Mark Dely - Chief Legal Officer & Corporate Secretary Rob Wallstrom - President & CEO John Enwright - EVP & CFO.

Mark Altschwager - Robert W. Baird Courtney Willson - Cowen & Company Austin Hopper - AWH Capital Steve Marotta - C.L. King & Associates.

Good day everyone and welcome to the Vera Bradley Third 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. Please go ahead, sir..

Good morning and welcome everyone. We would like to thank you for joining us for Vera Bradley's third quarter earnings 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. Excluding charges, third quarter EPS of $0.23 was meaningfully ahead of our $0.13 to $0.15 EPS guidance.

This was primarily due to our ability to implement certain expense reductions in conjunction with Vision 20/20 more quickly than originally expected, along with diligent expense management. Third quarter revenues were within our guidance and our gross margin rate was slightly below.

As we discussed last quarter, Vision 20/20 is an aggressive plan to turnaround our business over the next three years. Vision 20/20 will restore brand and company held by strategically moving to a less clearance driven business model and meaningfully reducing our SG&A expenses.

In addition to resetting customers pricing expectations and restoring our full price business by significantly reducing the amount of clearance product available on verabradley.com and in our full line stores, we are also focusing on streamlining and building more discipline into our overall assortment offerings.

Of course, we will also remain keenly focused on our customer and on providing innovation, newness and creativity in our product offerings and our marketing initiatives and in both, our online and in-store customer experiences. As a reminder, we will implement the majority of the Vision 20/20 product and pricing initiatives beginning in fiscal 2019.

As a result, we expect that our revenues will be negatively impacted by $30 million to $50 million next year from this year's revenue base.

As a side note, while reducing clearance activity won't have a long-term positive effect on our gross margin, there will be offsetting pressure on gross margin in the short to moderate term as our channel mix changes and we take inventory levels down and experience related deleveraging of overhead cost.

As a key part of Vision 20/20, we also expect to reduce our annual net SG&A spending by upto $30 million excluding charges from our baseline fiscal 2017 level of $236 million, by rightsizing the organization to better align with the reduced size of the business.

Certain costs reductions have already begun and are reflected in our third quarter results and in our fourth quarter guidance. We expect that a total of $20 million to $25 million of the annualized SG&A reductions will be made by the end of fiscal 2019 with about $11 million of those reductions completed in fiscal 2018.

We are still finalizing our operating plans for next year and we'll provide more complete guidance for fiscal 2019 in conjunction with our year-end earnings release on March 14, 2018.

Vision 20/20 is setting the right course for the future of Vera Bradley by restoring our brand health, improving operating performance and producing continued solid cash flow.

I'll give you an update on our current initiatives, as well as some additional color on Vision 20/20 after John reviews our third quarter results and our fourth quarter outlook.

John?.

Thanks, Rob and good morning. Let me go over a few highlights for the quarter. The current and prior year non-GAAP third quarter numbers I will exclude the charges outlined in today's release. Net revenues of $114.1 million were in line with our guidance of $112 million to $117 million.

Direct segment revenues totaled $83.2 million, a 3.4% decrease from $86.1 million last year. Comparable sales decreased 7.4%, which was partially offset by new store growth. Comparable sales continued to be negatively impacted by year-over-year declines in store and e-commerce traffic.

Indirect segment revenues decreased 23.8% to $30.9 million from $40.6 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. Excluding charges, our gross margin rate for the quarter was 56.8% compared to 57.6% last year.

The 80 basis point decline primarily related to increased promotional activity in our factory stores and channel mix changes, partially offset by a reduction in product costs, all of which caused our gross margin rate to fall below the well end of our guidance range of 57.1% to 57.6%.

Excluding charges, SG&A expenses totaled $52 million, or 45.5% of net revenues, compared to $61.2 million or 48.3% last year. The rate was meaningfully lower than our guidance of 50.8% to 51.3% due to diligent expense management, and the implementation of certain expense reductions in conjunction with Vision 20/20 more quickly than expected.

In addition, approximately $1 million of marketing and other expenses budgeted for the third quarter are now expected to be incurred in the fourth quarter. Excluding charges, total operating income totaled $13 million or 11.4% of net revenues in the current year third quarter compared to $12 million or 9.5% of net revenues in the prior year.

Direct operating income was $17.6 million or 21.2% of net revenues compared to $17.7 million, or 20.6% of net revenues last year. Indirect operating income was $12.2 million or 39.6% of net revenues compared to $16.9 million or 41.7% of net revenues in the prior year.

Net capital spending for the third quarter and nine months totaled $2.9 million and $8.9 million respectively. During the third quarter, we repurchased approximately $2.9 million of common stock or 347,000 shares at an average price of $8.47.

This brings our nine months new purchase total to $6.3 million or approximately 721,000 shares at an average price of $8.69. As of the end of the third quarter, we had approximately $15.1 million remaining under the repurchase authorization or was scheduled to expire on December 31 of this year.

In November, our Board of Directors authorized the expansion of a repurchase program through December 31, 2018. Quarter-end cash, cash equivalents, and investments totaled $108.1 million compared to $83 million at the end of last year's third quarter. We had no debt outstanding at quarter-end.

Quarter end inventory was $100.1 million compared to $95.7 million the end of last year's third quarter and at the low end of guidance of $100 million to $110 million. Let's shift our focus to our outlook for the fourth quarter and full year.

Keep in mind that the current year estimates at certain store; impairment, severance, consulting, or other charges in the prior year numbers exclude the previously disclosed store impairment and severance charges and the release of certain income tax reserves.

For the fourth quarter, we expect net revenues of $127 million to $132 million compared to prior year revenues of $134.8 million. We expect direct segment net revenues to be flat-to-down low-single digits compared to the 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 in a high teen percentage range. Our gross margin for the fourth quarter is expected to range from 55.4% to 55.8% compared to 55.7% in the prior year.

SG&A as a percentage of net revenues is expected to range from 42.8% to 42.9% for the fourth quarter, compared to 44.6% in the prior year excluding charges. Expense leverage is expected despite the decline in sales due to expense management and implementation of Vision 20/20 savings. We expect diluted EPS of $0.30 to $0.33.

Excluding charges, diluted EPS was $0.28 in last year's fourth quarter. We expect inventory to be in the $90 million to $95 million range at the end of fiscal year, compared to $102.3 million at last year's fiscal end. For full year, we expect net revenues of $450 million to $455 million, compared to $485.9 million last year.

Our revenue guidance assumes direct segment net revenue to be down low single digits compared to last year with comparable sales including e-commerce down in the mid-single digit percentage range. Indirect net revenues are expected to decline approximately 20% for the full year.

Our gross margin for fiscal 2018 is expected to range from 55.8% to 55.9% compared to 56.8% last year. The expected decline relates to increased promotional activity at the Company's factory stores, channel mix changes and adjustment taken against slow-moving inventory, partially offset by a reduction in product cost.

SG&A as a percentage of net revenue is expected to range from 48.6% to 48.7% for the fiscal 2018 compared to 48.5% last year excluding charges. Modest deleverage is expected due to softer sales. We expect diluted EPS excluding charges for the full fiscal year to range $0.57 to $0.60. Before charges, diluted EPS totaled $0.72 last year.

We expect our net capital spending to total approximately $10 million to $12 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 business and more details on Vision 2020.

Rob?.

Thanks, John. Let me update you on our couple of product and distribution developments before I talk more about Vision 20/20. On the product front, we continue to be most excited about our 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 pleased that our RFID all-in-one cross body was selected as one of Opera's [ph] favorite things this holiday season and we are very happy with the sell-throughs.

We are also pleased with the progress we are making in licensing. We are strategically layering in licensing opportunities to reach new markets and customers. From bedding to phone cases, we continue to see an exceptionally positive response from the market in terms of placement in both existing and new distribution.

Our latest entry into medical uniforms has been very positively received. We also tested our flash sales-like concept in October. The event was a success and we will use learnings from this experience to strategically execute other events in future. The flash site will allow us to segregate certain clearance sales from verabradley.com.

On the full line store front, we have continued to upgrade our most productive stores with about half of our current 112 store base featuring our updated design standards. We opened a full line pop-up store in September in brand new hall in Boston and we have been very happy with the results in this high traffic location.

We closed two full line stores so far this fiscal year; San Francisco and Thousand Oaks, California, and expect to announce three or four additional closures by the year end. On the factory side, we opened six stores this year bringing our factory count to 52 and our new factory stores are performing well.

We expect to add about six new factory stores per year over the moderate term. On another note as you might recall, we have a very small wholesale presence in Japan with a licensed partner. In mid-2018 we will be exiting Japan.

At this time we believe it is important to focus on strengthening our core domestic operations through the implementation of Vision 20/20.

We continue to believe that there are opportunities for international expansion in the long-term, particularly as we remove the excess clearance activity from verabradley.com and focus our product assortment on our casual, comfortable and affordable lifestyle. Now let me turn to Vision 20/20.

During the third quarter we made a lot of progress solidifying our detailed Vision 20/20 plans and we are continuing that work into the fourth quarter.

As you know, the key focus areas for Vision 20/20 are moving to a significantly less clearance driven business model and reducing SG&A expenses which should position Vera Bradley for the long-term improved brand and company health. Of course, driving brand desirability through product and marketing innovation remains top of my product team.

On the product and pricing front, we will focus on three key areas. First, we will significantly reduce the amount of clearance product available on verabradley.com and in our full line stores. This will help to reset our customers pricing expectations and restore our full price business. You will see this change begin I spring of next year.

Implementing a limited number of flash sale event throughout the year will help with this effort. Second, we have already begun to narrow our current products offerings by eliminating unproductive or incongruent categories and SKUs from our assortment.

For example; we are just continuing our [indiscernible] leather collection fragrance and jewelry base bringing next year. As we reduce clearance and narrow our offerings, inventory levels will begin to come down next year.

Lastly, we are focused on building tighter assortment guardrails around introducing new categories, patterns and pricing; assuring the right fit for our brand and that our products not only provide beautiful solutions but also reflect our signature attributes of comfortable, casual and affordable.

Over the last several months in conjunction with outside consultants, we have done a lot of work around our patterns determining the DNA and isolating the characteristics of our most successful prints.

Conversely, we have determined commonalities amongst our least popular patterns and we are confident we could apply the findings with this comprehensive analysis to drive more pattern successfully forward and you should see these changes by fall of next year.

On the SG&A front, in the third quarter we took actions to right size our corporate infrastructure to better align with the reduced size of our business.

As we go forward, we will continue to look for other corporate efficiencies, lower marketing expenses and optimized return on spend and taking more aggressive stands on reducing store operating costs. In addition, we are forecasting the close upto 50 underperforming full line stores by the end of fiscal 2021, primarily as leases expire.

We have done a good job reducing cost of sales over the prior three years by shifting to lower cost manufacturing, better raw material sourcing and distribution efficiencies. And we believe there are incremental sourcing and supply chain opportunities in fiscal 2019 and beyond.

These savings can help offset the natural overhead deleverage that will occur as we reduce inventory levels and as our channel mix changes.

By continuing our focus on product and executing Vision 2020, we expect that our business and brand will become healthier, operating performance will improve and cash flows will remain solid over the next three years. Operator, we will now open up the call to questions..

[Operator Instructions] Your first question will come from Mark Altschwager with Robert W. Baird..

I just wanted to start about asking about the comp this quarter, could you talk a little bit about the trends in full price versus outlet. I think more broadly we've heard some other retailers talk about some firming traffic trends in late October and into November.

Just curious if you're seeing anything along those lines as well?.

So from a comp perspective, we don't disclose kind of the difference between full line and factory but ultimately factory [indiscernible] are better comp than our full line business. We saw from a traffic perspective, we saw into the late October and into early November, some improvement in our traffic in both full line and in factory..

And I also wanted to ask about marketing and the plans for the holiday period. Just with the timing shift into Q4, you outlined in the release, would -- is marketing spend going to be up year-over-year in Q4? So maybe conceptualize that a bit.

And then how are those dollars being allocated? I think last quarter you talked about more focus on conversion with core customers versus some of the brand awareness activities; just a little bit more color on what's being done there? Thanks..

Mark, ultimately marketing is going to be slightly flat to down-ish in the fourth quarter from a spend perspective and we're continuing to focus on kind of more -- I think we've talked about lower funnel versus higher funnel kind of spend into the fourth quarter, so more transaction we're trying to convert some more consumers..

So as you think about our marketing spend in fourth quarter and those lower funnel activities it's really targeting our digital spend to really -- could that put the customer -- it's also working on a lot of customer journeys with their existing customer base, I mean really being much more specific and trying to drive to conversion as opposed to only focusing on kind of top side brand building..

And next we'll hear from Oliver Chen with Cowen & Company..

Just considering Vision 20/20 and wondering about your long-term view on the indirect channel, sort of how this could evolve and how you plan to optimize your distribution network going forward; just thinking about the balance between stores and department stores and e-comm.

And then, just bigger picture separately; could you update us on the hand bag and the accessories market at large, thoughts on overarching trend you're seeing or any kind of changes in consumer behaviors within the market? Thanks..

First of all, in terms of the indirect part of our business; that as we think about Vision 20/20 implementation and really reducing the clearance activity on verabradley.com, we believe that that will be one of the key catalyst to begin to improve the trends that we've seen in indirect.

The amount of clearance activity that we've had online we believe has been destabilizing to our indirect channel, so that's part of it.

We're also continuing to work with our indirect partners, whether they are department stores or whether they are part of our specialty channel to really look at each door of distribution and doing some pruning and tightening that out [ph] and make sure that we're very focused in the distribution, it has been encouraging for us to see on the department store side as the department store partners who are the most full price oriented and less promotional with the brand is actually been having stronger results.

And so that really helps us as we kind of go forward and continue to narrow our focus and really look for opportunities to restore the brand health.

And in terms of the overall thoughts on the handbag markets; I think a lot of what we've been seeing in research is yes, maybe a some less negative that's been happening now on the handbag market which is encouraging to see.

We have still seen some erratic performance as we look at data out of NPD and in terms of kind of month to month, some ups and downs, but we do think that we have seen such a negative movement on handbags over the last 18 months that we do feel we're beginning to see -- beginning to hit the bottom or maybe the handbag decreases and seen some improvement in that trend.

But I still think we have little ways to go before we see a robust handbag market again..

[Operator Instructions] From AWH Capital, Austin Hopper..

In your prepared comments you alluded to -- I think you kind of call it near-term gross margins or maybe for 2019; well, are you saying that gross margins will be similar in 2019 to 2018?.

Yes. I mean we've not given specific guidance but we expect the Vision 20/20 benefit will have some longer term benefits versus the short-term.

So in FY19 we'll see some deleverage based on the reduced inventories working through Canaveral DC [ph] but ultimately some of the costs savings that were -- niches will be more of the back half and into really FY20..

So we are expecting gross margin next year to be similar to what we are today..

From C.L. King & Associates, Steve Marotta..

Is it possible that you can give a rough breakdown of the $20 million to $25 million in annualized costs savings from an SG&A standpoint? How much would that be from stores, from headcount, and from other expenses, can you give a rough estimate and some couple of buckets there?.

So if you think about just kind of the size of kind of the totals, ultimately, largest total is going to be through a labor reduction, ultimately for whether that's corporate and stores combined.

Then we'll have some incremental savings and associated with marketing as we bring some marketing efficiencies in-house from accretive perspective, we'll see some savings associated with that and also kind of our refocus on kind of where we'll be spending our dollars.

And then the next larger bucket really is broken down probably between kind of the store closures, the stores that we're going to close, as well some discretionary spend that we're not going to do, so think about that as either whether it's T&E or looking at contract associated with the consulting's.

So at a very high level, I can't give you the exact dollars but kind of the bucket is more weighted towards this salaries and between stores and corporate..

One of the question is related to lead times; I believe that part of the initiative over the last 12 months was to lower the time from design to delivery.

Can you talk a little bit about an update there where you are and how far you think you could go over the next 12 months?.

Absolutely. Two things; as we continue to diversify our supply chain, we actually have two different initiatives working and they do work against each other a little bit.

So as we move from China and diversified into places like Vietnam and Cambodia and Myanmar, that's put a little bit of pressure on the development timeline but where we've really focused a lot of that is in our factory division which we have a little bit more ability to accept the increased fleet time.

In terms of if you think about our full price business, what we've really been working on is separating what we call our core product development cycle from our chaseability, and really moving more of our inventory to chaseability so that we have less upfront investment and we're chasing the inventory backend which makes us much more responsive to what's going on with the consumer.

So we have had opportunities to test and learn and do things very rapidly, in some cases, kind of a four month timeframe from concept-to-market; but in terms of the overall core of the business, we're still in a 12-month plus development cycle because of prints.

The print development cycle in itself takes time and that's the piece that we're working on reducing and why we've been investing so much energy behind it as we've gone to the Vision 20/20 work..

You have the targets for 12 months from now and 12 months plus now from design-to-delivery; do you have a target for 12 months from now?.

In terms of overall timeframe, it's now our primary focus right now. Our primary focus is getting the products really right, getting our assortments back around our prints being really effective, our design being really effective, and as that works through we will get closer.

We are finalizing our targets as we talk about how much of the inventory that we're kind of chasing versus long lead. We can give more color around that as we get into next year..

[Operator Instructions] And at this time, I would like to turn the conference back over to management for any additional or concluding remarks..

Well, thank you for joining us today. Happy holidays, and we look forward to speaking to you on our year-end earnings call on Wednesday, March 14..

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation. And you may now disconnect..