Mark Dely - Chief Legal Officer Rob Wallstrom - Chief Executive Officer John Enwright - Interim CFO Theresa Palermo - Chief Marketing Officer.

Ed Yruma - KeyBanc Capital Markets Eric Beder - Wunderlich Securities Oliver Chen - Cowen and Company Mark Altschwager - Robert W. Baird.

Good day. And welcome to the today’s Vera Bradley First Quarter Fiscal 2018 Earnings Conference. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mark Dely, Vera Bradley’s Chief Legal Officer. Please go ahead, sir..

Good morning, and welcome, everyone. We’d like to thank you for joining us for Vera Bradley’s first quarter 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 January 28, 2017, 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. I will now turn it over to Vera Bradley’s CEO, Rob Wallstrom.

Rob?.

Thank you, Mark. Good morning, everyone, and thank you for joining us on today’s call. John Enwright our Interim CFO was also on the call and Theresa Palermo our Chief Marketing Officer will also be available to answer questions.

Challenges in the retail environment continued into the first quarter, although April sales trends did improved over those in February and March. Total revenues were in line with our expectations, while our gross profit percentage was slightly below our guidance.

Our first quarter net loss per share of $0.09, excluding severance charges, was better than guidance, primarily due to expense management, the timing of certain expenses and a lower than expected tax rate.

As a reminder, our primary objective in fiscal 2018, is to increase our customer count in order to do this, our focus is on three things; first, driving brand desirability through a robust marketing program and focused on clarity; two, drive product desirability through focusing on our core assortment and strategically leveraging license and opportunities to expand the brand reach; and three, strengthen our distribution network; focusing on driving comparable sales in our core businesses, including continuing to strengthen our digital flagship and closing up to 15 underperforming full line stores.

Executing these three key goals can position Vera Bradley for the future and improve profitability. We will bring you up to date on our progress after John gives us a brief update on our first quarter results and our outlook for the balance of the year. John..

Thanks, Rob and good morning. Let me go over few highlights for the quarter. The non-GAAP current first quarter income statement numbers that I will discuss exclude previously disclosed severance charges. Revenues up $96.1 million were in line with our guidance of $94 million to $99 million.

Current year first quarter direct segment revenues totaled $68.8 million, a 5.6% increase from the $72.9 million in the prior year first quarter. Comparable sales, including e-commerce, increased 12.5% which were partially offset by new store growth.

First quarter sales were negatively impacted by year-over-year declines in store and e-commerce traffic, and as expected, e-commerce sales were partially impacted by the disruption caused by the conversion to a new platform.

As expected, indirect segment revenues decreased 15.2% to $27.3 million from $32.2 million in the prior year, reflecting a reduction in the number of specialty accounts coupled with reduced orders from specialty retails and certain key accounts. Our gross margin was 54.8% compared to 56.7% last year.

The 190 basis point decline primarily related to channel mix changes and increased promotional activity in our factory stores, which also caused our gross margin to fell modestly below the low end of our guidance range of 55% to 55.5%. Excluding severance charges, our SG&A expense dollars were essentially flat on a year-over-year basis.

As a percent of sales, SG&A was 58.7% this year compared to 53.6% last year. The expense rate was favorable to our guidance of 61.1% to 63.3% due to expense management and timing of approximately $1 million of marketing expenses that are expected to be incurred in the remaining three quarters.

Excluding severance charges, our operating loss totaled $3.5 million or negative 3.6% of net revenues in the current year compared to operating income of $2.9 million or 3.7% of net revenues in the prior year. By segment, direct operating income was $6.8 million or 9.9% of sales compared to $12.1 million or 16.6% of sales in the prior year.

Indirect operating income was $9.4 million or 34.6% of the sales compared to $12.6 million or 39.1% of sales in the prior year. Net capital spending for the first quarter totaled $3.4 million. During the first quarter, we repurchased approximately $1.2 million of our common stock, equating to approximately 132,000 shares at an average price of $9.11.

We have approximately $20 million remaining on our repurchase authorization. Cash, cash equivalents and investments at quarter end totaled $101.4 million compared to $81.8 million at the end of last year's first quarter. We have no debt outstanding at quarter end.

The quarter end inventory was $105.4 million to $113.4 million at the end of the first quarter last year, and in line with our guidance of $100 million to $110 million. Let's just focus to our outlook for the second quarter and full year. Our guidance reflects extremely challenging and unpredictable retail competitive environment.

Keep in mind that the prior year numbers speaks store impairment charges and other previously disclosed excluded item. Current year estimates do not include severance, impairments, store closing and other charges. For the second quarter, we expect net revenues of $111 million to $115 million compared to prior year of $119.2 million.

We expect direct segment net revenues to be relatively flat to up low single-digits compared to last year, including a comparable sales decrease, including e-commerce, in the low to mid single-digit percentage. Based on recent trends, we believe our indirect net revenues will be down to 20% to 25%.

Our gross margin for the second quarter is expected to range from 57.5% to 58% compared to 57.4% in the prior year. The expected improvement is primarily driven by overhead savings. SG&A as a percentage of sales is expected to range from 52% to 52.5% for the second quarter compared to 48.5% in the prior year, excluding charges.

Deleverage is primarily due to the expected reduced revenues in the quarter. We expect diluted EPS to be $0.09 to $0.11. Excluding charges, net income totaled $6.7 million or $0.18 per diluted share in last year's second quarter.

We expect inventory to be in $100 million to $110 million range at the end of second quarter compared to $96.5 million at the end of the second quarter last year. For the full year, we still expect net revenues to be $460 million to $480 million compared to $485.9 million last year.

Our revenue guidance assumes direct segment net revenues to be relatively flat to up low single-digits compared to last year with comparable sales, including e-commerce, down in the low to mid single-digit percentage range. Indirect net revenues are expected to decline in the mid to high teen percentage range for the full year.

Our gross margin for fiscal 2018 is expected to range from 56% to 56.5% compared to 56.8% last year. The expected decline relates to increased promotional activity and channel mix changes, partially offset by planned overhead savings.

SG&A as a percentage of sales is expected to range from 50.8% to 51.3% for fiscal 2018 compared to 48.5% last year, excluding charges. The planned increase relates to the annualization of new store expenses, incremental incentive compensation related to resetting targets and incremental depreciation associated with digital flagship.

In addition, deleverage is expected due to softer sales. We expect diluted EPS, excluding charges, for the full fiscal year to range from $0.40 to $0.50. Before charges, diluted EPS totaled $0.72 last year.

We expect our net capital expenditures will total $10 million to $15 million for the full year, primarily related to new factory store openings, full-line store renovations and continued technology investments. Let me turn the call back over to Rob, who will give us an update on initiatives for fiscal 2018.

Rob?.

Thanks, John. As I mentioned earlier and we discuss in detail on our last conference call, our number one priority for fiscal 2018 is to grow our customer count by driving more traffic into our stores and verabradley.com.

In order to do that, we must increase our brand desirability increase our product desirability and strengthen our distribution platform. Driving brand desirability primarily revolves around our comprehensive marketing efforts.

We have created a multifaceted marketing program this year, expanding upon our successful It's Good to be a Girl campaign introduced last fall. Our marketing campaign and brand positioning are modern and fresh but are still authentic and continue to reinforce our unique heritage.

Our spring campaign, highlighting our brand messaging and beautiful solutions and offering stories of optimism and female empowerment, launched at the end of the first quarter. We are continuing to broaden our reach by partnering with key influencers and leveraging their social media channels to increase our brand awareness.

In addition, we will continue to work with other high profile partners to enhance our image and expand our reach. A great example is, our sponsorship of and participation in, TLC’s six episode reality competition TV show called Girl Starter, which debut on April 28th. Each episode has integrated our product and It's Good to be a Girl clips.

The fourth episode, which aired on May 19th, even featured a builder challenge where the contestants were charged with providing the ultimate Vera Bradley starter bag, reinforcing our Beautiful Solutions message. And our founder, Barbara Bradley Baekgaard, was a guest judge on the episode.

And limited editions of the two bags created by the contestants are now featured on verabradley.com. Our initial online inventory supply sold out within hours. We are continuing with this partnership as Girl Starter embarks on intensity tour and selects contestants for season two.

And we will continue to leverage marketing analytics to optimize our media spend in order to increase our customer count and conversion. As we continue to enhance our product desirability, we are focused both on our core and creating newness.

We will continue to focus on our five core categories of fashion bags and accessories, travel, campus, wellness and beauty and home with particular attention to our top 10 best selling items in each channel. Beautiful solutions is always top of mind as we design and deliver products to our customers.

To us, offering Beautiful Solutions also means adding functionality and innovation, such as RFID blocking technology and all wallets and charging pockets and all appropriate bags and accessories by end of the year. Reinvigorating and reinventing time, which remains the most important piece of our business, is a key focus for us this year.

Our fall 2017 collection will feature are new micro quilting as well as some other unique quilting and stitching patterns. We will also add more modern silhouettes to the cotton collection.

Licensing is an important part of extending our brand and reaching new customer to markets, and we are strategically layering in licensing opportunities where they make sense. Vera Bradley technology products, including smartphone and tablets case power solutions and portable audio launched in March, and our swimmer collection launch this month.

Our bedding, stationary and hosiery collections will be introduced in July. We have already received some great press and industry excitement about these brand extensions and continue to see an extremely positive response from the market in terms of placement in both existing and new distribution.

In April, we announced our Plan 4A into medical uniform, which will be introduced in 2018. And we believe this will be the perfect fit for our brand as our research indicates that nearly 20% of our customers identify themselves as working in the healthcare industry.

As we look at our distribution network, we are pivoting from a growth mode to focusing on our core channels and working to drive comp sales. Our verabradley.com digital first strategy is key to our long-term growth. The re-launch our digital flagship platform went live in February.

We work through the first quarter troubleshooting issues and making additional enhancements, and the new site now offers a substantially enrich brand and shopping experience. We will continually push for additional opportunities to improve our customers’ experience and increase conversion through design changes and upgraded functionality.

Second quarter enhancements will improve the addition of the get now feature and improve shipping and tracking solution, product vignette pages for products like bedding and swim. Continued improvement in the site speed and additional visual enhancements to our checkout page intended to make the progress easier and to reduce cart abandonment.

We also just underwent a comprehensive Web site and e-commerce review by a third party benchmarking us against 100 other retailers on various criteria. We were happy that our composite ranking was 39 out of 101.

While we know our digital experience improvements still can be made, we are pleased with the elements on our sites, including our product pages ranked very highly. As we continue to make enhancements, we expect our ranking will improve.

On the full line store front, store upgrades are underway so that about half of our 113 store base will feature our new design standards by the end of the fiscal year.

We have no full line store opening plans, but we expect to close up to 15 targeted underperforming full line stores as leases expire or as we are able to negotiate early exits over the next 24 months. We expect a handful will close this fiscal year.

Under factory side, we opened three new stores in the first quarter Laredo, Texas, Myrtle Beach, South Carolina and Houston, Texas, bringing our count to 49. Three additional factory stores were opened at the end of the third quarter.

We have a lot of work to do to transform our business, but we will continue to work diligently to improve our performance and enhance our shareholder value. Operator, we will now open up the call to questions..

Thank you [Operator Instructions]. And we’ll take our first question from Ed Yruma with KeyBanc Capital Markets..

I guess first on the 15 stores that you're looking to close in full price. Can you talk about the loss profile on those stores, the economics the revenue, and then secondly, if you could give us an update on performance in your New York store? Thanks..

So a couple of things, on the 15 stores, we don’t necessarily disclose obviously the individual performance. But the stores that we targeting are stores that are cash flow negative. And so it definitely will enhance the operating income profile of the Company as we close those stores.

In terms of our New York SoHo store, we opened our SoHo stores typically to really bring the new Vera Bradley brand to life to be able to introduce the brand to both domestic and international tourist, as well as to really have a place where we could bring new wholesale customers, as well as press and media and influencers in.

And we've been very happy with the impact that it had against all of those targets. So it's definitely playing a really important role in bringing the new brand to life and we’re excited to continue to watch that growth..

And our next question comes from Eric Beder with Wunderlich..

Could you talk a little bit about some of the innovations we're going to see in the back half? And how you plan on telling the customer that these changes are occurring so that we can -- so that traffic can be increased in the stores?.

Yes, as we've talked about the reinvention at cotton, the story goes back just a little while back to last year when we hired our new head designer, Beatrice Mac Cabe. And when we went through that search, we were really focused on finding a new designer that could really breadth the life into our cotton assortments.

We've always known that our cotton assortments are our core, it's our foundation, a lot of the innovation that we've built around that was to bring new interest to the brand. But we knew that the success long-term with the profitability of the Company was based around cotton.

So the interest came in and we work with our existing design team and brought in some new design talent to really begin to reinvigorate cotton. The first thing that we have seen come to market that begins their process in our Handley collection, which you can see online right now and in some of our stores.

And it's been very encouraging to see the early results from Hadley, a lot of those key us styles have already jumped into our top 10 in terms of our current selling styles in our full line stores. And the second thing that we’re doing is as we go in to fall, basically there is two phases.

With our fall collection, the first phase is going to be changing about half of our assortment will go into the new design, which she redesigned the silhouette but micro quilting and we're really excited about how the product works, so that's going to be step one.

And then step two is we get into winter we’ll finish and get about 80% of the collection converted and really target travel as we go into holiday season, because the travel assortments are so important to our customer during that holiday travelling season.

And then in terms of how we’re driving traffic, it really goes around our marketing campaign and we’ll be talking both about the new products and continuing to talk about the brand at large..

You've talked before about trying to align the online site with the stores. By the way, that was great.

Could you talk a little bit about where you are in that process and what you feel you have to go forward now that you've set the platform and reset the online business?.

In terms of the online digital transformation, now that we have the site up, first of all, as we got through the first quarter we definitely went through transition in terms of first quarter, in terms of the site, both in terms of rebuilding the search as well as getting all the functionality working.

But as we came out of first quarter, we’re excited about where the site is right now. As we said, we completed the evaluation and we felt good about the results. As we go forward, there is a couple of things that we’re going to do.

One from the site experience it’s continue to work on speed and enhancing the speed, which we're making progress against, as well as just putting in the additional enhancements that we spoke of and we we're continuing to develop the roadmap, so that will continue to get better overtime.

One of the big areas on the digital flagships that we're getting aligned with our stores is just continuing to work on reducing the promotional environment on our Web site. And that continues to be I think one of the bigger headwinds that we’re finding in our sector is just the pricing pressure is out there right now.

So we’re continuing to work on how do we reduce the promotional activity on our Web site and make the pricing become much more consistent with what's happening in our full line stores..

And we’ll take our next question from Oliver Chen with Cowen and Company..

Question was about the cotton innovation that you're undergoing. Where do you see cotton as a percentage of total -- where do you want to settle out versus where it is now? And another question I had John is regarding the free cash flow profile.

Will the net working capital items being neutral, or will there be a source of cash and inventory? Just any general guidance around free cash flow as well. Thank you..

So first of all, let me take the cotton question. So in terms of the -- you want to go ahead and handle the….

Sure, I can speak about the free cash flow process.

So if we look at full year from a free cash flow perspective, from a working capital needs, are we still expecting inventories to be relatively flat year-over-year within $110 million range; so if you’re modeling out your total, you can expect basically free cash flow to not to see any incremental working capital associated with inventory..

So let me go back to the cotton question that currently cotton represents about 50% of our business and our full line stores. So we really expect the cotton business to stay at 50% to 60% range. And then in addition to that in the quilted category, we also have our microfiber business which represents another 10% to 15%.

So if you think about the core quilted part of the business, you’re really looking at about 60% to 70% of the business..

And Rob does that -- what you expect or would like the mix to stay as products continue to improve?.

Yes, we really would expect that continuing in that 60% to 70%. Right now, we’re probably closer to 60%. We might get back up to 70%, that’s kind of the target range.

If you think about the other 30% that’s a combination of the other fabrics, like our leather collection, some of our poly collection, as well as some of the other classifications that we have in the store; stationary, jewelry some of those tech accessories those types of things would make the rest of the it.

But that cotton quilted business is still the core..

And Rob as you engage in enhancement of product, how are you feeling about product by pricing point in terms of opening versus more and more elevated? And where might there be more opportunities versus strength in that evolution?.

If you think about our core products, our historical products, it's kind of been at that $100 and below roughly pricing point, I mean, there is obviously few large pieces that pop over that. But I would look at our cotton assortment in kind of the substantial 100.

In some cases, when we originally target our leather collection we really wanted it to step between $200 to $300 in some cases some of our price points jumped above that. We definitely saw that the sweet spot for us in terms of leather collection is more around that $200 price point.

So we definitely are looking for ways to continue to build pricing down on that level as opposed to up at the $300 range. So long-term, as we think about it, sweet spots, really 100 for us elevation is really doubling that price up into the $200 range. And that’s where we really expect to stay as we go forward..

And lastly, on the topic of store closures has been topic for investors generally. And you have a very loyal specialty distribution footprint, as well as a strong online presence.

So why don’t you need to put more stores than you announced, and what's your philosophy towards thinking about that?.

Yes, right now as we look at our full line store base, what we've really done is targeted the stores that are cash flow negative and really trying to eliminate that drain. And so that's been where our focus has been.

As we look at balance in our distribution, obviously, we’d continue to watch what's happening out there, continuing to look for growing growth in the channels. And we’re obviously in a state of lot of disruption happening in both the accessories space as well as retail at large.

So we continue to evaluate our store fleet as we go through year-after-year. But we really think in terms of mid target for our full-line store base, we feel comfortable basically of what we’re talking about right now..

[Operator Instructions] And we’ll take our next question from Mark Altschwager with Robert W. Baird..

I wanted to just as on the marketing side.

Do you see evidence that you’re building the customer count at this stage? And what are the trends that you’re seeing with your existing customer base? I know you talked about the marketing push is really been the biggest driver to the comp improvement this year, often tough to get real-time read on how effective some of the strategies are.

So just curious bigger picture how you are measuring that progress in real-time so you can be more nimble with your spending and your tactics?.

Couple of quick things, first our customer count is holding for us. We're seeing growth happening in our customer account right now we're seeing it coming from different areas than we traditionally have. So we’re continuing to watch that.

In terms of overall trends that we look at for performance, we of course look at the impression levels that we’re hitting and making sure that we’re continuing to have our marketing to be as efficient as possible. But more in largely, we’re looking at the marketing analytics behind the business.

So what's driving sales, what's driving traffic and where our consumers really responding, and then we're getting really, really granular on we are targeting them and how we are making our marketing speak directly to them, and applying creative principles to do that..

I think a couple of things just to add Mark is that as we launched into the first quarter going into second quarter marketing campaign, we have seen some improvements over the challenging trend that we have at the beginning of the year in terms of both sales and traffic. So that is good to see.

But we know from the customer count growth that we are getting some growth, but we need that growth to strengthen as we go through the year. So the marketing campaign is really looking at ways to continue to enhance what's working and to continue to drive that customer count growth even further than it has been so far..

And maybe to follow-up or continue along that line. The goal is to stabilize the cotton performance, which I think is a product that's traditionally been targeted at your loyal customer base.

The marketing push really focused at building that customer count, which is if you are successful we would expect to maybe see the newer fabrications grow little bit faster. So maybe just help me reconcile that.

And are you seeing some of the newer customers really purchase across the assortment, or just any help on what you’re seeing that would be great? Thanks..

We actually are, it's a great question. We are seeing new customers purchase across the assortment. They’re buying both in terms of solid as well as they are buying the cotton patterned fabrication. And then our marketing, we’re doing a lot to ensure that our creative shows all different kinds of fabrications across the brand.

And three things like Facebook for example, we’re able to get incredibly targeted, so the consumers are buying cotton are being shown creative with cotton. So we are seeing growth in new fabrications. We’re also candidly seeing growth in cotton..

And at this time, we have no further questions. I’d like to turn the conference back to Mr. Rob Wallstrom for any additional or closing remarks..

Well, thank you for joining us today. We look forward to speaking to you on our second quarter call on August 30th..

This concludes today's conference. We appreciate your participation. And you may now disconnect..