Stacy Knapper - SVP and General Counsel Robert Wallstrom - CEO Kevin Sierks - EVP and CFO Sue Fuller - EVP and Chief Merchandising Officer Julia Bentley - VP, IR and Communications.

Randy Konik - Jefferies & Co. Dana Telsey - Telsey Advisory Group Jennifer Davis - Buckingham Research Group Steve Marotta - CL King & Associates Mark Altschwager - Robert W. Baird Oliver Chen - Citigroup Tom Nikic - Sterne Agee.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Vera Bradley Second Quarter 2015 Earnings 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 Ms. Stacy Knapper, Vera Bradley’s Senior Vice President and General Counsel. Please go ahead, ma’am..

Good morning and welcome everyone. We would like to thank you for joining us for Vera Bradley’s second quarter earnings conference call.

Some of the statements made on today’s call 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 Form 10-K for the fiscal year ended February 1, 2014 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. The company undertakes no obligation to update any information discussed on the call. Thanks. I will now turn the call over to Vera Bradley’s Chief Executive Officer, Rob Wallstrom..

Thank you, Stacy. Good morning, everyone, and thank you for joining us on today’s call. With me today are Kevin Sierks, EVP, Chief Financial Officer; Sue Fuller, EVP, Chief Merchandising Officer; and Julia Bentley, VP of IR and Communications.

We achieved our earnings per share guidance for the quarter and reconfirmed our EPS guidance for the full year. Second quarter sales were at the high end of our expectations and as a percent of sales, SG&A expenses were at the low end of our target. We carefully managed our inventories and ended the quarter with a strong cash balance and no debt.

Although we posted negative total comparable sales number for the quarter, we began to experience some improving trends in July. Ecommerce began to turn around and although store traffic remained weak, our customers began to respond to newness in our stores.

And during our winter early order period for the specially gift channel, the retailers also responded favorably to our updated assortments. Even though the short term continues to be somewhat challenging, I am pleased with the progress we are making against our long-term product distribution and marketing strategies.

We are evolving and modernizing our product assortments, expanding our reach through opening new full line and factory outlet stores, transitioning to a made-for-outlet format in our factory stores, enhancing our online presence, broadening our department store relationships and intensifying and focusing our marketing efforts.

A little later on the call, Sue and I will provide more details about the progress we are making regarding the key elements of our five-year strategic plan.

The third quarter is certainly a period of important activity as we introduce our new coordinating collections, further intensify our solid microfiber offerings, launch our leather and faux leather halo collections, enhance the visual presentation of our full line stores, add more MFO products to our factory outlets, open 13 new locations and ramp up our marketing efforts.

As we move into the fourth quarter, we believe these initiatives will take hold and that our customers will begin to respond leading to more stabilization in the business. This is reflected in our guidance that Kevin will discuss.

We remain confident in our ability to achieve our five-year target of approximately 1 billion in sales and a high-teen operating margin by fiscal 2019 timeframe.

This is predicated upon a modest comp sales increase in our stores, ecommerce sales growth, new store growth that I will discuss shortly, stabilization of the gift channel, growth in our department store and key account revenues and gross margin expansion through several initiatives including made-for-outlet, product expansion and sourcing efficiencies.

As a reminder, we don’t foresee any significant SG&A leverage opportunity in the long-term and although we expect to reduce expenses in certain areas, we anticipate reinvesting savings in strategic growth initiatives such as ecommerce and marketing. Before I turn the call over to Kevin, allow me to update you on our leadership team.

I believe we have assembled the right group to drive the execution of our long-term strategic plan. We are lucky to have a blend of some executives with important Vera Bradley history and others with a wide range of other industry experiences.

The last open position on the executive team was filled in July when Angel Ilagan joined us as EVP, Chief Marketing Officer. Angel most recently served in a similar capacity with Pandora Jewelry. I will now ask Kevin to provide additional details regarding our results and forward-looking guidance..

Thanks, Rob, and good morning. Net revenues totaled 120.1 million for the current year second quarter compared to 125.4 million in the prior year. These sales were at the top end of our guidance of 113 million to 120 million. Net income totaled 7.6 million or $0.19 per diluted share compared to 15 million or $0.37 per diluted share in the prior year.

For the quarter, Direct segment revenues totaled 78.9 million, a 5.2% increase over 75 million in the prior year. In our stores, second quarter year-over-year net revenues grew 3.5% reflecting the opening of nine full line and six factory outlet stores during the past 12 months, which was partly offset by a comparable sales decline.

Total company comparable sales fell 5.3% for the quarter, which includes a 14.2% decline in the stores, partially offset by a 9.3% increase in ecommerce sales including eBay direct-to-consumer sales. Excluding eBay sales, total company comparable sales fell 8.8% for the quarter.

Going forward we will include eBay sales in our comparable sales calculations. The Direct segment accounted for approximately 66% of total revenues in the second quarter versus 60% last year.

Indirect segment revenues decreased 18.2% to 41.2 million from 50.4 million in the prior year, primarily due to lower orders from our specialty retail accounts as well as a reduction in our specialty retail accounts. Gross profit for the quarter totaled 64.1 million or 53.3% of net revenues compared to 71.8 million or 57.2% of net revenues last year.

The gross margin rate decline was primarily related to overhead costs deleveraging and modestly increased year-over-year online promotional activity. The second quarter gross margin rate was slightly below guidance of 53.5% to 54%, primarily due to a modest increase in online promotional activity.

SG&A expense totaled 51.8 million or 43.1% of net revenues in the current year second quarter compared to 48.3 million or 38.6% of net revenues in the prior year second quarter. The SG&A expense rate was at the low end of the 43% to 44.5% guidance primarily due to cost containment efforts and sales at the high end of guidance.

As expected, SG&A dollars increased over the prior year primarily due to incremental investments related to achieving the five-year strategic plan including key management additions, new store expenses and marketing and ecommerce spending.

Operating income totaled 12.8 million or 10.6% of net revenues in the second quarter compared to operating income of 24.1 million or 19.2% of net revenues in the prior year. By segment, Direct operating income was 16.8 million or 21.3% of sales compared to 19.1 million or 25.5% of sales last year.

Indirect operating income was 15.9 million or 38.7% of sales compared to 21.8 million or 43.3% of sales in the prior year. The effective tax rate was 40.3% for the quarter compared to 37.7% in the prior year second quarter.

The year-over-year increase in the effective rate was due primarily to state tax matters including an incremental reserve related to an ongoing state income tax audit. Cash flow from operations for the six months totaled 32.8 million compared to 27 million for the same period last year.

Cash and cash equivalents as of August 2, 2014 totaled 79.1 million compared to 9.3 million at the end of last year’s second quarter. The company had no debt outstanding at quarter end. Inventory at the end of the period totaled 112 million, below guidance of 118 million to 128 million and compared to 142.9 million last year.

Net capital spending for the six months totaled 12.2 million. Yesterday, the Board of Directors authorized a share repurchase plan using up to 40 million of available cash to buy back common shares through September 2016.

Before I talk about our guidance for the third quarter and full year, let me remind you about what is going on in our Japan business. We have entered into a five-year agreement with Mitsubishi and Look Inc. to import and distribute Vera Bradley in Japan.

We will finish exiting our existing 13 locations this quarter and are working with Mitsubishi and Look to determine the right points of distribution for the future. In fact, Look will open the first locations in October.

As a result of moving to the wholesale business model and exiting our existing direct Japan business, we will account for this business as a discontinued operation beginning in the third quarter.

We expect to incur a pre-tax charge related to Japan in the third quarter of approximately 2 million, equating to $0.03 per share, which will be reflected in discontinued operations and not in our third quarter or annual guidance.

Approximately 1 million of that amount relates to a non-cash charge for a currency translation loss that has accumulated in equity since entering the Japan market over three years ago. The remaining charge relates to the write-off of certain assets, employee severance and other exit charges.

The new wholesale business in Japan is included in the Indirect segment guidance but given the timing of opening the new locations, the impact of the current year sales and earnings guidance is minimal.

For the third quarter, on a continuing operations basis, we expect net revenues to be in the range of 123 million to 128 million compared to the prior year third quarter revenues of 128.9 million.

We expect the Direct segment net revenues to increase in the mid-to-high teen percentage range with comparable sales including ecommerce, which includes eBay sales down in the low-single-digit percentage range. We believe our Indirect net revenues will decline in the low-to-mid 20% range during the quarter.

The gross margin rate for the third quarter is expected to range from 52% to 53% compared to 55.2% in the prior year third quarter. This expected decline is primarily due to overhead costs deleveraging and modestly increased promotional activity.

SG&A as a percentage of sales is expected to range from 43% to 44.5% for the third quarter compared to 36.9% in the prior year third quarter. The deleverage primarily is being caused by incremental investment in key areas like ecommerce, marketing and management.

We expect diluted earnings per share to be in the range of $0.18 to $0.20 in the third quarter of fiscal 2015 based on diluted weighted average shares outstanding of 40.7 million and an effective tax rate of 36.5%. Diluted earnings per share from continuing operations totaled $0.39 in the prior year third quarter.

We believe inventory will be 125 million to 135 million at the end of the third quarter compared to 150.5 million at the end of last year’s third quarter. For fiscal 2015, on a continuing operations basis, we expect net revenues will be in the range of 520 million to 530 million compared to 530.9 million last year.

Our revenue guidance includes Direct segment net revenue growth in the low-teen percentage range with a decline in comparable sales including ecommerce, which includes eBay and the low-to-mid single digit percentage range. Indirect net revenues are expected to decline in the high teen to low-20 percentage range.

The gross margin rate for fiscal 2015 is expected to range from 52.5% to 53.5% compared to 55% last year. This decline reflects overhead costs deleveraging, a slight shift in the channel mix with factory outlet sales being a higher percentage of the sales mix and modestly increased promotional activity in fiscal 2015.

SG&A as a percentage of sales is expected to range from 40.5% to 41.5% for fiscal 2015 compared to 37.9% last year.

We are making certain key investments in the business in fiscal 2015 such as the previously discussed key management hires and incremental marketing and ecommerce expense that will increase SG&A but are intended to enable us to realize our long-term objective. In addition, we are budgeting incremental year-over-year incentive compensation expense.

We do have an active expense control program in place and we are focused on reducing expenses where possible. We have identified and are implementing several cost reductions beyond what we originally identified at the beginning of the year. These include the reductions in supply costs and increased manufacturing and shipping productivity.

Our expectations for diluted earnings per share from continuing operations remain unchanged and range from $1 to $1.10 for fiscal 2015. On a comparable basis, diluted earnings per share from continuing operations totaled $1.48 last year.

We still expect our total capital expenditures to be approximately 40 million for the full year with approximately 20 million related to our corporate office campus consolidation. The balance primarily is related to planned new store openings and continued investment in our systems, including our ecommerce platform.

Let me turn the call over to Sue, who will update you on the product component of our strategic plan.

Sue?.

Thanks, Kevin, and good morning, everyone. As you know, we are working hard to more fully engage our core customers and also to acquire new customers through execution of our product strategy which includes elevating and modernizing our assortment, better promoting our segment and pursuing brand extensions over the long term.

I am really pleased with the progress we are making and the good news is that the customers are beginning to respond to our strategies and to the newness in our assortment.

We are elevating and modernizing our assortment through the introduction of our halo collections of faux leather and leather, intensifying our solid microfiber offerings and launching our coordinating collections.

On August 28, we launched our faux leather collection on verabradley.com in all our own full line stores and about 75 of our top independent gift retails. This launch built on the earlier success of our faux leather, laser-cut tote and wallet launch in men.

There are eight styles in the faux leather collection in a variety of colors and the price points range from $24 to $130. Although it has been less than two weeks and faux leather is a relatively small piece of our assortment, we are happy to report that we are seeing very good early sell-throughs on this product.

Next week we will rollout signature quilted and non-quilted leather collections online in all Vera Bradley stores and to about half of Dillard’s stores. This collection will feature six styles in several colors and color combinations.

Leather prices range from $98 to $298, certainly elevated from our typical price point but still very competitively priced. The faux leather and leather products feature our trademark distinctive and fun prints on the inside.

We will continually refresh and expand the colors and styles of our laser cut, faux leather and leather products, but as a reminder, these halo products will represent no more than about 10% of our assortment going forward. I believe our two biggest needle movers will be solid microfiber and our new cohesive collection.

Solid microfiber continues to be a big win for us with black continually one of our top sellers. In addition to black, we consistently include several other seasonally appropriate solid colors in our mix.

In October, we will introduce our first comprehensive collections including strips and small geographic inside-out prints that coordinate back to our signature patterns in solids.

This year we have already introduced cotton quilted and faux leather totes and other products in some of these smaller coordinating geometric prints and they have been among our best sellers. In fact, several of the small prints have had better sell-through rates than the larger signature patterns.

While our traditional cotton quilted products will continue to be an important piece of our assortment, we are substantially lessening our dependence on them and diversifying our offering. By the end of the fourth quarter, we expect one-third of our assortment will be new products including leather, faux leather and our collection pieces.

As we better focus our assortments, we are reducing the number of signature cotton quilted pattern launches from 18 last year to 14 this year to 11 the following year. The gap left by the reduced signature patterns is being filled in with these halo products, solid microfiber and collection pieces I just discussed.

Our SKU reduction has resulted in a substantial increase in our SKU productivity. Part of focusing our assortment is majoring in the majors, making a bigger impact in the big volume drivers and classifications Vera Bradley is known for and what we do best like travel, backpacks, bags and accessories.

A good example of majoring in the majors is our increased backpack assortments this back-to-campus season adding new styles and a new water-resistant lighten-up fabrication. Sell-throughs have exceeded our expectations.

Another example is our planned travel collection expansion adding new travel totes, hard-sided luggage, rolling luggage and our new lighten-up fabrication and accessories updated with more solids. This will launch next year. Over the long term, we will pursue brand extensions that will enhance our position as a lifestyle brand.

We will either do this in-house or look for the right strategic partners or licensees that can augment the brand and provide an established distribution network for certain categories of business.

For example, we have entered into arrangements with two strategic jewelry partners to re-launch and expand our jewelry offering, elevating the esthetic and increasing our customer reach. This will launch early next year in our stores, online and in our specialty retailers.

We are very optimistic that these product changes will lead to better sell-throughs, increased revenues and higher gross margins over time. We are also taking other actions that we believe will expand our future gross margin rate.

For example, we are in the process of building a more nimble, efficient and lower cost supply chain through vendor and country diversification. We are broadening our base to countries outside of China where the majority of our goods are manufactured through other countries with expertise in specific product classifications.

We are also improving efficiencies and processes in our domestic facility. We believe that we can further reduce our manufacturing cycle and sourcing costs as we move into next year.

Rob?.

Thanks, Sue. Let me give you an update on the multichannel distribution component of our strategic plan. We plan on growing our relatively small store base over the next few years. During the second quarter, we opened one full line store in the Houston Galleria.

We will add eight additional stores in the third quarter and early in the fourth quarter bringing our total for the year to 13. As we have previously discussed, we believe we will add an average of 20 to 25 new stores per year going forward equating to about 300 full line stores over time.

While we are still working on creating our new prototype full line store that should launch next year, we are making in-store presentation changes soon. We have developed a new visual merchandizing approach that will not only showcase and highlight our collections but also improve our SKU count on the floor.

These store visual changes will be implemented in late October. We opened four new factory outlet stores in the second quarter in Las Vegas, Denver, Knoxville and Louisville. Nine new factory outlet stores are slated for the third and fourth quarters bringing the openings for the year to 14.

We continue to believe we can open an average of 10 to 15 stores per year with an opportunity to have over 100 factory outlet stores in the long term. Our new factory outlet store growth is permitting us to liquidate existing inventory and to move up our MFO introduction a bit earlier.

We were able to introduce a few key made-for-factory items into our assortment in the second quarter and collectively they were a big success with meaningfully higher sell-throughs and gross margins than our traditional outlet in merchandize.

While these six MFO styles did not represent a significant portion of total inventory, their performance gives us confidence that we are proceeding in the right direction as we more fully transition into an MFO model.

We will flow more factory exclusive product in the fall season and expect that our mix of MFO product will be around 25% in the early part of next year. Within five years, we expect that factory exclusive will compromise approximately 70% of the product in this channel.

We will focus our inventory investment on key MFO items in our assortment so that our customer should always be able to find the items they want. This MFO strategy is a profitable, financial model that should drive sales and gross margins over time. Ecommerce is an integral component of our five-year plan.

We have made the decision to transition to a new web technology platform over the next couple of years, which will allow us to offer an omnichannel experience for our customers and we’ll offer significantly enhanced search capabilities, management or promotions, personalization and segmented customer experiences and multi-site support for the separate full line and factory sites.

While we don’t expect this transition to be fully complete until 2016, certain assets will be implemented in 2015 and in fact we have already been able to make some enhancement to the site to drive customer acquisitions, full price conversion and retention.

Specifically, we enhanced the navigation, improved the browsing and sorting capabilities, added customer survey and cart-side abandonment e-mails and most recently added product recommendations. In addition, we survey our customers about their web experiences and are taking the feedback and making changes to our site.

For example, based on customer feedback, our product content and scale of the product displayed has been improved. We will be able to pull these high ROI enhancements forward to the new platform. Year-over-year conversion, number of transactions, UPT and most importantly sales all increased during the quarter.

As we work towards improving the productivity in our Indirect segment, we are placing greater focus on department stores.

Importantly, we have hired a VP of Wholesale, Debbie Kozlowski to oversee the department store relationships as well as our key accounts such as QVC and Disney and to help cultivate new department store and key account relationships.

Debbie comes to us with a relative experience from Marc Jacobs, Coach and Cole Haan and has established great connections with the department store industry. With Debbie’s leadership we will build a long range department store growth plan.

Department stores are the number one destination for handbag purchasing and they will be a great place to showcase our modernized and elevated assortments. Our presence in department stores will allow us to acquire new handbag customers and will offer great venues as we expand into more lifestyle categories.

Dillard’s remains an important relationship for us and they are the central platform for our upcoming leather launch. We also introduced a limited selection of our products primarily focused on back-to-campus in 70 Macy’s stores across the country in July. Initial results have been encouraging.

We are pleased with the Macy’s relationship and expect to further enhance our distribution, product assortment and store presentation with them later this year. We remain focused on improving the productivity of the indirect specialty gift channel.

Even though the specialty gift business will become a smaller percentage of our total revenue base over time due to the growth in other channels, we are working closely with our retail partners to stabilize this part of our business by carefully controlling and balancing inventories and by better tailoring and segmenting our product assortments by door.

Beginning next year, we will be operating our specialty gift retailers some exclusive products. We are particularly focusing on growing the sales of our largest accounts, which represent the Vera Bradley brand best. Let me add a little more color on Japan.

As Kevin mentioned, we are working closely with Mitsubishi and Look to determine the right points of distribution for our brands. They have an unparallel retail network of department stores, boutiques and free-standing stores throughout Japan as well as distribution and retail partnership with several internationally renowned brands.

Look expects to open a shop on October 4 in the high-end Takashimaya Tamagawa and a flagship store in the trendy Daikanyama district of Tokyo on October 25. They are targeting as many as 25 Vera Bradley locations in Japan by the end of our five-year agreement. Lastly, let me touch on the third strategic component of our strategic plan marketing.

Our marketing goal will be to generate excitement and desire for the aspiration of the Vera Bradley brand attracting new customers while continuing to foster strong connections with our loyal fan base. We want to modernize and strengthen how the brand is perceived. More of our spend will be allocated toward our halo brand enhancing assortments.

For example, our comprehensive creative campaign for our leather and faux leather launches is underway, which includes a strategic combination of carefully placed national ads, special events, social media with the focus on Twitter and Instagram and creating buzz to bloggers and fashion influencers.

We will broaden our customer reach by reallocating a portion of spend away from direct mail and increasing spend in digital and print ads as well as leveraging and expanding our data base to conduct more segmented targeted emails. We will focus less on promotions and more on new products in our collections.

Through market initiatives, we want to increase the quantity purchased, the number of categories purchased and the timing and frequency of purchases. Before we take your questions, I want to remind you that we will host an Investor and Analyst Day on Tuesday, October 7 at our New York City Design Center.

If you are interested in attending, please RSVP to Julia Bentley by September 19 at jbentley@verabradley.com. Operator, we will now open up the call to questions..

Thank you so much, sir. (Operator Instructions). Our first question comes from Randy Konik with Jefferies..

Hi. Thanks, guys. I guess first, Rob, your tone sounds better than the last call. You mentioned the word encouraging with Macy’s.

Can you just like expand upon that tone and the encouragement your talking around Macy’s? Are you feeling better about the reception to the new products? I guess you’ve obviously said that, but what are you kind of – just expand upon some of the improvements you’re seeing a little bit more? And then I saw that you guys announced, it looks like you’re first ever share repurchase program.

Is there any color on how aggressive you may be with that and is that a signal that you feel like you’re starting to get stabilization or some visibility back into the business? And I guess lastly, as it relates to the comments that are around editing down the assortment or the new pattern introductions, if I look on the website under the colors or patterns, there are still 30 kind of patterns that a person can choose from.

Is there some sort of like strategy going forward that there will be more of a statement made on a few trends rather than 30 different things to choose from, from the consumer standpoint because it seems a little overwhelming to look at? Just want to get some perspective there on editing the assortment both online and in-stores. Thanks..

Great. Thank you, Randy. Yes, a few things. We are beginning to see some green shoots in the business. A lot of the initiatives that we’ve put in place were starting to get some early reads. It’s important to keep in mind that again they are green shoots, they are relatively small to the total performance.

But some of those things that we are seeing, we did see a nice turnaround in our ecommerce business as a lot of these new enhancements we put in place started to take effect.

We were getting a good return on those investments, so that was encouraging and we spoke to as we started to put small prints out in the marketplace, the customer responded very well, the customers responded well to faux, the customers been responding to new silhouettes kind of like the Vera trend product line that we’ve put out there.

So we are beginning to see some of those encouragement out there in terms of strategies that we’ve been betting on. So that’s been encouraging to see. On the flipside, the ones and that we are still seeing is customer traffic still is one of our challenges.

The one area in our strategic plan that we’re still working through right now is all of the marketing initiatives and the marketing plan and with Angel just coming on board, that’s a little bit further behind in the implementation in the product and distribution initiatives.

So that’s the next one that we really need to see come online and start hitting and get customer traffic back into our store. That would be the next tipping point that we’re looking at. In terms of the 30 patterns that you see online, there’s a few things to talk about that. First of all, we are absolutely editing patterns down.

We’ve already committed to go from a height of 18 down to 11 as we go into next year. But I think part of what you’re seeing too with ecommerce and how is that getting reflected on ecommerce. And one of our tricks short term is that our ecommerce site is not only showing what is current and fresh in our stores but it’s also showing our outlet product.

And that’s where we still would end up having an over assortment. So we’ve talked about that we’ve been going through this web platform evaluation that we do see change in our platform.

We are working to split apart our factory and full price presentation, which will really clean up that by moving all of the auxiliary patterns and inventory over to a factory site. But at this point that’s still far off and probably looking at the beginning of '16 in order to get that done in terms of calendar '16.

I think your other question was regarding the repurchase program and Kevin, you want to jump in..

Sure. Hi, Randy.

How are you?.

Good..

Good. As you know, we have a strong balance sheet. We’re very liquid and even during tough times we’ve experienced very strong cash flow. So we’re very comfortable. We can invest in the business to support our long-term strategy. And then we’re also obviously confident in that long-term strategy given the green shoots that Rob just talked about.

So we believe it’s the right time to bring some value to the shareholders. As far as how aggressively we’re going to buy, it’s going to most likely be an open market type of purchase, so we’ve only got a few weeks each quarter we can buy back.

So I don’t expect this to be an aggressive buyback and we’re not contemplating right now anyway an accelerated repurchase program..

Great. Thanks a lot, guys..

Thanks, Randy..

Our next question comes from Dana Telsey with Telsey Advisory Group..

Good morning, everyone, and nice to see here the improvement and especially the product enhancements that are being made. It certainly sounds like on some of the new product with the halo product.

How is the margins on that? Is it in all stores? How much of it is in the department stores? And how much differentiation in the product between channels will there be? And are you beginning to attract a different customer or is it too early?.

Great question..

Thank you..

I think a few things. One, in terms of our faux leather product right now it is in all of our direct stores, it’s online and is at 75 of our independent partners or about 300 stores.

So we definitely kept the launch tight in the indirect channel just because it was a new launch and we wanted to make sure that we did not put too much inventory into that channel as we might have historically in the past.

But we’ve been very, very encouraged by the performance so far and there definitely is a lot of demand in our indirect channel for expansion of the product line going forward. So that’s been very encouraging.

You also see by that what we really have been doing is focusing a little bit of product segmentation to use faux in our indirect channel as a point of differentiation and on the flipside with our leather launch are really focusing that not only in all of our direct stores and online but in Dillard’s.

And we decided to launch in half of the Dillard’s stores for the same reason in terms of we wanted to make sure with the new launch we did not over saturate the market initially, but we’re very excited about that upcoming launch and can’t wait to see the results..

And then when you talked about lower cost supply chain, how does that develop and how does that impact the margins go-forward? Is there a timeframe for that?.

Yes, actually. This is Sue. We believe that by end of next year is when we will start to see some improvements from the supply chain initiatives that we are moving forward with. Country of origin, diversification certainly will help with that in addition to the product mix that we will be layering in. MFO is an example of that..

Thank you..

Thank you..

We’ll take our next question from Jennifer Davis with Buckingham Research Group..

Good morning. A couple quick ones if you don’t mind and I don’t know if you can answer this, but I’m going to ask anyway. Are you planning on entering any additional Macy’s stores before holiday? And then I was just wondering I think Sue that and Rob you said that leather would be in half of the Dillard’s stores.

Will it be in any of the Macy’s stores? And then finally just made-for-products or the made-for-outlet products, just wondering if you could expand on that a little bit? Is it kind of excess material you have so kind of old patterns that you’re making into outlet product and it’s different styles or will it be different styles or different patterns or what if you could elaborate on that a little bit? Thanks a lot..

First, I’ll talk a little bit about what’s going on with Macy’s and then I’ll turn it over to Sue to talk a little bit about MFO and how we’re building that product. But in terms of Macy’s, we’ve been very happy with that relationship and Macy’s has been encouraged by the initial sell-through.

So we are working through with them on expansion both in terms of the amount of square footage that we have in their existing stores as well as potentially other stores. We want to continue to move forward in a nice prudent manner and make sure that we’ve really enhanced the presentation as we work through this together.

But the relationship is off to a very nice start. The customers are responding very well and we think that there’s a great future in the department store channel..

From an MFO perspective, you’re first question is related to the fabric and in the early stages we have been utilizing excess fabric. We do as we see that evolving over time as we continue to test into this segment of business and to potentially just having fabrics and patterns that are exclusive to that channel of business.

From a styling perspective, we were fortunate enough to be able to test 20 top selling styles and silhouettes that we knew the consumer was responding to early on. We have another 23 that are going into test mode in the next couple of months and we will continue to flow those in as we see the consumer response..

Jennifer, the margins on those have been higher than the signature quilted patterns as well, which has been nice to see..

Yes, the other thing that we’ve seen is the productivity on those new MFO styles not only from a margin standpoint but from a rate of sell-through standpoint, we’ve been getting significantly higher SKU productivity than the core factory assortment.

So it’s really encouraging that customers are responding extremely well and at the same time extremely profitably for us..

All right, great. Kevin, can I squeeze one more in quickly? Did you guys clear through that 5 million to 7 million of liquidation inventory that you had, did you clear through that in the second quarter? Thanks..

We plan to sell 5 million to 10 million this year and we have sold north of 5 million already in the first half of the year, so we expect to probably be on the top end of that range as we exit the year..

All right, great. Thanks a lot..

So we’re feeling good about inventory, Jennifer, overall..

All right, great. Thanks..

Thank you so much. Our next question comes from Steve Marotta with CL King & Associates..

Good morning, everybody. Thank you for taking my question. SG&A costs in the third quarter are implied to be in the $55 million to $56 million range, which is an uptick from the second quarter of roughly 52 million. You mentioned investments in management and marketing, I believe you said retail stores as well.

Can you possibly just aggregate what’s fixed and variable within that and maybe what the marketing budget is expected to be in the third quarter of this year versus the third quarter of last year?.

They will be a slight uptick in marketing spend in the back half of this year, call it 1 million, maybe a little more than 1 million from a marketing perspective.

A lot of what’s going on though in Q3 and Q4 is we have 17 stores opening in Q3 and Q4, so if you just think about the start-up costs as it relates to the stores, it’s a lot higher than the prior year. In prior years, we opened a majority of our stores in Q1, Q2 and very early Q3.

The other thing that’s happening is the annualization of a lot of our key management hires. So we’ve got most people on board now, so a lot of that’s annualizing into Q3. And keep in mind our revenue number is still pretty soft in our opinion anyway in Q3 and that’s why that percentage is high as well.

The only other thing we’re doing is we’re investing a little bit more in the web as well in the back half of the year. So there’s some web initiatives that we’re investing in and that’s playing into that percentage as well..

Okay.

The second question is, is it accurate to say that the expected and implied increase in the fourth quarter EPS growth on a year-over-year basis is predicated upon accelerating sell-through of new product between now and year end?.

It plays into it obviously but if you look at the numbers for Q4, a lot of it is just all these stores we’re opening and the benefit we’re getting from them. So if you think about the factory stores, for example, we’ve typically opened four or five a year. This year we’ll be opening 14 and all of those will be opened before the holiday.

So a lot of that being able to kind of meet, if you will, the EPS for Q4 this year versus last year has a lot to do with all the stores opening as well as getting the web back on track and getting that growing again. So those are probably the two biggest things from a top line perspective that are going to help us.

Obviously what’s playing against that some still is the Indirect segment as well as opening all the stores from a start-up cost perspective. And then one other thing I’d mention is keep in mind, we did take inventory reserve last year, about 5.5 million. So that’s a really big number that we don’t expect to annualize this year..

Okay. That’s very helpful. And it also leads into my final question. Robert, you mentioned stabilization in the indirect channel as being a key goal in the near term.

When do you see that happening on a rough basis where that channel is either flat or slightly positive?.

In terms of the channels we talked about when we did our early order period for our winter delivery, we definitely was very encouraged by how our partners were responding to that offering. So we’ve begun to see a slight turnaround there. We have not seen that yet in the reorder line.

So we need to begin to see that in the reorder line, but we’re hoping as we get towards the end of this year that that channel is beginning to stabilize and really move away from these significant double-digit drops, something that’s much more manageable because that definitely has been very challenging to overcome on the earnings line, but we do expect that to start to move the other direction as we get through this year..

Very helpful, thank you..

(Operator Instructions). We’ll take our next question from Mark Altschwager with Robert W. Baird..

Good morning and thanks for taking the question.

Just on the sales side, could you break down in a bit more detail the performance of the new go-forward product versus the performance of some of this clearance and retired product, just trying to get a better sense of the underlying run rate of the business once that liquidation is complete? And then separately on the indirect side, I’m not sure if you touched on this.

What are the sell-through rates that your partners are seeing in the indirect channel and if you could let us know the indirect store count today and your target for year end?.

On the indirect, maybe taking your last question, we do survey about 300 of our retailers and just talk about inventory levels and I can tell you the inventory levels from a retired perspective continue to come down. We don’t get a significant amount of sell-through data to be able to report that externally.

But the good news there is we think their inventory position continues to improve. And as far as productivity of maybe the new SKUs, maybe Sue can talk a little bit about the productivity of the new SKUs like the small prints and things like that..

Yes, Mark, good morning. We’re very pleased actually with the results especially on some of the new smaller patterns as we described. We’ve seen in some cases double digits SKU productivity increases on that product..

And then with regard to liquidation, we do feel like as we exit this year we’ll be in a better place from a liquidation perspective. Obviously, we’re accepting a lower margin on that liquidation product. So to the extent we exit the year in a better position from an inventory perspective, that will help us long term..

And part of what’s been really encouraging as we look at the performance in the new product as Sue was mentioning that the SKU productivity is significantly up on the new product versus the old product. And as we move into fourth quarter, about 30% of our product offering will be in what we call new.

So we’re very excited to see that impact on the business as we move into fourth quarter..

That’s helpful. Thanks.

And Rob, you did touch on this, but could you just talk a bit more about the new customer acquisition efforts? Recently you hired the EVP of Marketing, and I’m sure we’ll hear more in October, but just curious in what’s going to change in the back half of the year and what’s going to be specifically to target that 20 to 40-something customer where you’re under index today?.

It’s a great question and we’re taking what I’ll call a few foundation or small steps immediately. So first of all, what you’d see is with the leather and faux leather launch that’s out there we put marketing behind it and really targeted that customer.

The spend is definitely moving towards both the fashion magazines and the digital arena, again specifically to attract that new customer that we’re trying to get, so that’s the first step that we took even before Angel joined the team and I think we’re going to refine that strategy as we go forward.

The second thing that we’re doing is really working on our data base and really making sure that we can expand our data base capture in terms of how many customers we know and how we can contact them. Those are some of the early steps that Angel has already started on.

And then obviously he’s working through kind of a full strategic plan on marketing and we’ll be able to share more of that as we get to October..

Great. Thanks and best of luck..

Thanks, Mark..

Next, we’ll move on to Oliver Chen with Citi..

Hi. Thanks for all the details; exciting plans ahead.

Regarding your comp store sales guidance, how do we interpret how traffic and AURs may trend here and what’s incorporated in your guidance level? Also on a longer term basis, what should the relationship be with your own website versus eBay? And also as you engage in the indirect strategies, how should that mix of revenue change over time? And our last question was on the outlet side of the business and what you’re seeing with the promotional environment and couponing and if you’re seeing some abatement there, given the progress you’re speaking to? Thanks..

Oliver, with regard to traffic and AUR, we expect mild improvements in the back half of the year. We did see that in Q2 if you think about how we started the quarter in May, traffic was dismal at best. And as we exited July, July traffic was I’ll call it okay even though it was still obviously down in our stores anyway.

But it definitely improved throughout the quarter. We expect some modest improvements in traffic in the back half of the year. From an AUR perspective, some of this new product may move up the AUR a little bit. It’s not big enough to make big movements in the AUR, but our plan is for AUR to slightly go up in the back half of the year..

On traffic, are you communicating that it will just be less negative or are you hoping for positive?.

That’s correct. In our stores, we expect it – brick and mortar stores, we still expect it to be negative..

Okay. Thank you..

Regarding the ecommerce and eBay, it’s a great question because here’s what we’re finding on eBay is we feel that there is an opportunity to move some of our liquidation activity off of our core site and move it onto eBay site. What we’ve found by doing that is one, we are reaching out to a different customer on eBay.

It also allows us to focus our site on more full price product and less on the liquidation market. So over time, we believe there’s a real opportunity to migrate a little bit in terms of where the liquidation product is sitting.

Part of the reason we wanted to combine those results is not only is it a direct consumer situation for us with eBay where they pass the orders through and we fill it, but even more important we’ve seen that there is an ability to kind of move this clearance onto eBay and we did not want to overstate what was happening in our ecommerce space overall.

So we do think it will be brand enhancing for us over the long term..

And what about your indirect channel overall? Is the mix going to decrease or will an offset be as you engage in more department store relationships over time?.

Yes, for the current year you can tell by our guidance obviously we’re still expecting the indirect channel to be down low 20s for the full year. So not a big mix change as you think about how we exit this year.

As we continue to build the department store base and to build the key accounts, that will help increase the indirect segment of the business but the direct side will still grow quicker than the indirect side just because a big part of our LRP and our long-term strategy is to grow the store base and to get ecommerce growing on a consistent basis..

Thank you.

And the outlet side, what are your thoughts on how the promotional environment looks and has there been some relief there?.

Yes, from a promotional standpoint particularly as we came through the end of July, we saw some improvement in terms of performance in the outlet world but obviously we’re continuing to watch it very closely. Traffic in the outlet side of the business is also down.

So we still are seeing a weakness in traffic but overall in the channel some stabilization in the promotional activity..

Thanks. And Robert, just a final question.

Within the context of the department store channel, what are the adjacencies? Like are you comfortable with where Vera Bradley is getting placed and what are you typically next to in the store and do you feel like there’s more opportunity for developing the aspiration in shop-in-shop over time and what should we notice when we check that out? Thank you..

Yes, a couple of things. In terms of where we see adjacencies is we’ve spoken with our department store partners. We really see Vera Bradley as kind of what I’ll call perfect bridge and the bridge would be between – on one side you have Coach, Michael Kors and Kate Spade and then on the other side you have brands like Dooney & Burke.

And we feel that we really are the brand that kind of can bridge that well to play both in the aspirational designer market at the same time more on kind of this core functional handbag business that some of the other players play in.

So, we definitely are looking to enhance our presentation in the department store world, moving to more hard-shop presentations, stronger brand presentations.

As we talked about in Macy’s, we ran very quickly in both Macy’s and us, got product in their stores in kind of a hyper timeframe and now we’re really going back with them and working on improving adjacency, improving the presentation.

They’ve been good partners with that and we continue to look at how we have upgraded our presentation throughout our department store channel..

Great. Thank you. Best regards. Looking forward to the Investor Day..

Thank you, Oliver..

Thank you so much. (Operator Instructions). We’ll take our next question from Ike Boruchow with Sterne Agee..

Hi. It’s actually Tom Nikic on for Ike. Thanks for taking my question. I guess I was just wondering about the sales in Q2 and I guess thus far in Q3, have you seen any sort of change in the cadence like are things getting sequentially better? Did things change as the quarter progressed or anything like that? And then also just a housekeeping question.

The sales via eBay, were those previously in the indirect channel and are now being counted as ecommerce or is there any change in the treatment of those sales? Thanks..

No problem, Tom. With regard to the sales of eBay, they used to be in and are still in the direct segment of our business, but think about them in the non-comp part of our direct segment. So they’ve always been there.

And then with regards to Q2 sales, I think you mentioned Q2 sales, how they progressed? It basically did sequentially get better for us during the quarter. And then as you think about it, as you get into August, obviously August is baked into our guidance and we use that to come up with our guidance.

We did see a little bit of an improvement in our winter EOP selling and to our indirect side of the business. So that gave us a little confidence that at least the indirect side of the business likes what they’re seeing.

We still have to wait and see if it results in increased reorders because that will give us a little more confidence, but nevertheless they like what they’re seeing from a product perspective which gives us a little more confidence that we’re going in the right direction..

Okay. Thanks. I guess I was just also wondering about the full year sales guide.

I guess it looks like you just raised the low end by 10 million and it seems like there weren’t really any changes to the indirect guide or the comp guide, so I was just kind of wondering like how it is that the low end moved up by 10 million?.

Yes, very slight improvements maybe across the board but also the overachievement of Q2 plays into that as well because we’re at the very top end of our range from a revenue perspective that helped us.

We’ve also seen some good traction from selling our liquidation product as well, so we moved over 5 million in the first half of the year and we actually estimate we can at least move that in the back half of the year..

Okay, great. Thanks very much..

Thank you so much. And that is all the time we have for our question-and-answer session today. At this time, I would like to turn the conference back over to our presenters for any additional or closing remarks..

Thank you. Our team members throughout Vera Bradley have made great strides and they inspire me daily. I am very pleased with the progress we are making against our five-year strategic plan. We carefully laid out our plans six months ago and are executing to it.

We are evolving our products, distribution channels and marketing to drive sales, profitability and shareholder value. We obviously have a lot to do but I hope that you share my optimism and excitement about the future of the Vera Bradley brand. Thank you for your interest and time..

This will conclude today’s conference. We thank you for your participation..