Earnings Transcript for VRA - Q2 Fiscal Year 2024

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley Second Quarter Conference Call for Fiscal 2024. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mark Dely, Vera Bradley's Chief Administrative Officer.

Mark Dely: Good morning, and welcome everyone. We'd like to thank you for joining us for today's call. Some of the statements made during our prepared remarks and in response to your questions, may constitute forward-looking statements made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect. Please refer to today's press release for the company's most recent Form 10-K filed with the SEC for a discussion of known risks and uncertainties. Investors should not assume that the statements made during the call will remain operative at a later time. We undertake no obligation to update any information discussed on today's call. I will now turn over the call to Vera Bradley's CEO, Jackie Ardrey. Jackie?

Jacqueline Ardrey: Thank you, Mark. Good morning, and thank you for joining us on today's call. We are very pleased with the meaningful year-over-year improvement in second quarter earnings driven by significant gross margin expansion and successful company-wide expense reduction efforts. As a company, we are doing a better job of being attentive to our cost structure and are being very intentional on how we invest our dollars to drive long term profitable growth. Our transformational efforts continue to bear fruit, and I'd like to thank all of our associates across the country for their contributions to this very important work. During the quarter, we carefully managed our debt-free balance sheet, adding to our cash position while continuing to strategically improve our inventory position. One of our key goals this year is to stabilize revenues. We are continuing to make progress on that front with second quarter consolidated revenues of $128.2 million, only modestly below last year. Total second quarter revenues for the Vera Bradley brand were down 1.2% from last year. Vera Bradley direct revenue declines resulted from store closures over the last year while we saw a small comparable store gain in our full-line stores. The successful return of the Vera Bradley annual outlet sale offset weakness in our factory outlet stores in addition to compensating for the elimination of one online outlet sale during the quarter. The remainder of our e-commerce sales continued to perform well. Lastly, Vera Bradley indirect revenues were up slightly to last year. Pura Vida year-over-year sales declined 3.6%, primarily related to a shortfall in wholesale revenues, which we believe should improve in the second half of the year. [Technical Difficulty] to realize the benefits of changes in our performance-based marketing program. In general, at both brands, customers have responded enthusiastically to our collaborations into product offerings when they are innovative and trend right even as they have been more selective in their discretionary spending in light of the current macro environment. We continue to make meaningful progress on Project Restoration focusing on four key pillars of the business for each brand

Michael Schwindle: Thanks, Jackie, and good morning, everyone. Let me begin with a few highlights from our second quarter but before I do, for the sake of clarity, I will discuss -- all the numbers I'm discussing today are non-GAAP and exclude the charges outlined in today's press release for a complete detail of items excluded from the non-GAAP numbers as well as a reconciliation of GAAP to non-GAAP, please reference today's release. Our second quarter consolidated net revenues totaled $128.2 million compared to $130.4 million in the prior year second quarter. Consolidated net income totaled $10.2 million or $0.33 per diluted share compared to $2.4 million or $0.08 per diluted share last year. Vera Bradley Direct segment revenues totaled $85.7 million, a 1.5% decrease from $87 million in the prior year. We permanently closed 19 full line and two factory outlet stores and opened three factory outlet stores over the last 12 months. Our comparable sales declined 5.3%, primarily due to weakness in the factory outlet channel that Jackie noted earlier. This year, the direct segment revenues also included sales from the Vera Bradley annual outlet sale which was not held last year. Vera Bradley Indirect segment revenues totaled $17.4 million, a 0.2% increase over $17.3 million last year. Pura Vida segment revenues totaled $25.1 million, a 3.6% decrease from $26 million in the prior year, reflecting a decline in sales (ph) to wholesale count and a modest decline in e-commerce sales, partially offset by new store growth resulting in noncomparable retail store sales. Second quarter gross margin totaled $72 million or 56.2% of net revenues compared to $67.8 million or 52% 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 (ph) activity. As a reminder, our prior year gross margin was materially impacted by high inbound and outbound freight expense as well as a deleverage of our revenue costs. SG&A expenses totaled $58.3 million or 45.5% of net revenues compared to $64 million or 49.1% of net revenues in the prior year. This reduction from the prior year reflects the early sets (ph) of our company wide cost reduction initiatives across various areas of the organization. Second quarter consolidated operating income totaled $14 million or 10.9% of net revenues compared to $3.9 million or 3% of net revenues last year. Turning to the balance sheet. Our quarterly (ph) cash and cash equivalents totaled $48.5 million compared to $38.3 million at the end of last year's second quarter. We continue to have no borrowings on our $75 million ABL facility. And subsequent to quarter end, we completed renegotiation of our ABL agreement and the modifications among other things, convert the interest calculation from LIBOR to SOFR as well as enhance our future ability to expand ABL, if necessary. We are confident that our access to liquidity and capital is sufficient to address our needs for the foreseeable future. Inventory was $139.3 million at the end of the quarter compared to $179.6 million at the end of the second quarter last year. We have taken strategic actions to reduce our inventory levels, and we believe we are appropriately positioned as we enter the fall selling season. During the quarter, we also repurchased approximately 120,000 shares at an average price of $5.16 per share, totaling approximately $683,000. $26.3 million remain under the $50 million share repurchase authorization that expires in December of 2024. As Jackie said earlier, we are very pleased with our performance year-to-date as well as with our progress on the transformation, I likewise thank all of our associates for their hard work and commitment to these efforts. So as we look forward, based on the first half performance as well as our initiatives underway and the current macroeconomic trends and expectations, we are updating certain components of our guidance for the fiscal year. And as a reminder, our forward-looking guidance numbers are on a non-GAAP basis. We now expect consolidated net revenues of between $490 million and $500 million for the year, as a reminder, net revenues totaled $500 million last year. We also expect a consolidated gross margin rate of 53% to 53.8% compared to 51.4% in the prior year. This year's gross margin rate is expected to be favorably impacted by lower year-over-year freight expense, cost reduction initiatives and the sell-through of previously reserved inventory, but partially offset by an increase in promotional activity. Consolidated SG&A expense is expected to be between $237 million and $243 million compared to $245.3 million last year. The decline in SG&A expense is being driven by our company-wide cost reduction initiatives, partially offset by restoring [indiscernible] long-term incentive compensation to more normalized levels. in addition to incremental marketing investment intended to accelerate customer file growth. This result in anticipated consolidated operating income of $24 million to $28 million compared to $12.3 million last year and a diluted earnings per share of $0.57 to $0.65 compared to $0.24 last year. We also continue to expect net capital spending of approximately $5 million this year versus $8.2 million last year. And this reflects investments associated with new Vera Bradley outlet stores as well as technology and logistics enhancements. As a result, our free cash flow anticipates to be between $40 million and $45 million compared to a cash usage in last year of $21.7 million. So that concludes our formal remarks. I would like to open the call to questions now.

Operator: Thank you. [Operator Instructions] And our first question comes from Nick Gomes with NOBLE Capital. Your line is open.

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

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

Joe Gomes: Great. Thanks for that. And also maybe give us a little more color or detail on how the collaborations with Disney, Hello Kitty -- again, I know it's really early days, NFL, are all working out?

Jacqueline Ardrey: Sure. We're very pleased with the results of these collaboration efforts, especially Hello Kitty really resonated with both existing and new customers in the quarter, and NFL initially is that we're very happy with the results there. So it will be -- it continues to be a key part of our strategy now and for the future.

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

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

Joe Gomes: Okay. Great. Thanks for that. I’ll get back in queue.

Michael Schwindle: Thank you.

Jacqueline Ardrey: Thanks.

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

Eric Beder: Good morning.

Michael Schwindle: Good morning, Eric.

Jacqueline Ardrey: Good morning, Eric.

Eric Beder: A quick question, you've had a number -- you continue to aggressively reduce the inventory levels. Are we kind of at the normalized level here? And this is how we should be thinking about it going forward or are there other opportunities to continue to reduce the inventory and increase productivity?

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

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

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

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

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

Eric Beder: Great. Good luck for the holiday season.

Jacqueline Ardrey: Thanks, Eric.

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

Jacqueline Ardrey: Before I close, I would like to thank all of our associates once again for their collaboration and support of Project Restoration, for being resourceful and innovative and for embracing the mindset of diligent expense management. This year by focusing on stabilizing sales, expanding gross margin and controlling expenses, we believe we can, at a minimum, nearly double year-over-year operating income and more than double EPS. We are excited about the opportunities for both brands. We are also committed to returning both of our brands to profitable growth and generating strong cash flow through Project Restoration. This should deliver value to our shareholders over the long-term. Thank you for joining us today, and we look forward to sharing our progress with you on our third quarter call on December 6.

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