Q4 2020 Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the Vera Bradley fourth quarter fiscal yearend earnings Conference calls at this time, all participants I didn't listen only mode bothering to presentation. We will conduct a question answer session instructions will be provided at that time pretty tricky for the question.
And as a reminder, today's conference is being recorded.
Now I'd like to turn the conference over to Mike do you like their Bobby's Chief administrative officer. Please go ahead Sir.
Good morning, and welcome everyone would like to thank you for joining us for Vera Bradley's earnings call today. Some of the statements made during your prepared remarks in response to your questions may constitute forward looking statements made pursuant to an within the meaning of the safe Harbor provision 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 in the company's most recent form 10-K filed with the FCC for a discussion of known risks and uncertainties investors should not assume that that statements made during the call will remain.
Operative at a later time, we undertake no obligation to update any information discussed on the call I'll now turn it over to Vera Bradley CEO, Rob Wall Street, Rob.
Thank you Mark good morning, everyone. Thank you for joining us on todays call John invite our CFO also joining me today.
Consolidated revenue was asked your they performance were in line with our guidance for the fourth quarter and the fiscal year, although the gross margin rate fell below our expectations. Our promotional cadence was inline with last year, but our customers focused there's been very promotional clearance periods, which resulted in reduced gross margin across both.
Brands. In addition shipping costs were higher than expected as a result, our fourth quarter in annual consolidated non-GAAP diluted EPS fell below our guidance.
Although fourth quarter earnings were not as strong as we would've liked we made significant progress during the year our path to building a strong foundation for future growth and improve shareholder return.
Over two years ago, we embarked on vision 2020, our aggressive three year plan to restore the Vera Bradley brand and business to a healthy foundation and to return to our company to solve the growth.
Two years into our plan, we have made meaningful headway strengthening the Vera Bradley business and acquiring pure Vito.
Able to generate a 39% non-GAAP EPS improvement on a 19% growth in revenues for the year.
In fiscal 2018, the first stage of 2020 was to resort branded company help we've reduced clearance, Rob revenues and restored full price selling delivered SGN day and cost of goods reductions maximize retention of the company's customer base and generated cash from operations, we continue to build on that.
Progress in fiscal 2020 by once again, improving the quality of sales at our full line stores that I'd Vera Bradley Dot com through increased comparable full price selling into these two channels of approximately 3%, which is on top of the 20% increase in the prior year.
As we completed year two of our three year journey in fiscal 2020, our commitment to grow it our customer base sales and profitability paid off.
And as a reminder, our three key areas of focus for fiscal 2020 were number one broke our main objective was to return to positive comparable sales growth. This year, and we generated comp growth of 3.4% at Vera Bradley Despite the challenging handbag and accessories environment. This improvement was driven by innovative pro.
Product and supported by data driven marketing at a constant focus on customer engagement and the consumer experience. The addition of pure be that to Vera Bradley portfolio, what's important element of our fiscal 2020 growth pure of either is a great strategic fit it is bolstered our position as a unique lifestyle company.
And number two operational excellence, we mitigated the impact of increase tariffs through rapid replatforming the diversification of our sourcing countries moving to approximately 25% of our production and trade up from approximately 54% in 2018 in 70% in fiscal 2018.
Midyear. We also began a two year process or re platformed meet our ERP and other key information systems to become more streamlined nimble inefficient in our technology platform and business processes.
The number three ownership, we continually reinforced our unique culture has an ownership based model every associate has the ability to drive significant value creation through both individual and team efforts. Our 2018 associate engagement survey once again generated best in class engagement scores at our fiscal 2020 customers satisfy.
Jackson score of 88 hit our NPS score of 76 were also best in class.
Let me talk about some of our other specific fiscal 2020 accomplishments.
For Vera Bradley of the product area, we continued to build dominant at our T. franchise areas of youth campus travel and every day as well as our top 10 items, we've developed a type like for innovative fabrications to drive customer engagement and modernization of the brand.
We launched our first in a series of performance fabrics Cold performance 12, which is lightweight durable and water-repellent customers love It and it is the specialty appealing to 25 to 40 year olds urban customers and higher income customers.
We also introduced our environmentally friendly reactive collection beta fabric from recycled plastic bags in fact, nearly 4 million bottles will be recycle this year for the reactive fabric reactive is generating strong customer engagement and media coverage.
We also drove silhouette innovation, we introduced the slaying along with our lay flat collection first old travel pieces that a zip our three size for easy accessibility.
Access retail so selected Vera Bradley's lay flat duffel as a winter for its design Excellence awards in the travel luggage category.
We successfully introduced collaboration with several iconic brands, including Starbucks Crux Disney in Gillette fetus to create and sell limited edition product collections.
The Vera Bradley plus vetoes razor collaboration was recognized in people magazine's best New beauty products of 2018 Awards.
We announced another exciting collaboration with Warner brothers consumer products to create a Vera Bradley plus Harry Potter back to campus and dorm line, which will launch in September of 2020. These collaborations increase our brand visibility among new customer groups and provide momentum for growth.
We expanded our customization program, where customers can design there are backed by mixing patterns and solids, along with creating embroidered personalization both inside and out.
On the Vera Bradley distribution front, we continued to rationalize and strengthen our store base. We opened six new factory stores relocated and expanded three of our top factory stores and closed 11 underperforming polo stores and ended fiscal year with 88 full line stores and 63 factory locations.
Our customer service model and newly implemented voice of customer initiative continue to drive industry, leading customer satisfaction scores.
Our annual outlets sale gather nearly 43000 brand loyalists did generated sales of over $6 million during the five day of that highlighted our strong customer community.
Our online outlet flash sales allowed us to sell merchandise and a more discreet better removing over 48 million of thirds activity from our full line stores and BB dotcom over the last two years.
In the marketing area Vera Bradley.
We completed the in sourcing of our customer data science team added to our business analytics group and completed the rollout of our new customer data platform. The insights gained from our robust data now will allow us to adjust our marketing mix at approach or a real time basis. Consequently, we experienced a year over year income.
Ladies and new customers of over 10%.
Our digital first strategy focused on targeted digital efforts increased brand awareness with total impressions up more than 170% to over 5 billion for the year.
We increased brand collaborations and Influencer engagement shows the strength and relevance of our brand generated tremendous media of does our influencer programs one several industry awards.
Vera Bradley one to 2018 outlet retail chain Best Marketing program Award at the International Council of shopping center deal, making carpets.
Vera Bradley was about 84 outlet chains nominated for this prestigious industry Award.
Under the umbrella VB cares, we reinforce our position as a total stakeholder focused and socially conscious organization and continued to strengthen our community support and charitable initiatives that are meaningful to our customers and that make it significant impact on those and need, particularly women and children.
Efforts, including supporting New Hope girls, our national blessing to the backpack program and raising 2.1 million for the Vera Bradley Foundation for breast cancer.
We are proud to have supported nearly 30 different charitable organizations in fiscal 2020.
At pure veto.
PURA Vida had a terrific revenue year with sales up more than 50% over the prior year.
The team continue to experiment with introduced new designs and signature Corp, bracelets, and jewelry as well as introducing new trends, including the mood ring of bracelet enamel Daisy collection, and semiprecious stones charms and stone hoops.
Charity bracelets continued to be a big draw with pure video, reaching over 2 million in lifetime charitable contributions.
Pure via social media engagement is strong they are one of the most highly engaged brands in the accessory space, surpassing the 1.9 million market followers on Instagram and consistently listed as one of the most if not be most engaged jewelry brands on Instagram.
Instagram followers on Facebook likes and monthly clubs subscribers all rose during the year.
PURA Vida continued to rate at the top of the industry for their net promoter and customer satisfaction scores.
Looking ahead vision 2020 year three.
Last year was an important year filled with both successes and challenges in the end, we improved our financial results.
Strengthened our customer engagement enhanced our culture and established a growth plan for the future.
Fiscal 2021 promises to be an exciting but challenging year as we complete our three year journey.
Our goal is to build upon the progress of the last two years and as a company. We will focus on two key areas robust growth in sustainable health I will talk more in a few minutes about or initiatives for fiscal 2021.
However, the uncertainties in the global environment, particularly surrounding Corona virus potential supply traded revenue implications make our fiscal 2021 financial performance difficult to protect and as a result, we are only providing guidance for the full year, which does not reflect any future ramifications firm.
Good day team, we will not be providing quarterly guidance until we have more clarity on the situation.
We do not believe this will affect our long term strategy in initiatives.
Now, let me turn the call over to John to review the financial results and outlook.
Thanks, Rob and good morning, as a reminder, financial results have been consolidated to include pure beat up beginning July 17th 2019 that first full day following the acquisition prior period numbers have not been understated.
The current year non-GAAP fourth quarter in fiscal year income statement numbers reference below exclude that previously disclosed pure via ITC and other net charge as outlined in today's release.
Fourth quarter consolidated net revenues totaled 156.9 million within our 155 to 162 million guidance range.
Excluding pure veto Europe rally net revenues totaled 121.4 million, a 2.7% increase over 118.2 million in the prior year fourth quarter.
Excluding net charges consolidated fourth quarter. If your Bradley incorporated net income totaled 14.3 million or 42 cents per diluted share an increase of more than 60% from last years net income of 2.6 million or 25 cents per share.
The current year number included eight cents attributable to pure Vito.
As Rob noted our fourth quarter results fell below our guidance of 49 cents to 53 cents.
Current year fourth quarter beer abruptly direct segment revenues totaled 103.6 million, a 5.7% increase over 98 million last year.
Comparable sales increased 2.4% for the quarter.
Beer, probably indirect segment revenues totaled 17.8 million.
And 11.6% decrease from 20.2 million in the prior year fourth quarter. The decline was primarily related to a reduction in orders and in a number of department store accounts.
Pure FIDA segment revenues totaled 35.5 name.
On a non-GAAP basis, excluding the pure view.
Confusing the purely the inventory step up in their division gross margin totaled 87.2 million or 55.6% of net revenues compared to 67.1 million or 56.8% of net revenues from the prior year fourth quarter.
Pure Buda had no impact on the current year fourth quarter non-GAAP gross margin.
The nine crack gross margin was below our guidance range of 57.5% to 57.8%, primarily due to higher customer spending being promotional and clearance period and incremental shipping costs.
On a non-GAAP basis, excluding net charges consolidated <unk> expense totaled 67.2 million or 42.8% of net revenues for the quarter compared to $55.6 million were 47.1% of net revenues in the prior year fourth quarter.
These non-GAAP expenses or within the guidance range of 66 to 67.5 million.
Pure via added $14.3 million SGN expenses, which excludes the copper mentioned intangible asset amortization.
Total operating expenses were higher than the prior year, primarily due to these pure viewed expenses.
On a non-GAAP basis, excluding net charges fourth quarter consolidated operating income totaled 20.1 million or 12.8% of net revenues compared to $11.7 million or 9.9% of net revenues in the prior year fourth quarter.
Consolidated net revenues totaled 495.2 million for the current fiscal year.
Excluding purity to build rally net revenues totaled 429.3 million.
2.2% increased from 416.1 million in the prior year.
Excluding net charges appeal Bradley incorporated consolidated net income for the fiscal year totaled 20.2 million or 82 cents per diluted share.
This performance included 16 cents attributable to peer review.
We posted net income of 20.8 million for 59 cents per diluted share in the prior year.
Beer Bradley direct segment revenues for current fiscal year totaled 347.5 million, a 5.9% increase from 328 million in the prior year.
Comparable sales increased 3.4% for the for the year.
Full price selling and accompanies full line stores and onto a rally dotcom increased by approximately 3% for the year.
The dealer Bradley indirect segment revenues for the fiscal year totaled 81.8 million, a 7.1% decrease from 88.1 million in the prior year, reflecting reduction in orders and in a number of department store accounts.
Pure view this segment revenues totaled $65.9 million for the partial year.
Excluding inventory step up amortization non-GAAP gross margin for the fiscal year totaled 280.1 million or 56.6% of net revenues compared to $238.6 million were 57.3% of net revenues in the prior year.
The inclusion of pure Evita benefited the current year non-GAAP gross margin by approximately 40 basis points.
The non-GAAP gross margin was below our guidance range of 57.3 to 57.4 due to higher customer spending during promotional and cleans periods and incremental shipping costs.
On a non-GAAP basis, excluding net charges machine and expense totaled 242.4 million of 49% of net revenues in the current year compared to $212 million or 50.9% of net managed in the prior year.
These non-GAAP expenses within the guidance range of 241 to 243 million.
Purity to added 28.2 million reduction expenses, which excludes the aforementioned intangible asset amortization.
Total pension expenses were higher than the prior year, primarily due to these peer reviewed expenses.
Excluding net charges currently consolidated operating income was 38.8 million or 7.8% of net revenues compared to 27.1 million or 6.5% of net revenues in the prior year.
Operating cash flow totaled 20.6 million for the fiscal year.
Now, let me turn to the balance sheet net capital spending for the fiscal year totaled 13.3 million inline with our expectations.
During the fourth quarter, we purchased approximately 2.3 million of common stock at fiscal year end with approximately 35.8 million remaining under 50 million dollar share repurchase authorization.
Cash cash equivalents and investments fiscal year end totaled 17.8 million compared to 156.6 million last year the reduction from the prior year, primarily relates to the pure via the acquisition.
We continue to have no outstanding debt.
Total fiscal year end inventories was 123.6 million, which includes 17.1 million of inventory related to pure data.
Inventory was 91.6 million at last fiscal year end.
Inventory was level with modestly lower than our guidance range of 125 to 135 million.
Now, let me take a couple of minutes to review our outlook for fiscal 2021.
As Rob noted based on the uncertain environment, we're not providing first quarter guidance only annual guidance.
Annual guidance does not include any impact from Corona buyers.
All forward looking guidance numbers to I will discuss our non-GAAP and include expected purely to performance.
Prior year numbers include pure Buda After July 16th 2019 acquisition date.
The prior year gross margin as she may in earnings per diluted share numbers exclude the previously disclosed net charges.
Current year guidance excludes any similar charges.
For full year, we expect net sales of 555 to 585 million.
This includes estimated purely to revenues of 125 to 135 million for the full year compared to 65.99 of partially or revenues last year.
Net revenues totaled $495.2 million last year.
Our full year revenue guidance unchanged Vera Bradley direct segment net sales will increase in the low to mid single digit range compared with the prior year.
Total comparable sales, which will include peer reviewed a direct to consumers in the back half of the year are expected to be flat to mid single digit increase.
We expect the Vera Bradley indirect net sales were down in the mid single digit range for the full year.
We expect our consolidated gross margin for fiscal 2021 will be 56.7% to 56.9% compared with 56.6% last year.
The rate increase should be driven by sourcing and operational efficiencies as well as inclusion on pure data.
We expect as she makes sense to total between 269 and $280 million for the year compared to $242.4 million last year.
This estimate includes 52% to $56 million pure beauty expenses for the full year compared to $20.2 million question expenses for the partial year last year.
We expect full year diluted EPS will range from 93 to one dollar eight.
This estimate includes 33 cents to 37 cents attributable to pure leader for the full year compared to last year's partially appear unit EPS accretion of 16 cents.
We expect capital expenditures will total between eight to 10 million compared to 13.3 million last year, reflecting investments in new factory stores in technology and logistics enhancements.
We expect to generate 60 to 70 million of consolidated operating cash flow in fiscal 2021, Rob.
Thanks, Joe.
Fiscal 2021 promises to be a challenging but exciting year as we complete the third and final phase of our vision 2020 journey, we have a strong plan in place with a robust innovation pipeline across product marketing and distribution.
On the other had there are some internal and external wrist, most notably is co bid.
Team.
Nonetheless, we will focus on building upon the progress over the last two years for both Vera Bradley enter of either our fiscal 2021 strategic priorities will center around robust growth and sustainable help let me start with Vera Bradley.
Vera Bradley's growth will be driven by continued product innovation as well as enhanced brand and customer engagement.
Our products will remain authentic and true to our brand, but innovation is becoming more and more critical to our product assortment.
We have developed and ongoing pipeline of fabric innovation to ensure marketing relevance by offering cotton updates in cotton alternatives, both to retain existing customers and attract new customers to the brand.
We will continue to grow our newest offerings of performance twill and reactive and we'll large more fabric innovation over the next 12 to 24 months. We will also continue to bring new styles and differentiated silhouettes to the market to meet all facets of our customers lifestyles.
Our focus is on building dominance in our key franchise areas of youth campus travel that every day.
The branded customer engagement has several facets, including marketing initiatives collaborations VB cares CSG and store profitability.
In the marketing area, we will capitalize on and build upon the investments we've made last year and data science business analytics and customer data additional engagement will be driven by more advanced used to customer data as a further refine media spend and mix on a real time basis.
In addition, we will utilize more user generated content drive more engagement on social media extend our branded bastard program strengthened our customer journeys centered activate activations improved storytelling and amplify our VB cares messaging.
Our customer segmentation work will far into at our product development and go to market strategies. We will also allocate funding to expand customer acquisition efforts to underrepresented customer groups.
We're continuing with our collaborations as strategic alliances that excite and engage existing and new customers expand our brand reach increased brand awareness generate media buzz and provide opportunities for Vera Bradley to strategically test and ultimately enter new product categories.
These partnerships are truly a testament to the strength in white appeal of our brands. This year, we will enter into another year of high profile product collaborations with brands light to Leadfeed us Disney in crops. We are working with several other iconic internationally known brands and exciting future product collaborations most notably.
We are thrilled about our 2020 collaboration with Warner Brothers consumer products to created Vera Bradley military border.
Back to campus and dorm worried at Vera Bradley plus Harry Potter Cozy capsule for holiday gifting.
This collaboration will not only appeal to our Vera Bradley fans, but will also attract new customers to the Vera Bradley brands.
Under the umbrella of DB cares, we're strengthening our sustainable purpose driven company that delivers meaningful social impact and value for all stakeholders, our associates our customers our shareholders in our communities.
Although our company has been purpose driven throughout our history, we are enhancing that focus and increasing the visibility to our activities. In this area. This spring we will be publishing our comprehensive EPS to report with our proxy and post commit to our web site, which will outline our accomplishments and initiatives in detail.
We will continue to strengthen our community support and charitable initiatives identifying areas, where we can make a real impact, particularly for women and children.
We want to create positive change it often invite our customers to participate with calls to action.
Just last week, we announced our second annual collaboration with New Hope Girls, a nonprofit organization that provides jobs from vulnerable limited refuge in education for girls in the Dominican Republic. The limited edition. Many collection features a total total bag and travel pouch and with design and sold by women.
By Dominican Republic artists.
Like last year the collection launched our March eight in celebration of international wins day in generated enormous media attention, we couldn't be happier to continue our support of new hope girls and brand awareness to the organization with this collection.
In April we will probably support autism speaks with a custom plus throw Blake hit in order of optimism awareness month, we're looking forward to our third annual back to school partnership with blessings in the backpack, an organization that mobilizes communities individuals and resources to provide food.
For the millions of elementary school children across America, who might otherwise go hungry and of course activities supporting the Vera Bradley Foundation for breast cancer Golan all year, our annual Vera Bradley Foundation for breast cancer Classic in June the largest women's amateur Gulf. It have been in the country typically raises over 1 billion for Brett.
Cancer research.
On the storefront, we will focus on strengthening performance in our stores, particularly on restored restoring our full line channel. The health we are improving the profitability of our full line store portfolio by rebalancing our existing fleet through select closures, along with identified future market opportunities, we know that improve.
Over the top and bottom line performance. The full line channel will improve the long term sustainability of the brand portfolio. We will continue to focus on our highest potential stores enhancing the customer experience in further localizing. Our assortments. We will continue to develop can test new formats.
We expect to close approximately 12 additional full line stores during the year.
Which would brings our total full laurie closings to 38 since the beginning in fiscal 2018.
This year, we will continue to maximize our factory performance by added six new locations and expanding what additional high performance store in Myrtle Beach South Carolina.
We will continue to sustain and strengthen our held through operational excellence by enhancing our already strong and unique culture.
We are in the midst of implementing project Novus, our new technology platform that will be flexible streamlined and efficient.
The project should be complete by the end of fiscal 2021 or early in fiscal 2022 and will not only less than the complexity of our it systems, but will also reduce ongoing expenses as enabled the company to achieve our future objectives, both in the short and long term.
At the same time, we are in the process of enhancing our go to market disciplined evaluating opportunities for efficiency improvements and reduction in time loading counter we're continuing to decrease our reliance on China with our production in China expected to drop to less than 20% this year.
Our culture is being enhanced by our ownership based model, which gives every associate the framework to drive significant value creation to their individual and team efforts. Overall, we are moving to a more innovative agile data obsessed and customer centric organization.
Now, let's talk about pure viewed as robust growth in sustainable health.
We remain really excited about the future of the pure via business. It continues to be a rapidly growing brand driven by expansion to this distribution strategy and product innovation combined with a market leading customer engagement in marketing program.
PURA Vida continues to experiment with and introduce new designs and their signature cord bracelets and jewelry and play a part of the successes of last year's launches like the mood ring embraced foot and semiprecious stones charms and Julie.
PURA Vida signature Cherry bracelets continued to be a big drop.
This year, we will launch char bracelets, the tie back to specific charities, which we believe will be very popular with pure veto caused by the end customers. This will also enable us to increase price points as well as increased total donations pure Vito will continue to innovate and grow at a signature area of the business.
New product categories for fiscal 2020 was including gravels leaning into the personalization trend hair accessories jewelry for the hair and fashion bags, which are distinctly different Vera Bradley bags.
Pure via will also opened its first labs store in San Diego by fall of this year.
This will allow us to showcase existing products as well as new product innovations and to get direct customer feedback.
The store will also create Instagram mobile moments and host Influencer events.
We will evaluate historic performance for possible future expansion.
On the marketing front pure via social media engagement is strong in army of 100000, plus micro Influencers had been Onboarded and this is a key part of our strategy.
In fiscal 2021, we will continue to build upon this very impactful Influencer program, particularly focusing on those with the greatest number of followers co founders Griffith dial and Paul Good mid will also invigorated grass roots customer outreach events, focusing other popular meet if a beds in college stores.
To ensure a sustainable health pure Vito will focus on profit management, primarily on optimizing marketing spend and generated solid gross margin performance, we will build scale in the core braced the business carefully reviewed product pricing and introduce new product categories with the potential for higher margins.
On the distribution front, we will target some larger accounts and those that will build the pure via brand.
And at PURA Vida grows we want to continue to build their retained talented organization that will drive the ongoing expansion.
In closing and so proud of each of our associates throughout the company at both brands their talent teamwork tenacity and their accomplishments thus far over the course of vision 2020.
We have restored the company to a healthy foundation return to revenue and EPS growth. It further strengthened our special culture. We still have significant work ahead, but we are looking forward to complete our vision 2020 journey in continuing our momentum into the future.
Operator, we will now open up the call for questions.
Thank you.
Good question. Please thanks.
And your telephone.
Thank you using speakerphone, please make sure your mute function.
Yes.
Kevin.
Please.
Good.
Your next question.
A question from Oliver Chen from Cowen. Please go ahead.
Thank you Hi, Rob and John the Hello, Indirects and pure vivo revenues were a little bit softer than we had model I would love. Your your thoughts on how those are trending relative to your expectations of visibility and and what happened during the quarter also.
Regarding the gross margin on this above you have a lot on shipping costs as well as promotional response.
Hi, Thank you.
Yes.
So a couple of things I think was in terms of pure viewed as we were going through the quarter. The business was exceptionally strong through the black Friday period. So much so that we had on shortened the promotional.
Cadence that we had planned and they had actually shorten that promotion, but as we saw the consumer in December and January we had said outages in terms of inventory that impacted our availability in impacted our sales volume at the back half for the quarter.
And then there was just some tightening in shipments in wholesale but overall, we still feel good with the pure via the growth rate as we go forward.
In terms of indirect we continue to see some pressure in the indirect space as department stores continue to get tighter tighter on inventory levels. There was a shortened holiday periods. There was a little bit more pressure in the indirect channel than we had anticipated.
It is it is we're forecasting to end this year, we still expect some small contraction in the indirect channel.
The gross margin mind, there were really two primary factors. One we just saw a lot of customer spend really concentrated on two key periods one was around the.
The Black Friday timeframe timeframe, which performed very strongly across both brands and then very strong and kind of the around Christmas period going into January with a real outperformance. After Christmas. So we just saw the customer gravitate towards those periods of spend which happened to be more promotional in nature.
Our promotional cadence overall was very similar to last year, but where the customer chose spend was little distorted. So that was about half of the gross margin challenge. The other half of it was just due to shipping costs and as shipping costs were going up.
It was the other half the gross margin pressure can't just add a little bit on the shipping costs. When you look at both brands.
Just a little bit on shipping costs, and I would say from a pure beta perspective.
Being a little bit more near to the business, we use our third quarter estimate to estimate fourth quarter and obviously, it historically a little bit more to more expensive and then for their valley at the end of the day, we estimated based on how we had been trending and it was just slightly more impactful than we had thought the increases.
As we think about next year, we've golf balls increases into our expectation for gross margin.
Thank you and Corona viruses something wells in monitoring on it hourly basis, what are your thoughts on.
What you're seeing what the consumer and how that may or may not manifest and and traffic trends.
Too large to read out of your control.
Another concern we have this is thinking about the consumer in the possible recession.
How are your business will make there and what kind of strategies you may have within your control as you look at various scenarios.
Yes, Thanks, Oliver, Yes, but Florida virus, obviously as a big I know this year I think at first visit starting to break in China and supply chain. The team reacted very quickly and just like last year with the try to tariffs I think the team did really well and navigating the supply chain challenges that we bid.
At able to mitigate the vast majority of it so far.
And then hopefully as we're seeing try to stabilize at the supply chain sign will not be a big problem, but we're obviously continue to watch that particularly as it relates to logistics and logistics timing.
Because the lack of supply cutting going through the logistics supply chain is disrupting a little bit of that flow, but we think we can manage through that the real big question is what happens with us consumer demand.
And with travel sporting breaks coming up at all to travel activity. We're just not quite sure how the consumers tend to be responded.
And that's why to have quality, we're not win at totally clear on the impact, but we're watching it we have seen some than better to our traveled businesses already.
In terms of our beach categories, which is really purely spring break oriented and we have seen some early softness in those businesses.
But we will see as consumers make their spring break decisions will they travel will they stay home where the shop locally we don't know yet. So we are seeing some traffic over the last couple of days, though some impact to the traffic kind of inline with what I've seen on market.
Burst out there.
It will just watching this close if we get into as you mentioned a more recessionary environment.
We've had a history of a brand been able to navigate that fairly well due to lower price point.
We've been global brands in the past, we've seen people trade down into.
So we would hope that we wouldnt repeat that type of performance, but obviously, it's something that we're watching very closely the teams focused on.
We will make good decisions daily based upon the information that were Kevin.
Rob.
The outlet channel as well as the interplay between digital and.
Physical.
I got large what's your hypothesis.
For what may happen with customer behavior, and the color on the virus.
Why we do expect to see more of the impact on our physical channels that are digital channel. So I think thats again lot of what was sort of a marketed generally what we're seeing.
But again, we're just it's going to be tied to see how to consider whether responds is merely a shift or just the consumer just take a more cautious approach to spending in the short term.
Ill take that we just have to watch how this develops over the next few months.
Thank you very much best regards.
Thank you Oliver.
Our next question from.
Please go ahead.
Good morning, Thanks for taking my question.
Just to start out I'm on the Veer Brad the comp in Q4 can you speak to traffic versus a you are.
And your various channels and then along those lines looking at fiscal 2020 in aggregate the positive 3.4% comment Vera Bradley can you speak to how much of that was driven by some of the tactical price increases that.
You talked often tear ups last year. Thank you.
Sure. This is John Mark from a traffic perspective in the fourth quarter traffic was relatively flat.
Within our store network. So ultimately we saw some increases to 81 of the drove performance and as you think about from a full year perspective.
Our total comp performance I would say.
Portion of that was driven by our price increase ultimately we took close a low single digit price increase between both channels and not likely drove portion of increase we also saw some improving customer count in assumption in our.
Overall business as well as online and we saw some increase ats on our online business.
We do think as you go into this year when you look at our projected comp performance for the Vera Bradley business.
There is really that couple of big drivers in that one is this customer growth that we've seen this year with getting double digits customer growth. This year gives us a much larger customer file going into next year and as we continued to.
Worked through the best way of stimulating that customer that gives us an opportunity as well as just our innovation or innovation, specifically around product or innovation around marketing and those are really the key drivers as we look to this next year.
That's really helpful and maybe just following up there and bigger picture on the fiscal 2020 when guidance.
I'm doing the math correctly.
It appears to imply operating income X pure indeed, that's down slightly year over year.
Just one am I looking at that correctly and I am maybe help me reconcile that outlook with the commentary and focusing on robust growth sustainable how some of the other.
Innovative things that you were just speaking to I think use and understanding there's a lot of uncertainty today. Thank you said cobot 19 is not included in that outlook.
No. So cover 19 is not included in that outlook.
Things, including outlook Israeli performance from China.
February so if we look at just the Vera Bradley brand, we don't expect for that brand from an operating income perspective to be lower than last year, they might not be probably a low single digit increase from operating profit, but ultimately we don't expect a decline.
That's helpful. Thank you and best of luck.
Thanks.
We will now take our next question Kevin.
CCB Sir please go ahead.
[music].
Good morning.
Good morning.
Do you talk a little bit about so you build out in the last.
Six months of Rolls out performance will and react and reactive how are you seeing in that in terms of changing or customer nice.
And become in broadening the customer base a little bit.
Yeah, Eric a great question. One thing we definitely are seen with performance, which will is really a strengthening of kind of that 25 to 40 year old customer base, which has been really encouraging to see a little bit more strengthen our urban areas.
And then area that has not been is strong historically for us to those are some great. Early signs. We're also getting good feedback from partners that has attracted a new customer into their store.
Ed with reactive a little bit similar set the same type of attractions in different customer, but the customers is very environmentally focused it's been very excited to reacted very positively to the reactive collection and we think that long term, that's really an important platform as well as just an import.
Beginning for us as we move more and more of our product to environmental environmental friendly type of design, which will happen over the next few years.
We feel we're just continued vehicle attract generally a young customer who is very focused on it but we're also finding that that younger customer we'll call. It that 20 year old customer is also in flow insane.
Bob So we're not only see an attraction in the young environmentally focused customer, but we're also seeing in kind of that 45th year old customer also is reacting very positively and so we're having kind of a benefit on both sides.
Are you seeing a same impact with some of your hands free designs like this link in the same way that younger customer initially and then it is driving customers older customers through it.
Yes, absolutely we are seeing that through the silhouette design also and what we found with the right about the sling introduction is that it's really.
Also become an incremental purchase right, it's a different functions something very different than the light and it's driving incremental purchasing and as we go forward. We'll continue to look for what are those opportunities in the assortment that were not meeting.
That until those us.
The flash sales what has been in response to that.
Is that something that makes a ton of since you strategically is that something you're going to continue to expand how should we think about this last cells in terms of clearing out product.
Yes, the online outlet sales what we really are trying to do there is just that we do not see that as a major growth engine for us by any means we see it as the liquidation channel.
Number one purpose of the online outlet is to keep our other channels more pure and clean and focused on full price business and it allows us to clear inventory more discreetly.
But we do not see that as a growth drivers. We go forward, we just see it as an important liquidation show.
Okay.
All right guys, Congrats and good luck with one time.
Thank you Eric Thanks.
[music].
Good question. Please.
The next question from Dana Telsey from Telsey Advisory Group. Please go ahead.
Good morning, everyone.
Do you think about the components the gross margin merchandise margin.
Can you unpack them, a little bit for Q4, and what you're thinking about the 2020 and then on the direct business, which has been a bit more challenging how do you think of the long term game plan for the indirect business. Thank you.
Yes, I'll talk about the margins for Q4 and for full year for next year. So we saw in the quarter based on how our consumer shot that we sell merchandise margins down year over year, given the fact of there were more centered around more promotional class periods.
So at the end of the that we saw merchandise margins down and we also saw some obviously our shipping costs were brought it back down. So you can think about the next year over year and I missed the guidance beams basically being about 50% based on merchandise margins and 50% gain on chicken costs as we think about nextshares at this point, we're not seeing when we're not expecting to see any city.
It can change in our promotional cadence obviously, depending on how krona virus plays out that could change, but at this point, we're not expecting see any differences MSR merchandise margins, we would expect to be able to be maintained where we saw compared to fiscal 2020.
And then in terms of indirect indirect as a couple things I think first of all will really focusing in on our strong partners.
Distort our business and grow our business with our strong partners. It we're seeing that across various elements of the business.
But it's been partners like Amazon who is bid.
Big growth partner for US, we know that we need to begin to re platform indirect to find partners that are more to growth mode as opposed to a consolidation those they were in the process of doing that right now, but we think definitely next year, we still see some contraction in the indirect channel.
But we will continue to focus on new points of distribution.
Got it and then when you think about supply chain, given whats happened with the disruption in China.
We are you on supply chain and I know you've been diversifying how'd you sum it up in terms of opportunities to supply Tim.
Thank you.
Yes from a supply chain perspective, we believe will pharma finished goods production will be below 20% from outside of China, I think everyone. We should remain everyone ultimately a.
Significant portion of our raw material still travels from China into the other.
Countries, but we believe that weve, probably for side outside China as much as we're probably going to going to in the near term. We don't believe we can get that below 10%.
I would say we've made significant progress over the last three years and using kind of our partners to move into countries, where ultimately we have a lower cost went up total fob because we're not paying duty in some of those country. So I don't see any significant changes outside of next year going from 25 to call between the high teens area for.
Production in China.
Thank you pointed out way to add as I think this is supply chain the way that we're viewing the supply chain is that it's definitely.
Continuing to more can change and develop I think the flexibility as one of our strategic assets I think we have a talented team here or there are able to react quickly and we've seen them react quickly last year to the try to tariffs we seem to react quickly to the issues that we faced early in terms of with the protocol.
Chris impact in China, and the team is just continuing to stay nimble to reinvest in our most important partners, but continue to keep an eye on the global market and where are the opportunities to continue to maintain flexibility. So it's definitely one of our strategic assets.
Thank you.
Thank you David.
The next question.
Fair enough.
Okay.
Please go ahead.
Hey, Rob Hey, John.
Thank you for taking the calling.
Nice job navigating through things and assimilating the pure via acquisition. It does look like a wonderful contributor to the company.
And that certainly provides diversification with respect to what's going on here at the krona virus I'm assuming that.
As part of.
Sure.
Forecasts, you're looking at the pure view to sign of the business not having.
Not being impacted.
Too much by front of Iris is that fair to say.
Yeah, we definitely believe that pure data is less exposed to the impact of Proto virus as compared with our brothers global brand absolutely.
It does sound also like the forecast, including what.
I'm sure you kind of modeled out is potential impact on krona virus.
Nevertheless.
You're forecasting.
Profitable year for pure viewed I'm, sorry for your Bradley on its own.
Yes, yes were sofa, if we look at both brands independent we're expecting both brands to deliver profitable earnings next year, yes excluded the impact of Corona is obviously right now the worlds rapidly changing is hard to go everyone's aware of what by the flow.
Right and some of the potential impact of grown the virus.
Assuming gets offset by what is a very nicely cash willing business with pure data that should have a similar impact.
Is that fair to say.
Yeah, absolutely one of the phase that we think really helps us through.
The core the virus environment gets more challenging we do have a incredibly strong balance sheet, a very strong cash flow position than a lot of resources to get through it and as you said.
Sure sure data is much less exposed on the gives us some diversification to hedge against that so the phase two assets really help us as we get to the story, but we're really focused on the long term execution of our strategy. We believe the dealer, Florida virus impact is more of a short mid term as opposed to a lot.
Long term impact.
Well I couldn't agree more Morrissey Rob done.
I am I imagine you did impact is going to be.
Far less than the dire.
Predictions of some out there.
And your balance sheet is the cash and cash and cash equivalents investments.
Did I read that $75 million of cash with no debt.
Yes at year end, we're 73.8 million window.
Okay. So.
At $6 per share right now.
The share of fully diluted share count.
What does that John.
Cost 33.
0.5 when insurers.
Okay. So we're looking at sort of a told on enterprise value of.
Around 200 million less the cash.
In equity value of about.
$125 million that.
So I have those numbers.
Yes, so clearly thats the operating.
So the operating income was 19 and half million dollars last year.
And did that.
With that after some of these.
On this is in things that went for its pure BITA and its you kind of its once once you sort of adjustments for that is there is there a number that.
It's somewhat higher than.
$19 million is very very healthy operating income, but it seems like there's even some things that.
We're back down to that that related to the pure via acquisition.
Yes. So ultimately there were some non-GAAP adjustments with its includes some incentive comp associated attribute acquisition as well as the amortization of some of the purchase accounting.
Ultimately a noncash events, but on a go forward basis, you can add into a model.
And what do you have a rough number on that.
And then I can kind of look too.
In regards to us.
Last year stand on you have last years, just to get that $95 million LAAP region them sort of adjustment, obviously, but it would be prior to that so.
Noncash adjustments.
So we took a non-GAAP charges of around 39.
Operating income was excluding the non-GAAP Justin's 39.
So 39 million of operating income and then.
In addition to $39 million operating income is the depreciation is that 18 or 1918 and ask million dollars is that they have that right.
That sounds about right.
Ultimately as depreciation amortization will be whose can be a little bit higher given kind of the onetime charges that we will be amortizing out.
We continue to want to call. After we could go through more detailed call if you'd like to go through some of this off the call.
Yes.
Yes. Thank you I appreciate that John I'm, just trying to get it back of announcement I mean, it seems like.
The operating income and the depreciation together, you're talking about sort of an adjusted EBITDA.
Around $50 million.
And.
Valuation that the market is ascribing to the business today of 125 million, so like two and a half times cash flow I.
20 years of investing in running accretive capital partners in managing.
Since in small and micro cap public companies I have.
Im not sure run across the business has been this discounted by the market and its I am encouraged to TV.
Retirement or fares that you've been buying back some shares the treasury stock.
Has increased and there's been I guess to the Tenbfive one plan that that is underway in terms of on share buybacks.
Yes.
Well, it's it just is such an extraordinary opportunity for shareholders be wonderful to see if the company could somehow.
Capitalize on this opportunity.
Where a market is value in this business ads.
Discount that's probably.
60, 70 media 100.
Yes, the discount to intrinsic value is.
It is truly extraordinary so.
Business like this.
Think of it as like an eight to 10 times cash flow.
Multiple that the business onto lots of.
Given that it's it.
Later.
Growing the business you need a wonderful acquisition.
Margins are very healthy.
Everything is pointing towards very.
Profitable and positive future.
Very short term blip here, which exceeds your created.
Or exacerbated a true anomaly in terms of valuation of stock.
And there there are other ways of going out into the market buying back stock more aggressively, but I just can't imagine a better investment opportunity for the company.
Buying back its own stock was $75 million of cash and equivalents on the on the balance sheet.
Grown.
When the market cap with cells is.
It's a $125 million.
We as a company.
I'd say, we because accretive capital partners is now very substantial shareholder.
The company.
There there's.
Theres really a just a terrific opportunity here.
That.
Thank you seniors.
Very volatile stock you see a bounce around.
Over the years, but.
At an all time low right now and I would just be you would just be terrific. If the board and his management.
Serious thought into very aggressive.
Stock repurchase plan, perhaps on something like that.
The tender offer for some stock Dutch auction tender modified Dutch auction tender, which allows you go out and by very large blocks without being constrained by then and five dash one and can be.
Our rules and.
Like I say this just as.
Some food for thought.
A real opportunity, which I think.
Probably won't be or too long, but something that.
I would really benefit shareholders. So.
Anyway.
Thoughts or.
No I appreciate your perspective, we definitely have those types of conversations with our board all tied to sit and talk about what would be the best utilization of cash and understanding that right now we're at an all time low from a stock perspective, we will continue to have those conversations.
Appreciate that and nice job running indices, which is a real difficult retail environment at the mall level and.
Shifting over to E. Commerce is impressive that is underway here.
Theres a larger portion today than there was a year ago.
Through the ecommerce channels and certainly the benefit of working with the peer reviewed or folks were very successful and E commerce and.
Utilizing some of the techniques at Vera Bradley's is.
It is a real opportunity here, but you've got to a wonderful 30 plus year old brands.
Really truly spectacular management team.
We really like what you're doing you've been very prudent with our or capitals and make strong balance sheet.
And there's just just such a nice opportunity here that we hope you'll you will give us some serious thought in terms of going on progress that we find backpack.
No. We definitely appreciate all your comments in your confidence to me that fully.
We'll consider everything that you've said.
Okay.
As there are no further questions I'll turn the call back to Ron.
Thank you very much for joining us on today's call. It. Thank you for following our journey in the progress we have made since we launched vision 2020 over two years ago, we have an exciting future and are ready to tackle the fiscal tackle fiscal 2021 and beyond we remain confident of our ability.
He to deliver enterprise growth in revenue profit and shareholder value in the years ahead.
Thank you for your time and we hope you can join us for our first quarter call on June Threerd.
That will conclude today's call. Thank you participation you may now disconnect.