dana Telsey, Analyst
Got it. And any learnings from the project Novus side?
Rob Wallstrom, CEO
The key learning from the project is to stay responsive and technology-driven. Our project has enabled us to pivot swiftly. We can now execute changes in days rather than months, enhancing our competitive edge. It's an ongoing journey that evolves as we learn more.
Dana Telsey, Analyst
Thank you.
Rob Wallstrom, CEO
Thank you.
John Enwright, CFO
Thanks.
Operator, Operator
Our next question comes from Eric Beder of SCC Research. Please go ahead.
Eric Beder, Analyst
Good morning.
Rob Wallstrom, CEO
Good morning, Eric.
John Enwright, CFO
Good morning.
Eric Beder, Analyst
Hi. In Q4, you have been much more aggressive in terms of apparel. The response appears positive. Should we consider this a one-off for the holidays, or can we expect further category expansion moving forward?
Rob Wallstrom, CEO
During Q4, we’ve indeed expanded our apparel offerings, focusing on key items. The consumer response has been encouraging. We always believed in both brands being lifestyle brands, which opens up possibilities for future category expansions.
Eric Beder, Analyst
Regarding the Pura Vida store-in-store concept within Vera Bradley, what’s the physical size, and what additional products are offered beyond the core?
Rob Wallstrom, CEO
We’re finalizing designs for an 800 square foot Pura Vida location, focusing on a varied assortment. The metal jewelry segment is a big part of this, supported by the popular string bracelets. We’ll talk more about new initiatives in our next call.
John Enwright, CFO
Regarding Pura Vida in-store at Vera Bradley, we have tested a couple of hundred square feet in Birmingham, stocking best-selling product selections, with plans to roll it out further based on consumer response.
Eric Beder, Analyst
Okay. Finally, about ReActive, it’s been open almost a year now; how has it attracted consumers as you expected? Will you be as aggressive with patterns in 2021?
Rob Wallstrom, CEO
We’ve been very happy with ReActive’s performance; we’ve seen strong attraction from consumers eager for sustainability. We plan to incorporate further sustainability initiatives into the overall assortment.
Eric Beder, Analyst
Great. Thanks for the updates. Good luck during the holiday season.
Rob Wallstrom, CEO
Thank you, Eric.
John Enwright, CFO
Thanks, Eric.
Operator, Operator
It appears we have no further questions at this time. I would now like to turn the conference back to Rob Wallstrom for any additional or closing remarks.
Rob Wallstrom, CEO
Thank you so much for joining us on today’s call. I am excited to lead such a great team of talented, agile, and innovative associates who are passionate about our brand and customers. Vera Bradley, Inc. is an authentic, iconic lifestyle company with two powerful brands and devoted customers. We are committed to continual innovation in product and customer engagement. We have a strong balance sheet and ample liquidity, and we are fully committed to advancing our ESG and stakeholder focus to create long-term shareholder value. Once again, we have proven that by working together, we can thrive even when facing unrelenting headwinds. We are poised to emerge a stronger company with an exciting future. Thank you for your time and interest in Vera Bradley, Inc. We hope you can join us for our fiscal year end call on March 10, 2021.
Operator, Operator
This concludes today’s call. Thank you for your participation. You may now disconnect.