Vera Bradley Q1 2024 Earnings Call Transcript

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June 7, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley First Quarter Conference Call for Fiscal 20 As a reminder, today's conference call is being recorded. I would now like to turn the call over to Mark De Lai, Vera Bradley's Chief Administrative Officer. Please go ahead.

Speaker 1

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 ks filed with the SEC for a discussion of known risks and uncertainties.

Speaker 1

Investors should not assume that 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 I would now like to turn the call over to Vera Bradley's CEO, Jackie Ardrey. Jackie?

Speaker 2

Thank you, Mark. Good morning and thank you for joining us on today's call. Today, I'm joined by both John Enright, our departing CFO and Michael Schwindle, our newly appointed CFO. Before we begin, I want to My sincere thanks to John for his 9 years of service to Vera Bradley and his many contributions to our company and we wish him all the best in the future. And we welcome Michael Schwindle to our team who joined the company on May 8.

Speaker 2

He is a retail industry veteran with over 30 years of experience, including more than 15 years in CFO roles, delivering strong results through profit improvement and by providing innovative solutions. For the 3 years prior to joining our company, he served as CFO for accessory and jewelry retailer, Klairs. Previously, he held CFO roles at Specialty retailers Fleet Farm, Payless ShoeSource, Harry and David and Musician's Friend as well as other key financial roles at Home Depot and Limited Brands. You'll hear from both John and Michael later in today's call. Now let me turn to the quarter.

Speaker 2

We are very pleased that meaningful gross margin expansion and diligent expense control led to a significant year over year improvement in bottom line performance for the Q1. On the revenue side, Vera Bradley factory stores experienced challenging traffic trends in March April that led to weaker than expected performance for the quarter. This was partially offset, however, by several positive highlights in other areas of our business. First, we delivered our 1st positive quarterly revenue performance in 5 quarters at Pura Vida, primarily driven by non comparable retail store sales. We also saw improved year over year sales trends in both our Pura Vida wholesale and E Commerce Channel.

Speaker 2

2nd, we delivered strong Vera Bradley e Commerce performance and solid Vera Bradley full line store revenues. Vera Bradley indirect revenues declined as expected due to a non recurring key account order that took place in last year's Q1, But the underlying business remains healthy. We are building a collaborative team with the mindset of generating long term revenue increases, Expanding gross margin and ensuring strong financial discipline and cost control, which we expect will drive long term profitable growth. The team is working hard and taking strategic proactive steps to steadily grow Pura Vida's revenues and to reverse the trends in Vera Bradley's factory channel Through the expansion of successfully tested targeted marketing programs designed to drive traffic and average order size. At Pura Vida, we have a solid organizational structure in place with newly promoted General Manager, Sujay Shah, leading the team with heightened discipline and focus on day to day execution and driving business results.

Speaker 2

Sujay was Pura Vida's former VP of Finance And is leading the team to return the e commerce business to growth through utilization of the newly launched comprehensive customer data platform, Diversification of the marketing program, improving site navigation and focusing on customer retention. On the product front, our custom bracelet program and new friendship packs are a big focus and are working and we will continue to pursue high profile Collaborations like Sanrio, Harper Charms and Crumble Cookies that are always fan favorites. The hard work on project restoration began in the Q1, which is focused on 4 key pillars of the business for each brand, Consumer, brand, product and channel to drive the long term profitable growth we expect. To support project restoration and lay the foundation for our success, we made additional corporate changes and announced incremental cost reductions, including the elimination of approximately 25 corporate positions as part of an overall plan to further right size the expense structure of the company. Of course, Michael Schwindle's track record of driving profitable growth along with his passion for retail and operational excellence We also made several organizational changes in the marketing, E commerce, product design and product development areas that flattened and streamlined the organizational structure to improve execution, Make faster decisions and provide support for the 4 pillars of project restoration.

Speaker 2

These most recent organizational changes And non payroll expense reductions are expected to produce annualized savings of approximately $12,000,000 on top of our fiscal 2023 cost reductions. Let me give you a bit more detail on Project Restoration's 4 key pillars and some of the initiatives we currently have underway. At Vera Bradley, for the consumer, we will focus on restoring brand relevancy, targeting casual and feminine 30 to 54 year old women who value both fashion and function. For the brand, we will strategically market our distinctive and unique position As a feminine fashionable brand that connects with consumers on a deep emotional level. For product, we will refocus on core categories And items we are best at by innovating and expanding within our core products like travel and back to campus.

Speaker 2

We will elevate our Colorful feminine heritage, keeping it distinctive, but more trend relevant through updated print and design. We will also innovate into strategic adjacent lifestyle item introductions that make sense for our customers. As part of this, travel and travel accessories performed strongly across all channels in the Q1 and the travel category will continue to be a key Our go forward assortment. Additionally, our performance fabrics are trending well across all channels with the core customer being younger with Higher household income. This remains a big opportunity for us.

Speaker 2

Patterns will always be our signature, The coordinating solids continue to be a key opportunity for us as well. We will expand our solid collection this fall, including our foray back into a small collection of leather goods. Finally, product collaborations are still an important part of our brand expression. Our Winnie the Pooh capsule was a huge success. Our first Hello Kitty collaboration was just launched this month And our NFL collection will be launched in August just in time for football season.

Speaker 2

And then finally for channel, We will accelerate our digital first focus and online presence, build a balanced footprint that more clearly differentiates full line from factory stores and target and or strengthen relationships with strategically aligned wholesale partners. As part of this, our recent site rebranding and navigation changes Have been successful in reducing bounce rate and driving conversion and sales. So turning to Pura Vida. For the consumer, we will sharpen our focus on the carefree 18 to 24 year old girl who both those younger and older aspire to be. For the brand, we will recenter our brand ethos on living life to the fullest with marketing authentically sharing real moments, places and faces.

Speaker 2

Our Live Free campaign launched this month and will accentuate travel, adventure, friendship and freedom and will create engagement and excitement in our customer base for the entire summer. For products, we will focus on delivering unique, fun, playful designs that are affordable and accessible with a dominant emphasis on bracelets and jewelry as well as other strategic adjacent categories. Some great examples of this Our new summer collection and our Harper Charms collection, which are both resonating with our customers. And then finally for channel, We will have a strong focus on restoring e commerce growth, which I just talked about and growth of wholesale by Pursuing larger, more strategic partnerships and expanding larger existing accounts and refining our existing store model. Now let me turn the call over to John to review the financial results.

Speaker 2

John?

Speaker 3

Thanks, Jackie, and good morning. Let me go over a few highlights for the Q1. The numbers I will discuss today are all non GAAP and exclude the charges outlined in today's release. For a complete detail of items excluded from the non GAAP numbers As well as a reconciliation of GAAP to non GAAP numbers, please reference today's press release. Consolidated net revenues totaled $94,400,000 Compared to $98,500,000 in the prior year Q1.

Speaker 3

The consolidated net loss totaled $2,600,000 or $0.09 per diluted share compared to $6,000,000 or $0.18 per diluted share last year. Vera Bradley direct segment revenues totaled $58,900,000 A 4.4% decrease from $61,600,000 in the prior year. Comparable sales declined 3.3% primarily due to weakness in the factory channel, Jackie noted earlier. Vera Bradley indirect segment revenues totaled 15,400,000 A 9.4% decrease from $17,000,000 last year. Prior year revenues reflected a large one time key account order that was not repeated this year.

Speaker 3

Pura Vida segment revenues totaled $20,100,000 a 1.2% increase over $19,800,000 in the prior year Q1, primarily driven by non comparable retail store sales. 1st quarter gross margin totaled 51,700,000 or 54.8 percent of net revenues compared to $52,500,000 or 53.3 percent of net revenues in the prior year. The current year gross margin rate was favorably impacted by lower year over year inbound and outbound freight expense and the sell through of previously reserved inventory, partially offset by an increase in promotional activity. SG and A expenses totaled $55,600,000 or 58.9 percent of net revenues compared to $59,400,000 or 60.3 Net revenues in the prior year. Current year expenses were lower than the prior year, primarily due to cost reduction initiatives and the reduction in variable related expenses related to lower sales volumes.

Speaker 3

The company's 1st quarter consolidated operating loss totaled $3,500,000 or 3.7 percent of net revenues compared to $6,700,000 or 6.8 percent of net revenues in the prior year. Now let's turn to the balance sheet. Quarter end cash and cash equivalents totaled $25,300,000 Compared to $46,600,000 at fiscal year end, we had no borrowings on our $75,000,000 credit facility at quarter end. Total quarter end inventory was $142,700,000 compared to $161,800,000 at the end of the Q1 last year. During the quarter, we purchased 128,100 shares at an average price of $5.71 per share For an aggregate amount of approximately $732,000 $27,000,000 remains under the $50,000,000 repurchase authorization that expires in December 2024.

Speaker 3

Now let me turn the call over to Michael to talk about the company's fiscal 2024 outlook.

Speaker 4

Thanks, John, and good morning, everyone. Based on the Q1 performance as both Jackie and John have discussed, As well as our initiatives underway and the macro environment trends and expectations, we are revising our guidance for this fiscal year. As a result, all of our forward looking guidance or as a reminder rather, all of our forward looking guidance is on a non GAAP basis. For fiscal 2024, our updated guidance is as follows. We expect total revenues of $490,000,000 to $510,000,000 As a reminder, revenues totaled $500,000,000 in fiscal 2023, and we expect both Vera Bradley and Pura Vida revenues to be approximately flat We also expect gross margin rates of between 52.8% 53.8%, which compares to 51.4 percent for last year.

Speaker 4

Our fiscal 2024 gross margin rate is expected to be favorably impacted by lower year over year freight expenses, cost reduction initiatives and the sell through of previously reserved inventory, which will be partially offset by an increase in promotional activity. Our SG and A expenses are expected to be between $237,000,000 $247,000,000 compared to $245,300,000 last year. The expected year over year decline in SG and A expense is being driven by company wide cost reduction initiatives, partially offset by restoring incentive compensation to more normalized levels An incremental marketing investment intended to accelerate customer file growth. This results in anticipated consolidated operating income of $24,000,000 to $28,000,000 compared to $12,300,000 last year and diluted EPS of $0.57 Our diluted EPS totaled $0.24 last year. We also expect net capital spending of approximately $5,000,000 Compared to $8,200,000 last year, which reflects investments associated with new Vera Bradley factory stores as well as technology and logistics enhancements.

Speaker 4

And as a result, our free cash flow is anticipated to be between 35,000,000 And $40,000,000 compared to a cash usage of $21,700,000 in fiscal 2023. So with that, operator, we'd like to open up the call to questions.

Operator

Well, thank

Speaker 5

Good morning and thanks for taking my questions.

Speaker 3

Hey, Joe.

Speaker 2

Good morning, Joe.

Speaker 5

Good morning.

Speaker 1

So I wanted to start

Speaker 5

off, you talked about some lower traffic levels at Vera Bradley, I think in March April. Maybe you could give us a little more color or detail as to what was behind that?

Speaker 2

Sure, Joe. So first I want to say that the traffic challenges were limited really to the factory channel And they were primarily in March, I think where we were seeing some other retailers report similar slowdowns. And what we've done in this quarter is really look at some marketing programs that To drive more traffic to those factory stores, and that's part of the reinvestment that We're going to make for the rest of the year is really we had some successful test results from some of those programs to help increase in targeted markets and we're going to continue to deploy those programs. So But again, it was really just limited to the factory channel. Our full line traffic was strong throughout the quarter.

Speaker 3

And Joe, all I would add on to that and I think Jack did a good job is to say that to the point was March was really kind of the toughest month in the quarter And we saw a rebound a little, it's still down in April, but we saw a rebound in April better than March. And then in May, we've seen kind of that continued progression.

Speaker 5

Okay. And I don't know if you talked about this before or not. Maybe you can kind of give us a little size as to what that non recurring account order last year was just so we can kind of get a better idea The year over year ex that performance.

Speaker 3

Yes. So indirect would have been down about 2%, excluding that one time Sale last year for the key account order. So it was a little bit over $1,000,000

Speaker 5

Okay, great. And then one more if I may and I'll pass it along. Michael, congrats on joining the team. You've been there now a little over a month, early days, kind of maybe give us your First impressions and what are you kind of laying out as what your initial short term goals would be here? Thank you.

Speaker 4

Hey, thank you, Joe. Appreciate the question. Hey, with my days and days of experience as Jackie and others heard me say, So this is a tremendous brand. It's got a great solid foundation here, A great customer base, great brand recognition, that gives a tremendous foundation from which to build upon. And so Jackie and I've talked a lot about that.

Speaker 4

I'm very excited about that. Obviously, initially, there's a lot to learn here, around all the different channels of the business As well as with the Pura Vida brand. And so, I'm a bit vertical on the learning curve as you might imagine as I'm trying to digest and understand all of that. In the meantime, I've already been engaged pretty deeply in a lot of the cost initiatives that Jackie referred to earlier, Making sure that we've got good controls around that and making sure we have good visibility to delivering those initiatives As well as gathering additional understanding of the different areas of the business. I think one of the advantages I have been around lots of For retail organizations, I've had a lot of different operational experiences over my 35 years and that makes it A little bit faster kind of running start for me to jump into different areas of operations and other things to kind of have a solid foundation at the onset and then look for The opportunities in the business.

Speaker 5

Great. Thanks for that. I look forward to working with you going into the future. Thanks for taking the questions again.

Speaker 4

I do as well. Thank you. Thanks, Joe. Thanks, Joe.

Operator

And our next question will come from Eric Beder with SCC Research.

Speaker 6

Good morning. Congratulations on the quarter.

Speaker 1

Thanks, Eric. Thank you. Thanks, Eric.

Speaker 6

Okay. How should we be I know that this new management team joined, it's a little bit tough in the near term to really change the product mix And flows, obviously, you've done a great job in controlling what you can control on the expense side. When should we be thinking that we'll see like what you, Jackie, your team envisioned the stores to fully be. Is that back half of this year or is that really into next year?

Speaker 2

Yes. That's a great question, Eric. And as you said, it's tough to change A product trajectory quickly, but I think the team has done a great job of really getting in and dissecting What's working and what's not working, especially as it relates to our future customer target. So we have One of the things we learned that I talked about today is just the balance of solids and prints in our assortment and looking at The fabrics that we currently offer, who they attract in terms of a customer level and a price point level. So you'll definitely see some product mix changes at the back half of the year and then it will Steadily increased as we get closer to the middle of next year.

Speaker 4

Okay. That makes sense. How should we be

Speaker 6

thinking about Obviously, the Pura Vida store openings that have happened last year helped. Historically, we've been Closing full price stores, opening outlets. What should we be thinking about this year and I guess longer term?

Speaker 2

Yes. Another great question, Eric, and I have to say that we are deep in that work. That's Part of the channel pillar of project restoration for both brands. Our Pura Vida stores are working pretty well. So it but it's really about right now pausing to be sure that We can deliver the right strategic plan for the business.

Speaker 2

So that's the only reason that we haven't Continued opening Pura Vida stores, but I think you'll hear more from us By the end of the year about our plans for stores, but it's just really important that again right now we're focusing on the health Of the overall portfolio and making sure that we're making the right strategic decisions for store openings for both brands.

Speaker 6

Sure. And last question, Ray, what should we be thinking about how in terms of inventory flows? Obviously, Q1, you brought the inventories down significantly. Is there opportunities to continue that throughout the rest of the year? Thank you.

Speaker 4

Hey, Eric. This is Michael. I'll jump in on that and Jackie, I'll add some more color. As you noted, we have seen some pretty good reductions on a year over year basis. It's roughly flat with the end of the year.

Speaker 4

We do expect to continue to see a downward trajectory in our overall inventory, through the end of the year, something in the probably down 10 ish, Maybe a little bit more than 10 ish percent by the time we get to the end of the year.

Speaker 2

And just a little color on that. We've been The company has been engaged in an exercise around SKU reduction. It's called the SOAR project And that has really contributed to kind of cutting off the tail of some of our unproductive inventory and that's really contributing to Some of the declines that you've seen, we're continuing that work and really I think you'll see the continued evidence, as Michael mentioned, by within the rest of the year

Operator

Thank you. That does conclude the question and answer session. I'll now turn the conference back over to Jackie Artery for closing remarks.

Speaker 2

Thank you. In closing, we're committed to returning both of our brands to healthy top and bottom line growth and generating strong cash flow through Project Restoration, which I believe will deliver value to our shareholders over the long term. This year, by focusing on stabilizing sales, Expanding gross margin and controlling expenses, we believe we can at a minimum nearly double year over year operating income and more than double EPS. We have an exciting future ahead. Thank you for joining us today and we look forward to sharing our progress with you on our Q2 call on August 30.

Operator

Thank you.

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