Mark Dely - Chief Legal Officer and Corporate Secretary Rob Wallstrom - President, Chief Executive Officer, Director John Enwright - Chief Financial Officer, Executive Vice President.

Oliver Chen - Cowen and Company Mark Altschwager - Robert W. Baird Eric Beder - FBR Matt DeGulis - KeyBanc Capital Markets Andrew Gordon - E.F. Gordon Capital Dana Telsey - Telsey Advisory Group Steve Marotta - C.L. King & Associates.

Good day ladies and gentlemen and welcome to the Vera Bradley second quarter fiscal 2018 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Dely, Vera Bradley's Chief Legal Officer. Please go ahead, sir..

Good morning and welcome everyone. We would like to thank you for joining us for Vera Bradley's second 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 obligations to update any information discussed on the call. I will now turn the call 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 CFO, is also on the call. Before I get started, let me update you on some executive changes. I am happy to announce that Beatrice Mac Cabe has been named Vera Bradley's Chief Creative Officer.

Our founder, Barbara Bradley Baekgaard, has had the opportunity to work closely with Beatrice since she joined the company 18 months ago and has great confidence in her.

Beatrice joined Vera Bradley in January 2016 as our VP of Design coming to us with over 15 years of extraordinary design and brand development experience at several well-known retailers and brands including Fossil, Vince Camuto, Diane Von Furstenberg, John Galliano, and Marni.

Beatrice has an incredible design sensibility and since she has been at Vera Bradley, she has led our cotton reinvention.

In her new role, Beatrice will continue to oversee product design and will work closely with the product development, marketing in stores and verabradley.com teams to ensure brand and design consistency between our offerings, marketing, stores, and digital flagship. Barbara remains the heart and the soul of our brand.

She will remain with the company, but this change will allow her to spend more time focusing on several Vera Bradley projects that she is very passionate about including the Vera Bradley Foundation for Breast Cancer and promoting her book, A Colorful Way of Living.

Theresa Palermo, our former EVP of Marketing, has left the company, accepted another marketing position in her hometown of Dallas, and we wish her all the best. Stephanie Scheele, our VP of Marketing Strategy and Operations with over 20 years of industry experience has been named our interim Chief Marketing Officer. Now let's shift to our performance.

Although our comparable sales trends improved over those in the first quarter, challenges in the retail environment continued into the second quarter. Total revenues were in line with our expectations. Our second quarter EPS of $0.13, excluding charges exceeded guidance primarily due to our diligent expense management.

Over the last three years, we embarked on a plan to strengthen and modernize our brand. We made meaningful progress on many fronts including evolving our product offerings, distribution channels, and marketing as well as broadening our customer base.

However, given the backdrop of continuing challenging retail environment, our progress has not been made at the pace that we had planned. And as a result, we are in the process of refining our business model and strategic plan, which will involve taking a much more aggressive approach to turning around our business over the next three years.

Our ultimate goal is to restore brand and company health by methodically moving to a less clearance driven business model and reducing our SG&A expenses.

We have engaged an outside consulting firm working alongside our team to perform a comprehensive review of our business model, existing strategic plan, and historic performance, and to provide us with in-depth analysis and research on critical components of our business.

And this information and research is being integrated into our plan which we are calling Vision 2020. We will have more details on specific action plans to share in the coming months, but Vision 2020 will primarily center around two key areas, product and pricing and SG&A expense reductions.

We believe Vision 2020 will lay the foundation for growth, a more profitable future and continued solid cash flow. I will give you an update on our current year initiatives as well as some additional color on Vision 2020 after John reviews our second quarter results and our outlook for the balance of the year.

John?.

Thanks Rob and good morning. Let me go over a few highlights for the quarter. The numbers I will discuss are non-GAAP which excludes various charges outlined in today's release. Net revenues of $112.4 million were in line with our guidance of $111 million to $115 million.

Direct segment revenues totaled $89.3 million, compared to $87.2 million last year or a 2.4% increase. Comparable sales decreased 4.2%, which was more than offset by new store growth.

This comp performance was much better than the first quarter's 12.5% decline driven by a meaningful improvement on our verabradley.com business as well as improvement in our consolidated store performance.

Indirect segment revenues decreased 27.9% to $23.1 million from $32 million in the prior year, reflecting a reduction in the number of specialty accounts coupled with a reduction in orders from both specialty accounts and certain key accounts. Our gross margin rate for the quarter was 56.3% compared to 57.4% last year.

The 110 basis point decline related to a reserve taken against slow-moving inventory increased promotional activity in our factory stores and channel mix changes, partially offset by a reduction in product costs. All of these factors resulted in a miss to our guidance range of 57.5% to 58%.

Excluding charges, SG&A expenses totaled $55.9 million, or 49.7% of sales, compared to $57.8 million or 48.5% last year.

The rate was meaningfully lower than our guidance range of 53% to 53.5% due to diligent expense management, cost reductions, as well as the timing of approximately $500,000 of marketing expenses that are expected to be incurred in the second half of the year.

Excluding charges, operating income totaled $7.5 million or 6.7% of net revenues compared to $10.8 million or 9.1% in the prior year. Direct operating income was $17.6 million or 19.8% of net revenues compared to $19.7 million, or 22.6% last year.

Indirect operating income was $7.8 million or 33.9% of net revenues compared to $12 million or 37.5% in the prior year. Net capital spending for the quarter totaled $2.7 million and $6.1 million for the six months.

During the second quarter, we repurchased approximately $2.1 million of common stock or approximately 242,000 shares at an average price of $8.79. We have approximately $18 million remaining under our share repurchase authorization which expires in December of this year.

Quarter-end cash, cash equivalents, and investments totaled $102.3 million compared to $85.5 million at the end of last year's second quarter. We had no debt outstanding at quarter-end. Inventory totaled $104.1 million compared to $96.5 million the end of last year's second quarter and in line with guidance.

Let's shift our focus to our outlook for the third quarter and full year.

Keep in mind the current year estimates do not include certain consulting, severance, impairment, lease termination, store closing, or Vision 2020 charges, and the prior year numbers exclude the previously disclosed store impairment charges, certain severance charges, and the release of certain income tax reserves.

For the third quarter, we expect net revenues of $112 million $117 million compared to prior-year revenues of $126.7 million. We expect direct segment net revenues to be relatively flat-to-down, low-single digits compared to prior year, including a comparable sales decrease including e-commerce in the low-to-mid, single-digit percentage range.

Based on recent trends, we believe our indirect net revenues will be down by 25% to 30%. Our gross margin for the third quarter is expected to range from 57.1% to 57.6% compared to 57.6% in the prior year. The expected decline relates primarily to change to channel mix changes.

SG&A as a percentage of sales is expected to range from 50.8% to 51.3% for the third quarter, compared to 48.3% in the prior year excluding charges. Deleverage is primarily due to expected reduced revenues in the quarter. We expect diluted EPS of $0.13 to $0.15. Excluding charges, net income totaled $7.6 million or $0.21 per diluted share last year.

We expect inventory to be in the $100 million to $210 million range at the end of the third quarter, compared to $95.7 million at the end of last year's third quarter. For full year, we expect net revenues of $460 million to $470 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. For the full year, indirect net revenues are expected to decline in the high teen percentage range.

Our gross margin for fiscal 2018 is expected to range from 55.5% to 56% compared to 56.8% last year. The expected decline relates to increased promotional activity at the company's factory stores, channel mix changes and a reserve taken against slow-moving inventory, partially offset by a reduction in product cost.

SG&A as a percentage of sales is expected to range from 49.9% to 50.1% for the fiscal 2018 compared to 40.5% last year excluding charges. Deleverage is expected due to softer sales. We expect diluted EPS excluding charges for the full fiscal year to range from $0.44 to $0.50. Before charges, diluted EPS was $0.72 last year.

We expect our net capital spending to be approximately $10 million to $15 million for the full fiscal 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 the business and more details on Vision 2020.

Rob?.

Thanks John. This year we have focused on increasing our brand desirability through marketing, increasing our product desirability and strengthening our distribution platform.

This spring we expanded upon our It's Good to be a Girl marketing campaign introduced last fall and partnered with key influencers, leveraged social media channels and work with other high profile partners like Girl Starter TV, all to increase brand awareness.

On the product front, we are most excited about the reinvention of cotton, which remains 50% of our business. Customers are responding to our newly introduced iconic cotton collection featuring micro quilting, added functionality and innovation in several new updated silhouettes. We are also thrilled about the progress we are making in licensing.

Licensing is an important part of expanding our brand and reaching new customers and markets. We are strategically layering in licensing opportunities where they make sense. Vera Bradley technology products including smartphone and tablet cases, power solutions and portable audio launched in March.

The swimmer collection launch in May and our bedding, stationary and hosiery collections were introduced in July. We continue to see an extremely positive response from the market in terms of placement in both existing and new distribution.

For example, our smartphone cases are now offered in over 900 AT&T stores and due to strong performance we will be expanding to all 2,500 doors this fall. Bedding is available in over 200 Bed Bath & Beyond locations. And in 2018, we will introduce medical uniforms to the mix and we are continuing to explore other opportunities.

As we look at our distribution platform, we have primarily focused on three areas this year, launching our new verabradley.com website, rightsizing our full line store base and prudently growing our successful factory business.

The relaunch of our digital flagship platform went live in February and we have continued to make additional enhancements to the site to improve our customer's experience and increase conversion.

And during the second quarter, we added the Gift Now feature, an improved shipping and tracking solution, product vignette pages for products like bedding and swim, continued improvement in site speed and visual enhancements to our checkout page intended to make the process easier and to reduce cart abandonment.

And as a result, second quarter verabradley.com conversion increased and sales trends improved significantly over last quarter. On the full line store front, we are continuing to upgrade our most productive stores so that about half of our current 111 store base will feature our new design standards by the end of the year.

We closed two full line stores so far this fiscal year, our San Francisco location in the second quarter and our Thousand Oaks, California store in August. We expect to have additional full line store closings to announce in the coming months.

On the factory side, we opened three stores in the first quarter and will open three additional locations in the third quarter, which will bring our factory count to 52. Now let me elaborate a bit more on Vision 2020.

As I noted earlier, our primary goal over the next three years is to improve our brand and company health by moving to a significantly less clearance driven business model and reducing SG&A expenses. We are in the process of finalizing our detailed plans with the majority of the implementation to begin next year.

On the product and pricing front, we will focus on three key initiatives, resetting our customers pricing perception and restoring our full price business by significantly reducing the amount of clearance product available on verabradley.com and in our full line stores.

Two, narrowing our current product offerings by eliminating unproductive or incongruent categories and SKUs from our assortment.

And three, building tighter assortment guardrails around introducing new categories, patterns and pricing ensuring that the right fit for our brand and that our products not only provide beautiful solutions but also reflect both our comfortable and casual lifestyle at attractive price points.

We know these actions, particularly dramatically reducing our clearance levels, will not be easy, but are the right actions to take for the health of our business. The majority of the product and pricing initiatives will not be implemented until next year. We estimate revenues will be negatively impacted by $40 million to $60 million in fiscal 2018.

As we reduce revenues, we also expect to reduce annual SG&A spending by up to $30 million from our fiscal 2017 baseline spending excluding severance, Vision 2020 and other disclosed charges. Certain cost reductions have already begun and are reflected in our 2018 SG&A guidance.

The majority of the balance of the reductions is expected to be made in fiscal 2019. Reductions will come through rightsizing our corporate infrastructure to better align with the reduced size of our business along with taking a more aggressive stance on closing underperforming full line stores.

We are forecasting to close up to 50 full line stores by the end of fiscal 2021, primarily as leases expire. Over the last two years, we have increased our marketing spend with the incremental expense largely focused on branding and brand awareness and we found that it was difficult for the brand related marketing to rise above the clearance noise.

As we make changes in our assortment and reduce our clearance promotions, we will reduce our marketing spend in the near to moderate term, focusing primarily on optimizing return on spend and keeping our most loyal customers highly engaged.

We have done a good job reducing cost of sales over the prior three years by shifting to lower cost manufacturing, better raw materials sourcing and distribution efficiencies.

We believe that there are incremental sourcing and supply chain opportunities ahead and these savings can help offset the natural overhead deleverage that will occur as we reduce our inventory levels. On the distribution front, we will continue modest expansion in our factory channel adding about six stores per year.

We will also launch a flash sale site in the fall to segregate certain clearance sales from verabradley.com. We will provide guidance for fiscal 2019 in conjunction with our year-end earnings call.

By executing Vision 2020, we expect that our business and brand will become healthier, operating performance will improve and shareholder value will be enhanced in the next three years. Our team is very committed to and focused on turning the business around. Operator, we will now open up the call to questions..

[Operator Instructions]. We will take our first question from Oliver Chen with Cowen and Company..

Hi. Thank you. Good morning.

Rob, regarding Vision 2020 and also your thoughts on for the businesses now, what are your thoughts regarding pricing and what are you looking at for good, better, best in terms of the big opportunity going forward there? Related to that is the parameters around different channels and what should happen from a product perspective, and any color on what the indirect channel is looking like in terms of opportunities to improve that over time?.

Well, thanks for the question, Oliver. Couple of things. In terms of pricing, a few things that we are looking at, we definitely know in our research that there’s two different factors. One is clearance.

Clearance definitely, despite our actions of reducing hyper promotional clearance activity over the last couple years, our overall level of clearance has just remained too high.

The perfect example is, if you go on to our verabradley.com website and you pull up something like the Vera Bradley tote, you will see that we have, let's call it eight patterns under new and we will have twice as many patterns under clearance, which just is not a sustainable business model, so we feel that we really need to take that down to a much more appropriate level, which is probably closer to two times the pattern assortment in our full price selection as in our clearance section, so we believe that that's going to be critical to kind of reestablishing our full price business.

As we look at price points, what we found out is that we believe in our core cotton product that our price points are appropriate.

As a matter of fact as we introduced our iconic collection, we have actually taken some of our price points up as we have added additional functionality in and we have actually found that those new products are actually performing better than the old styles, which has been encouraging to see.

On the flip side, as we have introduced new categories and new fabrications, in some cases I don't believe that we kept our price point sharp enough.

So a perfect example, as we are looking at leather and we did a lot of analysis on our leather collection, what we saw is that the velocity was much stronger in our more opening price points of our leather business than our more casual parts of our leather business, and so we are really going to refocus our leather assortment around this casual, comfortable, and affordable price point.

So what does that mean specifically? It means that we used to have price points in leather that probably hovered closer to the $300 price point, and we actually see that probably coming down on average, about a third to be more around the $200 price point.

As a matter fact, we have a great new crossbody that we are excited that's going to be launching at $98, so we do believe that our prices have to be sharper in the new fabrics that we put into the assortment that the earlier price points might have been a little bit high. And that also applies as we go into brand extensions.

And one thing that has been happening as we worked with the licensing partners is, they have been very good at focusing on price targets and the right part price targets, and we want to make sure that we keep those really at this great sharp affordable price point which is we believe where the Vera Bradley customer is.

As you think about distribution and what does it mean from a distribution standpoint, our goal right now is to really help our wholesale partners as well as ourselves drive comp sales, get their inventories leaner, cleaner, moving faster. And so at this point, what we see is keeping the distribution tight.

We don't see a lot of distribution expansion in our department stores and our specialty channel, maybe a slight tightening there where we see the distribution expansion occurring as we open up our new licensing partners as we talked about with AT&T and Bed, Bath & Beyond.

So we think that's a great way to bring new customers into the brand and get some expansion in the consumer where albeit at the same time not over distributing our core channels that we have today..

Rob and also regarding the store base, it's a hot topic and some client incoming on just your framework for thinking about what's the right size of your store base and there is a difference between full line versus your factory? And it would be great if you could share with us some of your thoughts around optimizing your relationship with Amazon as well?.

Absolutely. So first of all, in terms of the store base, as we all know, the retail environment obviously has been challenging.

Mall traffic continues to be very challenging, particularly in the full line space, and we really believe that as we looked at the leases, last time we talked about store closures, we had talked about the stores we were going to close this year and next year and we talked about 20.

As we put the Vision 2020 together, we have looked further out and we have put a couple of additional years on the backside of that, and that's why we are now talking about totally getting up to 50 stores.

So we do believe that we are going to continue to watch the full line industry and see how the mall traffic begins to stabilize over the next few years, but we are taking a very cautious approach to our full line real estate. On the factory side, our factory stores, as we open them up, continue to perform well.

We believe that there is opportunity on the factory side, but we are trying to take a very prudent and kind of modest growth plan there.

And so, if you project out what that ratio of full line to factory stores looks like at the end of 2020, if everything goes according to what we have laid out, we would be closer to a one-to-one relationship, so we are monitoring that and very aware of that ratio.

On the Amazon side, we are working closely with Amazon, working to understand how to maximize that relationship with them by focusing on full price and really focusing on enhancing the brand on the Amazon experience, trying to clean up unauthorized distribution and really reestablish our full pricing on Amazon.

So we do think there is growth there and we are focused on it, but we want to make sure it's the right type of growth, which is a full price growth and not enough price growth..

Thank you. Best regards looking forward to Vision 2020..

Thank you Oliver..

And we will take our next question from Mark Altschwager with Robert W. Baird..

Great. Good morning. Thanks for taking the question. Rob, just with the initial guidance related to the 2020 plan. It seems to imply roughly neutral eBay impact, I guess assuming that the current gross margin run rate on the lost revenue offset by the SG&A savings.

Is that the message we should be taking away today? Or any other puts and takes we should be considering as we take a look at your out-year models?.

Yes. So Mark, this is John. Ultimately, I think we are not going to give guidance update but I think that's a fair estimate of how to look forward if you look to think about this reduction in sales of $40 million to $60 million with up to $30 million of SG&A saved.

From EBIT perspective, you would depending on where gross margin comes in, because we are still finalizing that, you could estimate it's going to be relatively flat..

That's helpful. Thank you.

And then on the $40 million to $60 million revenue reduction, any way to add some context to how much of that is the reduction in clearance sales versus the reduced buys of some of the retired product and then the streamlining of the assortments that you mentioned earlier?.

Yes. What I would say in that $40 million to $60 million, we anticipate that the vast majority of that is all out of the current bucket. That's really what the guidance implies. We are really going out and targeting by reducing our entire clearance volume by over 50% in our direct consumer business. So it's a very aggressive approach.

The majority of that will come on our e-commerce site. The fact that our e-commerce site has remained primarily a clearance business is not healthy for the brand and we have tried to wean that down.

But as we have gone through that voyage, we really feel that we have to take much more aggressive action to establish that more full price oriented experience on e-commerce..

Thank you. And one more quick one, if I may. On the marketing front, any updates on the learnings from the recent campaign and any anticipated changes to the strategy moving forward, given the management changes announced at the beginning of the call? Thanks..

Yes. Absolutely. Regarding marketing, what we have found is that everything that we were doing as we talk a lot about building brand awareness and top of funnel, we have really increased activity.

So to give you a perfect example, last quarter we saw the impressions that we generated they went from 50 million in the prior year to over 300 million this year. So we definitely got a lot of people looking.

What we were finding though with that, we weren't driving enough of them through our funnel and really with all of the clearance information that's out there, all the pricing information that's out there, the people were going more towards our clearance assortments. So we were not getting the full pay off we expected out of the marketing.

And so part of that we will give more definition around, but with 2020 we are going to tighten up some of the marketing spend, move a little bit of it from the top of the brand awareness and really focus on kind of down funnel activities, conversion, really focus on the customer that we know and we believe getting a higher rate of return from our marketing spend as we reestablish the full price assortment credibility and then will take a new look at that in the out-years..

Thank you for all the details. Best of luck..

Thank you Mark..

And we will take our next question from Eric Beder with FBR..

Good morning..

Good morning Eric..

Could you give a little update on back-to-school? I know it's a big holiday for you guys.

What are you are doing in terms of the back-to-school product here?.

Yes. In terms of back-to-school, as you say, it's not only a big season in retail, but definitely a big season for us. So there has been a lot of movement in back-to-school in terms of back-to-school, like most the holidays continues to get a little bit lighter.

But we are continuing to see, we still have a very dominant position in the backpack business and it continues to be really important for us. But we see the back-to-school business continuing even now and continuing through early September and our performance in back-to-school is reflected in our guidance..

Okay.

And when you look at the license categories, what should we be thinking about the ability for them going forward? And how big do you think that can be longer-term in terms of your vision here and how they fit into Vision 2020?.

Yes. I think with the licensing categories, right, a lot of these businesses are just launching, but what is exciting for us as they really plan future growth, right, they help us bring new customers in the brand, the new classifications, there is other classifications that we are pursuing.

So from a retail sales standpoint and a brand expansion standpoint, they offer some opportunity. Now with licensing, when you look at royalty revenue and how that flows through to the bottom line, it obviously doesn't hit the topline as productively as the businesses we do internally. But we are very excited about it.

We think that there is a couple more categories. But you will see us stay very focused around the home category, very focused around this casual, comfortable lifestyle and that's really where our focus is as we sign up new opportunities..

Okay. And finally last year, you had the issue with the data breach. How much do you think that was an impact last year and I am assuming that's not going to be an issue this year for you hopefully at all.

How should we think about that?.

Yes. So from a data breach perspective, all the analysis we did last year, we don't think actually impacted our sales at all. And obviously for this year, we don't anticipate anything occurring. So there is no impact that we found through our analysis to last year's results..

Okay. And last question, even if you do the entire buyback you have significant amount of cash. You are probably going to be with less stores and less sales reducing inventory even more.

What should be an appropriate use going forward, do you think, for all of this cash?.

So I will take a first stab and Rob, you can jump in. I think depending on our strategy, first and foremost we are going to cash for strategic initiatives going forward. So as we implement the Vision 2020, to your point, we will utilize the cash associated with any strategic initiatives there.

So we may have some additional investments in technology, but I would not think there would be significant use of cash associated with Vision 2020. Outside of that, as we move forward from Vision 2020, it will be based on what our new strategy would be on a go forward basis..

Yes. I think that the only color I would probably add to what John is talking about is that our current cash position, we have obviously taken a little bit of a conservative approach to it as we navigate this retail disruption that's out there and we believe that that's the most prudent short-term use of our cash.

As we look in the out-years of the Vision, we know that cash is an opportunity for us to improve shareholder value and it's something that we will be looking at as we go forward in the years to come.

But in the near term, the short term, we believe that it gives us the basis to execute our turnaround plan and that's really where our focus is as we want to get the business healthy and get it stabilized. So that's our primary focus today..

Great. Good luck for the rest of the year..

Thank you Eric..

[Operator Instructions]. We will take our next question from Edward Yruma. Please proceed..

Hi. Thanks for taking our questions. This is Matt, on for Ed. So can you talk a bit more about the third key initiatives, adding more discipline into your assortment and introducing new categories? Does this mean new patterns will be introduced more methodically? I guess I just need some clarification there. Thanks..

Thanks for the question, Matt. A couple of different points. One in terms of patterns, we are absolutely looking at our pattern lifecycle. Our analysis has really shown us that we have been introducing, even as we have worked on adding new patterns and pulling patterns down, we have kind of moved through patterns quicker than we need to.

As we look at the rate of sale, we think that some of our patterns have a longer lifecycle and due to the amount of clearance business we have been funding, we have been marking patterns down and moving them into the clearance bucket earlier than they probably need to. So we are going to be working on pattern flow.

That's a big part of the work that we are working through right now. So we will have a lot more to say as we progress through that work. The second thing in terms of tighter guardrails.

As we look at all of the products that we introduced over the last couple of years and we think that there has been a lot of positive learnings and a lot of new customers that we brought into the brand, but what we did find is that products that were casual, comfortable and at sharp price points were the best-performing ones.

And when we allowed ourselves to kind of move out of our core customer segment and move into what I call a dressy point of view and a higher price point of view, we found more trouble. So let me give you some perfect examples of that. A great example would even be in something like fragrance.

What we found are things like our hand lotions that were just easy and simple were top producers but things like our crystal cut glass and candle that became very expensive and kind of very formal and very dressy did not perform well.

In our leather category, our Gallatin performed much stronger out of the gate kind of at that $200 price point, very casual in appeal. But when we did things in Sycamore where we did framed handbags and we did pony hair and we did things that became very dressy, those are the ones that definitely did not perform as strongly.

So we do believe that we have learned a lot through those launches and we believe that we will have a much more focused assortment as we go forward..

Thanks.

And have you learned anything from the virtual reality experience? And will this rollout to more stores or categories? I guess how do you view virtual reality in the stores moving forward?.

Right now, we see virtual reality in the stores as really an entertainment, right. It's really an opportunity for customers to come and experience something fresh, something to talk about, something to keep customers engaged. In terms of, is it going to become a primary purchasing vehicle, no.

We do think it's a way to showcase parts of our assortment that are not available, but we don't see a major rollout. It really was meant as a great way to kick off of bedding assortment and let customer's experience it because we obviously couldn't get beds into all of our stores just based upon our size. So it was a fun way of rolling that out.

But we don't see a short-term major rollout of VR. We might continue to play with it with new opportunities that come up, but it's definitely more on the entertainment side than truly on the commercial side..

Thank you..

And we will take our next question from Andrew Gordon with E.F. Gordon Capital..

Hi. Good morning guys. Thanks for taking the question. I was curious about the part of the guidance around the SG&A. There is about an $8 million shift for fiscal 2018 versus what you had implied over the last two calls. And I think you mentioned rightsizing the corporate infrastructure and one point during your comments.

But I wondered if you could be a little more specific on exactly what you are changing?.

Just for clarity, I want to make sure I understand.

Are you talking about $8 million shift in guidance for FY 2018?.

Yes..

So I think just to speak to that right, we have an expense reduction plan in place each year, right.

So we look at expenses each year and as we continue to look through the quarters, we have had savings, if you look through the first and second quarter, of a few million dollars below what we had anticipated, from an SG&A perspective and rolling out forward, we expect some additional savings.

So that's where you probably see the $8 million associated with some corporate infrastructure, whether it's headcount, marketing, some T&E and also associated with some professional fees. So those are the, like, big larger buckets that we are looking at for FY 2018. We see some savings associated with FY 2018.

And if we look at FY 2019, those are also larger buckets that we are looking at for savings in Vision 2020..

Okay. Just be clear, I am talking about an $8 million shift for your current full year guidance versions what you had implied over the last --.

So probably I am not getting clear..

The other part of it that makes me scratch my head a bit is, your store base is continuing to grow this year. By my math, it's an average of six stores higher than last year, but your total SG&A target now is about $4 million lower.

I guess what I am wondering is, is this impacting your spend on product development at all? And also marketing, how much is that? What's the budget change for marketing?.

All right. So let me try to hit both of those points. So over the course of the year, we will probably net to incremental stores as we add basically six factory doors as Rob commented to earlier and then we are going to close some doors this year. So we closed two doors this year and we expect to close more doors and in the back half of the year.

In regards to whether or not we are curtailing product development spending and marketing spending, the answer to that is no. Marketing spending is probably expected to be about $2 million less than last year, but as it is based on efficiency, we are actually bringing stuff in-house that is making our marketing a little bit more efficient.

And then in regards to the $8 million difference from the beginning of the year guidance when you just do the ratios. Again, we have just basically been curtailing kind of this discretionary spend in order to help with earnings.

Does that answer your question, Andrew?.

[indiscernible]. Well, it does and it doesn't. I am still wondering about product development expense..

And I would answer that, no, we are not curtailing our product development expense..

We are absolutely continuing to invest in products. If you look at our SG&A investments over the years, what we have been doing is taking expense out of the non-consumer facing touching areas.

So areas like finance and IT and legal and HR and the back of the house areas and continuing to invest in product development cost and have been continuing to invest in marketing.

Now the marketing spend, we are taking a little bit approach this year and really pushing efficiency and part of that is because as we have invested in marketing over the last few years, we have been able to build up some infrastructure to do a lot more in-house and take a lot back out of the agency world which we can do a lot more efficiently..

Fair enough. If you don't mind, I will be squeezing in one more question. The Vision 2020 plan, it sounds like an exciting strategy development.

But I was a bit curious, it just seems to me that when you shifted away from being promotional, like in 2016 and 2017, ultimately you were pulled back into being more promotional, maybe as a function of the broader environment among other handbag sellers.

And I just wondered if maybe you could give a little color on the degree to which you feel your ability to move away from clearance is fully in your own hands versus being impacted by other sellers' activity? Thank you..

I think that's a great question and I will answer it a couple of different ways. First of all, when we started to pull back, the first thing we did from pulling back on promotion was reducing what we called hyper promotional activity.

And to just remind everybody, if you went back three years ago, at that point, we were advertising online 70% to 80% off and advertising up to 50% off of our regular price product. So we were at discount levels that were completely non-sustainable and we were able to eliminate those.

The issue is, as we got through that and we eliminated that, we still had a very large proportion of our business that was in the clearance category. So they moved from buying it a hyper promotional discount to just moving to a clearance discount.

And what we did not do adequately enough was make sure that the balance between our regular price offering and our clearance offering was right. The fact, as I said earlier, that you go on to our website and you have one-third of assortment that's at full price and two-thirds that's off-price is just the wrong balance going forward.

We are not saying that we will not have promotion in the business and that we will not continue to do targeted pricing and promotion to keep the customer engaged because we do believe that in this market that there is still a need for some promotional activity, but it's just removing the amount of our business that's done at clearance, which is basically the 50% off category is what we need to get back in line.

And that's really where our focus is. I do believe that the retail market is challenging. We know that the accessory market is really the most challenging. So we are expecting and that's probably the reason we are taking the actions that we are taking that that probably continues in the near term.

So that's why we felt it was more prudent to take cost out of the business, get the clearance of the business right now while the market is still in a degree of challenge and then as we get on the backside, it will be a lot healthier. The other area that we do continue to respond to the consumer from a pricing standpoint is our factory channel.

So our factory channel is a healthy channel for us. It continues to contribute. We believe it's important to give the consumer an opportunity to find Vera Bradley products at a great price, but we believe that the appropriate place for that to happen is in the factory channel. And the inappropriate place for that to happen is on verabradley.com.

So we are going to take a much more aggressive approach to getting that right and that's why you are seeing us continue with modest growth in factory while taking a very aggressive approach to reducing clearance out of verabradley.com..

Great. Thanks so much..

You are welcome..

And we will take our next question from Dana Telsey with Telsey Advisory Group..

Good morning everyone.

As you think about the sweet spot of the pricing paradigm that you mentioned, as you think about the adjustment to lower prices, what impact on margins do you see from that? And how do you balance off volume versus pricing and margins? And then on the indirect business, what do you see on ordering trends there? And what's different about their desire for goods or different types of goods that they may be ordering that you have that is selling through on the website and also in your stores.

Thank you..

Thanks Dana. First of all, on the whole pricing reset and the volume mix, we are still as we said in the middle of finishing the Vision 2020 work and really working through the pricing models and elasticity models. So we don't have all of that work completely done yet.

But that's the work that we will be finishing up over the next few weeks and we will begin to test a lot of that. We do know that there might be slight pressure on that side, but we feel there is a lot of gives and takes in the gross margin numbers.

So if you think about that gives and takes, reducing the clearance volume will be positive to the gross margin number. Resetting some of the pricing to be a negative to the margin number as well as the overhead deleverage can be negative.

And then on the flip side, the other positive is continuing to work on our cost of goods and the team has done a lot, particularly looking at country of origin and reducing costs through that side of the business. So a lot of pushes and takes.

But what we really think is that the pricing in terms of what we are finding with our consumers that we just need to stay very, very focused on the sweet spots, stay very, very focused on using our pricing with kind of a laser focus.

We are seeing big differences between elasticity in different business classifications and different channels of distribution. So we are going to take a much more sophisticated pricing approach.

If you talk about the wholesale and the sell-in, what we do know from our wholesale partners and we have heard from our wholesale partners over the air, the number one thing that has been suppressing their orders has been the amount of clearance activity on verabradley.com.

And they found it to be in very, very challenging for them to compete with our pricing promotions on our website. And so we are hopeful that as we begin to work through this that that will be a positive for our wholesale partners.

In terms of what's selling best through our wholesale channels, it continues to be two things, it is our kind of our top 20 items. There is a lot of focus on our top items becoming stronger and stronger through our wholesale channel as well as our focus on the new iconic products that is also been doing well in our wholesale channels..

Thank you..

Thanks Dana..

And we will take our next question from Steve Marotta with C.L. King & Associates..

Good morning everybody..

Good morning Steve..

As it pertains to the issue of the targeted S G&A savings for fiscal 2019, is that an absolute number for the fiscal year in its entirety? Or is it a run rate targeted at by the end of the year?.

So that would not have been absolute. So the $30 million is really a savings over the three years, the period of time for Vision 2020. But the majority of the savings are going be realized in FY 2019.

So you can expect to see and your questioning being, will we get a portion of it throughout the year, the answer to that question is, I would expect to see a lot of the savings happen at the beginning of FY 2019 and see the full realization of the savings, not of the $30 million, but of the savings that we are going to have in FY 2019 to happen at the beginning of that year..

Okay.

So it's essentially a run rate, but the target would be $30 million below the last fiscal year, using it as a benchmark?.

So, yes. I mean I think that's a fair way to think about it. But the $30 million really is a number over the three year period, but the majority will happen in FY 2019..

Okay.

If you look at your current SKU base and you talked about a SKU reduction associated with Vision 2020, what do you think, what's being targeted for, as a percent of the total from a SKU reduction standpoint? Is it in the 5% to 10% area? Or is it in the 30% to 40% area?.

In terms of working through the SKU reduction, Steve, we are still finalizing all of that. As we have looked at certain categories of business and we might be discontinuing a couple of categories. As we do that, some of those might be on the more SKU intensive side.

But overall I would say that we are looking at a SKU reduction that's probably more in the 10% plus range as opposed to the 30% plus range..

Helpful.

And my last question is, can you comment briefly on your exposure to Hurricane Harvey in both the Houston area as well as all the affected areas of the storm?.

Sure. I will comment and Rob can add to that. Right now, we have about seven stores that are impacted, two factory locations and five full line locations that have been impacted in Texas. From a sales perspective, we are analyzing it, but it looks like it's probably about $300,000 to $500,000 worth of impact.

We have not been able to assess any damage associated with the stores yet. Once we will be able to get in and assess if there is any store damage or product damage, but right now we haven't been able to assess that..

Very helpful. Thank you..

And we will take a follow-up question from Oliver Chen with Cowen and Company..

Thanks for getting me in. We just had a brief question related to product and Chief Creative Officer. She comes from a really powerful DNA of a lot a lot of great luxury goods companies.

I am just curious about the direction and the priorities about where she will look to evolve the brand? And since cotton is such a big part of your product with the cotton reinvention, just thoughts there on the next hurdles for cotton and what you wanted to do? Thank you..

Thank you Oliver. We are really excited about Beatrice becoming the Chief Creative Officer. I think there is a lot of reasons why we are excited. I mean part of it is, she does have a very unique background. As you said, she comes from some very high end brands. And you know, therefore really has a great design sensibility and understanding of detail.

And that's one of the things that's truly impressed me about her over the last year-and-a-half as we worked together. At the same time, she has also been in more affordable prices of the business with the Vince Camuto's of the world and the Fossil's of the world. So she has not stuck in high design. She also understands affordability.

And she has a great understanding of who our customer is, who the Vera Bradley customer is, how to appeal to her, how to bring our brand to life in a way that's fresh and modern but very approachable, comfortable and fun. And that's a very fine line and I think she has a really good understanding of that.

As we talk about cotton, as we brought Beatrice in, the first thing we asked here to do was reinvent cotton. She went back in. She looked at silhouettes.

She did the micro quilting, the new Hadley Collection that came out, the new Iconic Collection that just hit, she was really behind that and did a really nice job in updating the silhouettes, updating the quilting, paying attention to all the details, adding the functionality and I think really kind of modernize what cotton could look like.

And it has been very encouraging to see the consumer responding to that direction. The next area that she is putting a lot of focus and is really critical to our turnaround is really improving our ability to put patterns in market.

Our pattern delivery over the last 10 years has been inconsistent and she has really started about 60 days ago a real deep dive into our print DNA language, what makes a strong Vera Bradley print to make sure that we have a very consistent print language that appeals to our core customer at the same time is modern.

So kind of blending that blend between your great heritage as well as modernizing the prints. And we are really excited about the work that she is putting together and are really expecting as that comes to the market over the next year that we will see our print performance improved.

And as we know, prints are so important to us as a company that as our prints get stronger, our performance will get stronger. So that's really what her number one focus is right now..

Sounds like a balance. Thanks for answering that..

You are welcome..

And ladies and gentlemen, that concludes today's question-and-answer session. At this time, I would like to turn the conference back to our speakers for any additional or closing remarks..

Well, thank you for joining us today and we look forward to speaking to you on our third quarter call on Wednesday, December 6..

And ladies and gentlemen, that does conclude today's conference. I would like to thank everyone for their participation. You may now disconnect..