Mark Dely - Chief Administrative Officer Rob Wallstrom - President & CEO John Enwright - EVP & CFO.

Janet Kloppenburg - JJK Research.

Good day and welcome to the Vera Bradley First Quarter Fiscal 2019 Earnings Conference Call. This call is being recorded. And now at this time I'd like to turn the conference over to Mr. Mark Dely, Chief Administrative 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 February 3, 2018 filed with the SEC for 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, also joins me today. We are very pleased that our first quarter results exceeded both expectations and prior year performance.

This was primarily driven by a higher than planned gross margin rate, largely related to reduced inventory clearance and improved full price selling and better than expected expense leverage.

Vision 20/20 – our plan to strengthen our brand and Company health by materially reducing clearance and realigning our expense structure continues to be the driving force behind every action we make.

As a reminder, we continue to implement Vision 20/20, we are routinely monitoring and reporting on four key elements; progress on restoring full price selling, delivering our SG&A and cost of sales reductions, cash flow generation, and retention of our customer base. We made excellent progress against these initiatives in the first quarter.

We improved the quality of sales by reduced clearance activity in our full-line stores and on verabradley.com by over 75% and increasing comparable full-price selling in these two channels in the high-single digit range.

We continued to deliver on our SG&A reductions through diligent expense management, and implementation of our Vision 20/20 initiatives. We increased our cash and investment balances compared to the prior first quarter by more than $30 million to over $130 million.

As expected, our overall customer count was down in the quarter reflecting lower online traffic due to significantly reducing clearance levels combined with continued traffic issues in the factory channel.

The good news is that the customer count in our full-line stores and on verabradley.com exceeded our expectations and a higher percentage of new customers are entering the brand through full price purchasing.

A primary goal for fiscal 2019 is to drive brand desirability through product and marketing innovation, and we made substantial progress on these fronts as well. And I will talk more about this later in the call. Now, I will turn the call over to John to review the first quarter financial performance.

John?.

Thanks Rob, and good morning. Let me go over a few highlights for the quarter. As I discuss the quarter, keep in mind that the prior year income statement numbers exclude previously disclosed severance structures. Current year first quarter net sales of $86.6 million were in line with our guidance range of $84 million to $89 million.

Prior year first quarter net sales totaled $96.1 million. Our first quarter net loss totaled $1.4 million or $0.04 per diluted share which was better than our guidance range of $0.08 to $0.10 loss. Last year before severance charges, we posted a net loss of $3.2 million or $0.09 per share.

Current year first quarter direct segment sales totaled $65.5 million, a 4.8% decrease from $68.8 million in the prior year first quarter. Comparable sales, including e-commerce decreased 8.5% for the quarter, which was partially offset by new store growth.

As expected, first quarter comparable sales, especially verabradley.com sales were negatively impacted by the reduction in clearance activity. Indirect segment sales decreased 22.9% to $21.1 million from $27.3 million in the prior year first quarter, reflecting a reduction in orders from both, specialty accounts and certain key accounts.

Gross profit for the quarter totaled $48.6 million with 66.1% of sales compared to $52.7 million or 54.8% of sales in the prior year first quarter, a year-over-year 130 basis point improvement, primarily related to reduced clearance activity and increased full-price selling on verabradley.com and in our full-line stores, channel mix changes, a reduction in product costs and freight savings.

These improvements were partially offset by flash sale activity on our online outlet sale and increased promotional activity at our factory outlet stores. The gross margin rate was meaningfully better than the guidance of approximately 54.8%, primarily due to better-than-expected full-price selling on verabradley.com and in the full-line stores.

SG&A expense totaled $50.7 million, or 58.6% of net sales compared to $56.4 million or 58.7% in the prior year first quarter excluding severance charges. SG&A expenses were slightly lower than our guidance range of $51 to $53 million due to timing of expenses and careful expense management.

Our operating loss totaled $1.9 million or 2.2% of net sales in the current year first quarter compared to an operating loss excluding severance charges of $3.5 million, or 3.6% of net sales in the prior year first quarter. By segment, we also had a nice year-over-year increase in operating margins percentages.

Direct operating income was $7.3 million, or 11.1% of sales compared to $6.8 million, or 9.9% of sales in the prior year; and Indirect operating income was $8.3 million, or 39.3% compared to $9.4 million, or 34.6% in the prior year. Now let me turn to the balance sheet. Net capital spending for the first quarter totaled $3.7 million.

We still expect to spend about $10 million this year in CapEx. Cash, cash equivalents, and investments at quarter end totaled $132.3 million compared to $101.4 million at the end of last year's first quarter and we had no debt outstanding.

We have managed working capital effectively by reducing inventory by over 18% which is well above our sales decline. Quarter-end inventory was $86.2 million compared to $105.4 million at the end of last year's first quarter and at the low end of our guidance of $85 million to $95 million.

Now let's turn to our outlook for the second quarter and full year. Keep in mind that all guidance numbers are non-GAAP. Prior year non-GAAP numbers that I will reference exclude the severance, store impairment, consulting, tax reform legislation, and other previously disclosed charges.

Current year non-GAAP estimates exclude any potential similar item. Just a couple of things to mention as we look ahead.

Due to the 53rd week last year, comparing this year to last year by quarters, not by apples-to-apples; the second quarter will be the beneficiary of it's shift as our annual year birthday [ph] sale of factory promotional event moved into the second quarter this year from the third quarter of last year.

Also keep in mind, in the fall of this year we will begin anniversarying the Vision 20/20 SG&A expense reductions. As a result, second half EPS performance expected to fall below the prior year as we continue to reduce sales.

For the second quarter, we expect net sales of $111 million to $116 million compared to prior year second quarter of $112.4 million. We estimate that approximately $6 million of sales will move into the second quarter of this year from the third quarter last year related to the 53rd week calendar shift.

We expected direct segment net sales to be flat to up in the low to mid-single digit range compared to the prior year including a comparable sales decrease including e-commerce in the low to mid-single digit range. We believe our indirect net sales will be down in the low single-digit range during the quarter.

We expect our gross margin to be flat or down slightly compared to last year's second quarter of 56.3%. The rate may be down slightly due to the previously mentioned promotional event shifts into the second quarter. SG&A expense, we've expected to range from $55 million to $57 million compared to $55.9 million in the prior year second quarter.

The SG&A estimate reflects expense management and implementation of Vision 20/20 savings offset by the timing of certain SG&A expenses, primarily marketing, expected to shift into the second quarter this year. We expect second quarter diluted EPS will be $0.15 to $0.17 compared to $0.13 in the prior year second quarter.

As previously mentioned, event shifts based on EPS benefit of approximately $0.07 per diluted share to the second quarter. We expect inventory to be in the $85 million to $95 million range at the end of the second quarter, compared to $104.1 million at the end of the prior year second quarter.

As a reminder, the majority of Vision 20/20 product and pricing initiatives have been implemented this year and we believe these changes will negatively impact year-over-year annual sales by $30 million to $50 million which is reflected in our updated annual guidance of $405 million to $422 million. This compares to sales of $454.6 million last year.

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

Gross margin from fiscal 2019 is expected to increase to a range of 56.3% to 56.6% compared to 56.1% last year. The year-over-year rate should be boosted by reduced reliance on clearance selling and lower product costs, partially offset by channel mix changes and expected overhead deleverage due to lower inventory levels.

We expect SG&A expense to total between $210 million and $215 million for the year compared to $221.4 million last year, with estimate reflecting expense management of Vision 20/20 savings.

Expense reductions are coming through right-sizing our corporate infrastructure to better align with the size of our business, growing our marketing spend by focusing on efficiencies while keeping our most loyal customers engaged and taking more aggressive stands on reducing store operating costs and closing under-performing full-line stores.

As a reminder, we expect through these SG&A expense, by upto $30 million through fiscal 2021 from our fiscal 2017 baseline spend of $236 million for severance Vision 20/20 and disclosed charges.

The expense reduction process began in the fall of fiscal 2018 and we expect that $20 million to $25 million of the annualized SG&A reduction will be implemented by the end of fiscal 2019 which is reflected in our $210 million to $215 million SG&A guidance.

Based on the first quarter performance, we increased the full year diluted EPS expectations excluding charges totaling to $0.40 to $0.50. Before charges, diluted EPS totaled $0.60 last year. We continue to expect $40 million to $50 million in operating cash flow in fiscal 2019.

Rob?.

Thanks, John. Let me make just a few more comments about products, marketing and stores. We will continue to focus on driving full price selling through our Top 10 SKUs [ph] of our solids business and our signature categories like back to campus and travel. Innovation and adding new colors, styles and silhouettes are key.

We are seeing nice growth out of our Top 10 items, customers responding to our new solid colors of denim and rose gold shimmer, and new silhouettes and innovation are paint-off in areas like travel and backpacks.

We will also continue to look for appropriate brand extensions for licensing opportunities like our recently announced [indiscernible] collection that will debut next year.

We remain focused on implementing our tighter assortment guard rails around introducing new categories, patterns and pricing assuring the right fit for our brand and then our products reflect our signature attributes of comfortable, casual and affordable.

We have thoroughly analyzed our historical pattern performance determining the DNA and isolating the characteristics of our most successful brands. We are applying the findings from this comprehensive analysis to drive more pattern success going forward.

You should see these changes fully implemented with our August launch but our current pattern performance is lining up with our initial findings and projections, in conjunction with significantly reducing the amount of clearance product available on verabradley.com, and then our full-line stores, we hosted three limited duration flash sale events during the first quarter.

These events allow us to feature more full-price products on verabradley.com and to sell-through our clearance merchandise in a much more discrete manner. These events are not widely marketed and in fact, are only marketed to our hyper promotional customers.

We had another successful annual outlet sale in [indiscernible] in April generating nearly $7 million in revenue and gathering over 45,000 brand loyalists from all 50 states in several countries for few days of shopping with other Vera Bradley fans. This annual pilgrimage speaks to the brand strength.

In the marketing area, we continue to increase brand awareness with our digital first strategy. Our first quarter marketing folks focused on high quality placements and targeted digital efforts with much more emphasis on full price offerings and less on clearance and sale.

Our total impressions were up over $20 million to nearly $300 million in the quarter. We piloted our customer journey's program during the quarter where our best customers are given incentives and special recognition throughout the year. With our initial test of 20,000 customers we saw 12% lift in conversion.

We are excited about the potential and we'll continue to refine and expand this program throughout the year. We are also continuing our community and charitable initiatives with a particular focus on women and children.

Just this week the Indiana University School of Medicine announced they are establishing the Vera Bradley Foundation Center for breast cancer research in recognition of over two decades of philanthropic support from Vera Bradley and our foundation.

The foundation has donated over $30 million to breast cancer research at IU since the foundation's inception. And this fall, we will kick-off our blessings [ph] in the backpack program so the 25,000 at-risk children from cities around the country will have the tools they need for a successful school year.

On the store front, we expect to close approximately 15 full-line stores in fiscal 2019. We closed 4 stores in the first quarter and in the quarter with 105 full-line locations. We expect to close approximately 45 stores during the three-year period ending in fiscal 2021, primarily, as lease is expired.

At the quarter end, we operated 55 factory stores which include the 4 new factory locations opened in the first quarter; Lake George, New York; Charleston, South Carolina; Baraboo, Wisconsin; and Gulfport, Mississippi.

We opened our final two factory stores in Pennsylvania and New Jersey Shore in Tinton Falls, New Jersey in the second quarter prior to Memorial Day, the official start of the summer season. Each of these new locations are in high traffic, tourist locations and are off to a good start.

By executing Vision 20/20, we expect that our business and brand will become healthier, operating performance will improve and cash flows will remain strong. We still have a lot of heavy lifting ahead but we are laying the foundation for the future growth of the business. We look forward to returning the solid growth.

Operator, we will now open the call to questions..

[Operator Instructions] And first, we will hear from Janet Kloppenburg with JJK Research..

I wondered Rob, if you could talk a little bit about the indirect business and you know, it seems like the declines are starting to moderate but what's your visibility is there in terms of stabilization? It would be great to learn more about.

And also, sounds like you're improving your performance in the [indiscernible] channel; when will the promotional impact -- the change in promotional strategy impact -- be washed out there? And are you hopeful that that channel can turn positive in fiscal '18? Thank you..

First of all, in terms of our indirect business we are beginning to see and hear from our indirect partners that the sell-through's are beginning to improve, gross margins are beginning to improve which is a great first step. So that is good news to begin to see out there as we're seeing that stabilize.

Obviously, we're watching what's going on in retail, and particularly with our department store partners and watching that closely, obviously the onetime closure was disappointing but for us luckily, it was not a material piece of our total business.

So we're just watching the department store sector and our specialty channel but we are beginning to see better sell-through which is really encouraging. On the e-commerce side, we will see this reduction in clearance activity throughout this fiscal year, so we will continue to see that impact.

But as we get into next year, yes, we would anticipate that we would begin to see our e-commerce business grow again..

And what about the full-price stores? How are you feeling about the comp trends there?.

We're very excited to see both in verabradley.com and our full-price stores is that our full price business during the first quarter increased in the high single-digit, so that is really encouraging to see.

And obviously, we're going to be monitoring that very closely as we go to the rest of the year but that was definitely a very encouraging sign and we are beginning to see the traffic trends improving in our full line stores relative to where they've been which again is a second sign of encouragement..

And just lastly, in the product assortment, the way you increase the cotton content, is that balancing complete and what should we be thinking about in terms of merchandising execution upgrades for the rest of the year?.

From a merchandising standpoint; first of all, the cotton business represents about half of our total business if you think about everything that we sell, and we expect that it probably will stay around that number.

We think that's a fairly healthy number for us, so in the other 50% we have our solids business which is moving towards 30% of our business and the other 20% is all the other categories that we have but we feel very comfortable about that.

We are continuing to see really strong performance in our solid business, particularly as we introduce new fabrications, particularly what I call cloth fabrics as opposed to some of the leather categories that we've introduced in the past. So again, encouraging to see that in that part.

As we look forward in terms of product coming out in the back half of the year, we are excited that the pattern performance is going to line up with our DNA work. So as we get to the fall season, we're expecting that the pattern performance will continue to increase.

And as we've watched the first half of the year, the pattern performance has really been in line with our expectations and some of the changes we were able to tweak at the very end, we're seeing some positive responses from that. So we are building confidence in terms of our pattern -- ability to project pattern performance..

And now we will hear from Edward Yruma with KeyBanc Capital Markets..

This is Matt [ph] on for Ed, thanks for taking our questions. So stepping back, can you comment on the brand health of the business right now.

So a lot of things have changed in the past years, so new signage and store design, limiting promotions, smaller assortment, adding more cotton; so I guess how would you score your effort so far and have you been able to detect any change in brand perception thus far?.

Absolutely, Matt. Couple of answers to that, first of all, we always track our brand awareness and we saw our brand awareness over the last year took up about 400 basis points, so that was encouraging to see. As well as we were looking at brand health, the number one thing we're looking at is, what's going on with full-price business.

Obviously, we believe the more that we're driving our business to full-price, the healthier the brand is becoming, we're obviously seeing full-price going out.

The other thing that we're watching is our customer file; and as we look at our customer file, our strengths are within -- are reactived in continuing customers, so again, we're beginning to see more and more traction as we're continuing to refind the assortment.

So the initial steps we're taking, we feel that the brand is getting healthier, we're just looking forward to continue to build that strength and then eventually pushout to drive more customer acquisition in the future..

So building on that, you've had a couple of quarters in a row now, pretty nice gross margin expansion. Can you talk about the puts and takes in that line for the rest of the year. I assume that with a smaller assortment, you can order deeper on certain inputs and obviously, like you mentioned the full price selling will help.

So it seems like the gross margin guidance you gave is a little bit conservative, so I guess could you just walk me through that line?.

Yes, I can do this. Ultimately, in our initial expectations for gross margin, we didn't expect full-price selling in the first quarter and for the year to be up high single-digit, so that is one of the reasons why we're expanding our gross margin for the full year from a guidance perspective.

I mean some of the puts and takes, so much of what we talked about in the fourth quarter, you know, we're going to have some pressure from a deleverage perspective associated with a reduced inventory levels, so that's going to be some of the challenges that we're up against but there has been a lot of good work that the team has done in looking at cost savings, so our sourcing and product development team, our design team, our distribution team have all been working hard and looking at cost savings and we did see some IMU improvement in the first quarter that we also didn't anticipate.

I've anticipated that happening closer to the back half of the year. So, I don't know if I would call our guidance -- our updated guidance conservative. I would say I think what our current expectation is given that our first quarter performance..

[Operator Instructions] We will now move to a question from Oliver Chen with Cowen & Company..

This is Joanna [ph] for Oliver today, thank you for taking our questions.

Could you just talk about what you saw in terms of performance at your outlet versus full-line stores and what you saw in terms of traffic and conversion online? And were you able to capture some of the value-driven customer who used to shop more promotional items? That will be great, thank you..

Let me try and answer that. First of all, in terms of what we're seeing in the outlet versus the full line business, we definitely have seen in our outlet channel, little bit of softening in traffic as our full line businesses become a little bit stronger from a traffic flow.

In terms of trend our outlet has softened up a little bit, so that is one thing we're really watching, there has been a lot of changes between weather and calenderization and so we're anticipating that that will begin to strengthen as we go through the year but there have been a little more challenges on traffic and outlet.

On the flipside, conversion on our outlet channels have been improving, so that's what we are.

In terms of the e-commerce business, we are seeing traffic down slightly because of the amount of promotional activity, we've taken that out but we've actually been very pleased with the traffic changes due to the amount of clearance we've taken out which always converted significantly higher, we are seeing that impact in our conversion -- our full-price conversion on our e-commerce business is actually up but the total conversion is actually down just due to the reduction of clearance activity..

And have you seen any impact from the cotton price increase given you have some exposure to that?.

From a sourcing standpoint, no. The cotton piece of our total sourcing cost is not that high and the team has done a really good job of finding other ways of offsetting that..

[Operator Instructions] And with no additional questions in the queue I will turn the call back over to your host for any additional or closing remarks..

In closing, I would like to thank our amazing Vera Bradley team. We are all committed to executing Vision 20/20, we have an exciting future ahead and the collaboration, ingenuity and tenacity of our team will be key to our success.

And thank you for joining us today, and we look forward to speaking to you on our second quarter call scheduled for September 5..

With that, ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation and you may now disconnect..