VRA - NASDAQ

Greetings. Welcome to Vera Bradley, Inc.'s Third Quarter Fiscal 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. Anyone today should require operator assistance, please press 0 from your telephone keypad. Please note that today's conference is being recorded. At this time, I'll turn the conference over to Mark C. Dely, Chief Administrative Officer. Mark, you may now begin.

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 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. Investors should not assume that the statements made during the call will remain operative at a later time.

First, we are sharpening our brand focus. Leveraging our joyful and authentic brand DNA through innovative product relevance and storytelling. To reconnect with our loyal customers while engaging new audiences. Ensuring consistent messaging across all consumer touch points. Second, we are resetting our go-to-market approach by transforming our product, planning, promotional, and inventory decisions through data-led insights. To create more productive assortments supported by integrated marketing. Third, we are rewiring our digital ecosystem. To optimize performance across all digital touch points. From social media and vb.com to our outlet online presence and emerging social commerce platforms ensuring clear brand identity, and channel roles supported by cohesive storytelling, for customer acquisition and retention. Fourth, implementing Outlet 2.0 under the umbrella of a broader reinvention of our physical retail. To develop a more brand-enhancing and productive outlet experience given the importance of this channel to our business. This aligns with our efforts to create cohesive customer experiences across all digital and brick-and-mortar channels. And finally, we are reimagining how we work, by building critical new capabilities and aligning our organizational structure operating model, and culture for sustainable future growth. Before diving into our progress on each of these five transformation initiatives, I would like to briefly discuss our results. For the third quarter, we registered revenues of $62.3 million, 11.7% below prior year. This compared to a 24.6% decline during the second quarter. Revenues in our direct business segment were $49.7 million, 5.3% below prior year compared to a decline of 16.2% in the second quarter. Importantly, we achieved sequential improvement in our key metrics in nearly all direct segment channels. Highlighted by positive comparable channel sales in our brand channels that have been product-led and have continued for five months extending from back to school through the Black Friday weekend. Additionally, we are making progress on improving profitability and cash management through more disciplined pricing and promotional strategies. In summary, while we recognize there's still significant work ahead, these early wins in our direct segment give us confidence that our focused approach to product innovation, brand storytelling, and operational excellence is moving Vera Bradley, Inc. in the right direction. We remain committed to building upon this foundation as we continue executing our transformation strategy. Now let me dive a little deeper into each of these five transformation initiatives the progress we have made, and the impact it is already having on our business. Strategic initiative number one, sharpening our brand focus. As we continue our Project Sunshine transformation, we are fundamentally reshaping how Vera Bradley, Inc. operates. We lost track of what made Vera Bradley, Inc. special and unique. And what customers loved about us. We became indistinguishable from other brands and over-reliant on promotions with an aging customer base. We are now moving to recapture our joyful, authentic DNA that our customers love. While attracting new generations through innovative products and compelling storytelling. As we continue to sharpen our brand focus, we've developed new brand guidelines that are both modern and authentic to who we are. We are being intentional about what Vera Bradley, Inc. represents. We are feminine. Creative, cheerful, whimsical, joyful, fun, colorful, approachable, high quality, and smart value. Equally important is what we are not. We are not trying to be luxury, high fashion, or sophisticated. In ways that make us seem exclusive, intimidating, or too expensive to our customers. This clarity in our brand identity is helping us reinforce the unique and differentiated positioning that made us successful to begin with. And sharpened how we show up and communicate with consumers. We need to stay true to the joyful, functional, and accessible brand that our customers fell in love with while ensuring we remain and compelling to new generations. This brand clarity has already been informing our product development, marketing campaigns, and customer experience all across all touch points. And we believe this authentic approach will help us reconnect with our core customers while attracting new ones. Who are seeking the joy and optimism that only Vera Bradley, Inc. can deliver. This is the market white space that only Vera Bradley, Inc. can own. As we continue to execute our Project Sunshine strategy, we remain focused on what our customers truly value about Vera Bradley, Inc. Our research confirms that customers are drawn to three core pillars that define our brand promise. First is joyful functionality. The thoughtful organization, lightweight materials, and practical designs that make daily life and travel easier for our customers. Second is our distinctive patterns and color palette. Those signature prints and border iconography that allow our customers to express their individuality and optimism in ways that no other brand can deliver. And third is smart value. Providing high perceived quality at an attainable price point, This is not just about promotional pricing, but about making our customers feel smart about the investment they are making. As we continue our transformation journey through Project Sunshine, I want to emphasize how our approach differs fundamentally from our previous project restoration initiative. We are building from our DNA, not rebranding. Leaning into Vera Bradley, Inc.'s distinctive heritage in cotton, color, prints, joy, and craft rather than trying to emulate other brands. This time, we are focusing on both new and existing customers. Engaging them through lifestyle and needs rather than trying to grow only with new customers and moving loyal shoppers to outlet channels. Our strategy is focused on a realistic, disciplined, and sustainable build rather than an overnight turnaround. Most importantly, we are carefully integrating data and insights into every decision from product development and pricing to storytelling. Using results and customer understanding to drive our decisions. We are also fundamentally changing how we work, with clearer roles, cross-functional alignment, and shared incentive designed for peak performance. This disciplined customer-centric approach gives us confidence that we are building the foundation for sustainable, profitable growth while staying true to what makes Vera Bradley, Inc. special. Beginning with product, which has been our primary focus to date, I'm pleased to report that we continue to see momentum in several areas that give us confidence that Project Sunshine is moving in the right direction. Building on the success of our back-to-school business, highlighted by product wins across iconic backpacks and lunch bags, Q3 results were positively impacted by the return of additional iconic styles, and proven heritage-inspired prints and border iconography. Including the Vera tote, and Glenna Satchel, the original 100 bag, and our patchwork Rachel Ditzy, and mistletoe lattice prints. Our refocused investment in cotton was also a key driver of performance during Q3. Our shift to a social-first marketing approach is also delivering measurable results, driving new customer acquisition on vb.com while significantly expanding our social media reach. We're thrilled that our initial orders of the original 100 bag sold through across the majority of SKUs. At the same time, our social campaign, including the New York City Rockettes, drove new consumers to purchase on vb.com. The 100 bag is also attracting a younger customer. Achieving more than twice the penetration of Gen

I have a few brief comments to make about our performance for the quarter. For the sake of clarity, all the numbers I am discussing today are non-GAAP and exclude the charges outlined in today's press release. A complete detail of items excluded from the non-GAAP numbers as well as a reconciliation of GAAP to non-GAAP. Can be found in that release. For the 2026, our consolidated revenues totaled $62.3 million, compared to $70.5 million in the prior year third quarter. Net loss from continuing operations for the third quarter totaled negative $8.3 million or negative $0.30 per diluted share compared to negative $3.7 million last year negative 13¢ per diluted share. Results from continuing operations for the quarter were significantly by a $5.9 million inventory write down related to the brands to strategic product shift toward cotton and heritage prints along with a $4 million write off of television media credits, were acquired to support the company's project restoration efforts and won't be fully utilized with the focus on digital and performance marketing. The previously mentioned charges had a negative 35¢ impact on diluted earnings per share for the quarter. In terms of segment performance, Vera Bradley, Inc. Direct segment revenues for current third quarter totaled $49.7 million a 5.3% decrease from $52.5 million in the prior year third quarter. Comparable sales similarly declined 5.8%, which represents our third quarter of sequential comparable sales improvement. Initial efforts to improve products along with a return to back to school resulted in positive brand comps and overall positive growth versus last year. Total revenues year over year were also impacted by five new store openings and 14 store closures since the prior year third quarter. Vera Bradley, Inc. indirect segment revenues for the third quarter totaled $12.6 million a 30.2% decrease from $18 million in the prior year third quarter. The decrease was primarily was related primarily to a decline in specialty and key account orders, which were partially offset by increased liquidation sales. The quarter's performance also marks a sequential improvement relative to the preceding quarter. Third quarter gross margin totaled $26 million or 41.7% of net revenues compared to $38.4 million or 54.5% of net revenues in the prior year. The decrease in year over year margin rate resulted from previously mentioned inventory write down as well as additional duty expenses partially offset by pricing improvements. Excluding the inventory write down, gross margin for the current quarter was 51.2%, which represents our third consecutive quarter of gross margin improvement. SG and A expenses totaled $37.4 million or 60% of net revenues compared to $43.6 million or 61.8% of net revenues for the prior year third quarter. The $6.2 million decrease in expenses was primarily due to lower compensation expenses and other cost reduction initiatives, which were partially offset by the previously mentioned media credit write off. Third quarter operating loss from continuing operations totaled negative $11.1 million or negative 17.8% of net revenues compared to negative $5 million or negative 7.1% of net revenues in the prior year. Operating loss, excluding the previously mentioned inventory reserve immediate credits, write off totaled negative $1.2 million or negative 1.9 of net revenues. Continuing our efforts from last quarter, we are focusing on store performance, inventory levels, and website performance in order to improve product availability and navigation of the online outlet website. We are pleased with the trajectory of the improvement made to date, evidenced by sustained sequential comp improvements across three of our four direct channels and continued cost efficiency focus. The team continues to review our processes and actions to identify opportunities for new approaches to how we work. Turning to the balance sheet. Cash and cash equivalents at the end of the quarter totaled $10.7 million, We had borrowings of $10 million on our $75 million ABL facility at quarter end. Our third quarter inventory decreased year over year by 24.3% to $82.9 million compared to $109.6 million at the end of third quarter last year. Furthermore, our inventory balance has declined 9.3% from the 2025 and remains lower even after accounting for the inventory reserve recorded this quarter. We recognize that inventory performance is a key opportunity for our business, and are focused on developing strategies to improve our turns over the next twelve months. We made good progress on aligning our receipts with sales expectations quarter along with continued focus on assortment optimization to reduce SKU counts while developing strategies to reduce lead times enabling faster response, where we see consumer excitement for our products. In closing, we remain committed to disciplined expense control and inventory management during this turnaround period. We are confident that these actions, combined with the execution of our strategic initiatives, will lead to improved performance and enhance shareholder value over the long term. This concludes our presentation, and we can now open it up to questions.

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Thank you. And one moment while we pull for questions. Thank you. Our first question is from the line of Eric Beder with SCC Research. Please proceed with your question. Good morning.

Good morning. Good morning, Ian.

Hi. So lot of changes this quarter, more rolling into Q4.

When we roll into 2026, what you would be thinking about as the kind of the key signpost that Project Sunshine is starting to have an even greater impact than it had in Q3 and into Q4.

Yeah. Thanks, Eric. Look. I think from day one, I've really believed that product is really the key. And, as you know, this was the first thing that we really began to focus on. We were able, obviously, to have a more limited impact on product for back to school and holiday. Although some successes. And, really, the first sort of window where we've been able to have a significant impact on product will be 2026, really starting with product that will flow between January and July. What gives us a lot of confidence is that, you know, our sort of strategy around refocusing on the reinvention of iconic styles, with critical, delightful function. Returning heritage-inspired prints, and the border iconography, reinvesting back into cotton. Which, you know, is now north of 50%, and it was below 40% and sort of much more qualitative and impactful IP products. As well as really focusing on sort of occasions that we can own like back to school, spring break, Mother's Day, travel. All of that, what we see and what we're doing, is working. And so we're entering really into the spring summer season with confidence knowing that we've been able to make bigger commitments into the things that we really believe are going to work. And I believe that, you know, success with product will be the most important thing that can turn the business. Frankly, is you know, the positive experience that we're having in our brand channels right now, I believe, is primarily product-led.

Okay. When you look at Outlet 2.0,

Yes.

Some ways, it's a we, you know, we visited two of them, and it's a great concept. It also in some ways provides for some consumers who have lost kind of their full price store a way for them to still see and touch kind of full price items. I'm curious what's kind of been the response to consumers to seeing kind of full price items in the Outlet 2.0 stores. And when you look at it, does that become a bridge given that a lot of you know, there's been a lot of closures in the full price stores.

Yeah. No. Great. Listen. Great question. I'll first talk about Outlet 2.0, and then I think I'll talk more broadly about sort of distribution and how customers can access, you know, the full price product and brand experience. Look. On Outlet 2.0, it's early days. You know, we launched seven pilot stores this holiday season. I would say that the qualitative feedback that we're getting from our teams as well as customers has been very positive. You know, positive about sort of the overall store environment, positive that it's, you know, more brand enhancing. Positive about the customer journey in the stores, with much clearer destinations and heroing of lifestyles and different products. You know, stronger visual merchandising, also supported by in-store, imagery. And you know, what we have seen again, at a very, very high level and recognizing it's early, you know, is even with sort of the very strong focused assortment editing of the assortment of SKUs, You know, we've seen sort of performance in line with stores that, you know, have 35% more SKUs. We're also seeing a positive impact on the profitability of each customer that comes in the store. Know? So we're leveraging the traffic that we do have because it's gonna take longer to get traffic to come back with stronger, conversion. And we're also seeing that, you know, the more time that these Outlet 2.0 stores have, to work through sort of the new system. The better they're performing. And, frankly, we're already seeing certain things in Outlet 2.0 that we feel we can take to other stores without having to do the full sort of Outlet 2.0, you know, update. Where we can get some wins. We also are planning to do more follow-ups, you know, visiting, we're gonna be visiting, a couple of the stores, with the team next week. We're also planning to do some customer intercept. So, you know, it's very much a test and learn, approach. To your question, specifically about full price product, you know, we're seeing very encouraging reaction to customers on the limited assortment of heritage product and select IP that we put into these stores. We think there's potentially more, potential there. And but, you know, again, that's I think, improving to the sorry. Impacting sort of the impact we're having on, you know, the profitability of each customer. More broadly on sort of how customers can really access you know, our brand proposition. You know, clearly, vb.com today is probably our most important vehicle. And we're continuing to really upgrade the customer experience there. To really, you know, represent the best of what Vera Bradley, Inc. can be. And, you know, we also you know, are looking very carefully at our overall full price brand fleet. But we have to, you know, get more confident, I think, in the business before we start making big commitments there. So we're the meantime, we're leveraging our outlet channel. And, also, you know, we are putting another big focus onto our wholesale accounts, especially our specialty accounts. I mean, those you know, as I said in the first call last quarter, you know, it's specialty retail and wholesale that actually are the ones that helped to build Vera Bradley, Inc. into a nationwide brand. And you know, we still feel very strongly that the with those strong relationships we have there, which, you know, we're focused on building. That they can continue to play a very, very important role in our transformation.

Yeah. I agree. I think also think there's somewhat of a lagging indicator but we'll see. Final question. I'd say to one two questions here. One one on inventory losing really impressive job reducing inventory. How should we be thinking about the opportunities, I guess, to tap working capital and get more productive going forward with the inventory. And, you know, how long of a journey do you think it can be to go young go a little find that younger customer That's a that's historically, it seems it takes a few years to start moving that kind of average age down Thank you. Yeah. Great question. I'll let Marty handle the first part on the inventory, and then, maybe I can talk about sort of the know, your question about the younger customer.

Thanks for the question, Eric. On inventory, we definitely see the opportunity for improvement there and to improve our know, from a productivity standpoint, And today, our turns are less than two, but we have seen you know, we're starting to see the improvement in turns this quarter, and we think that we're on track through our planning processes and other activities we're taking on to kinda move that into the greater than two to three range you know, over the course of the next twelve to eighteen months.

Great. And look, Eric, I think on the younger customer, you're right. It will take some time. And look. I think first and foremost, we have a significant opportunity in front of us, right, to reengage with our loyal customer, who is still you know, the biggest and most important part of our business. We have an opportunity to reengage them with the brand, bring back lapsed purchasers. I think also get them you know, used to buying, you know, better products that really invoke what I like to think of as the OG Vera Bradley, Inc. with, you know, not only the iconic styles and function, and prints, but also, you know, bringing back some of that craft. If you look at the 100 bag you know, where we have that sort of iconic quilt through lining, you know, the reversible tote, which we're introducing for spring, is really phenomenal. You know? It's basically a two-in-one bag. And so we have that opportunity But I think where we're now focused you know, besides product, you know, with the recent appointment of Melinda as our chief brand officer is now also starting to shift some of that focus into the marketing and the digital commerce, which are both areas where I believe we have significant opportunity to reinforce you know, the great work we're doing on product with great storytelling, that can you know, and targeted storytelling that can really, you know, spark the emotion of younger customers. And, you know, we saw in a limited way with the 100 bag, right, which we weren't able to have as much product as we wanted to have. We didn't have quite all the right focused marketing. But even that, you know, we saw twice the penetration of Gen

Alright. Great. And good luck for the rest of the holiday season.

Thank you. Thank you.

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