Q2 2022 Vera Bradley Inc Earnings Call
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Yeah.
Good morning, ladies and gentlemen, thank you for standing by welcome to the Vera Bradley second quarter Conference call. At this time all participants are in a listen only mode. Following the presentation. We will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference call is being recorded I would now.
I would like to turn the call over to Mr. Mark do you like Vera Bradley's Chief administrative officer. Please go ahead.
Good morning, and welcome everyone, we'd like to thank you for joining us for Vera Bradley's earnings call. Some of the statements made 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 995 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 most recent Form 10-K filed with the SEC for a discussion of known risks and uncertainties investors should not.
I assume that the statements made during the call will remain operative at a later time, we undertake no obligation to update any information discussed on today's call I will now turn the call over to Vera Bradley's CEO, Rob Wallstrom Rob.
Mark.
Morning, everyone and thank you for joining us on today's call John Enwright. Our CFO also joins me today.
We posted consolidated year over year second quarter revenue increase of nearly 12% on a comp basis Vera Bradley was essentially back to its pre pandemic fiscal 2022nd quarter revenue level and PURA Vida was up nearly 7% over the second quarter of fiscal 2020.
Second quarter Vera Bradley brand revenues continued to improve as customers responded to product innovation stores were fully operational and sales of travel related products rebounded. Despite anniversarying exceptionally strong mat sales from the prior year.
However, we experienced two major factors that negatively impacted our results.
First the Apple iOS 14, five update negatively affected PURA Vida revenues, primarily due to the impact it had on the effectiveness of Facebook and Instagram advertising.
Facebook and Instagram platforms had been our primary marketing vehicles to drive sales and PURA Vida has maintained a market leading position consistently ranking as the number one engage brand in the jewelry category on Instagram.
Our team is working diligently to quickly diversify a portion of our marketing resources to other platforms and consequently, we began to see PURA Vida DTC sales volume build momentum throughout the balance of the second quarter and into the beginning of the third we expect PURA Vida revenues will return to a 15% to 20%.
Growth rate in the second half of the year.
Second like much of the industry Vera Bradley continued to experience supply chain challenges and significantly increased freight and tariff expenses that put meaningful pressure on gross margin in the quarter. We expect these pressures to continue for the moderate term.
We were able to continue to diligently manage our SG&A expenses and our balance sheet and cash flow remains strong with our strong first quarter performance fiscal 2022 is off to a solid start with year to date earnings well ahead of last year and ahead of where we were in fiscal 2020 pre pandemic.
We realized we will continue to face certain headwinds and uncertainties for the balance of the year, but we also know that both of our lifestyle brands have significant long term growth opportunities well beyond their core product categories. We are on track and remain committed to our vision to be a purpose driven multi lifestyle brand high growth company.
Now, let me turn the call over to John to discuss the financials.
Thanks, Rob and good morning, Let me go over a few highlights for the second quarter.
The numbers I will discuss today are all non-GAAP for a complete detailed items excluded for the from the non-GAAP numbers as well as a reconciliation of GAAP to non-GAAP numbers. Please reference today's press release.
Consolidated net revenues totaled $147 million for the current year second quarter, an increase of 11, 6% over $139.0 million in the prior year second quarter.
Prior year revenues were adversely affected by temporary store closings and reduced store hours related to COVID-19.
Although they were also substantially benefited by mask sales.
For the current year second quarter Vera Bradley incorporated consolidated net income totaled $14.0 million or 28 per diluted share compared to net income in the prior year of $19.0 million or <unk> 32 per diluted share.
Current year second quarter, Vera Bradley direct segment revenues totaled $98.0 million, a 19, 6% increase over $83.0 million in the prior year second quarter.
Since the company stores were temporarily closed for a portion of the prior year second quarter comparable sales.
Comparable store sales calculation is not pertinent.
On an apples to apples basis comparable sales were nearly flat down just one 3% for the second quarter of fiscal 2020.
Vivo Bradley indirect segment revenues totaled $24.0 million, a five 1% decrease from $24.0 million in the prior year second quarter, reflecting a reduction in orders, primarily primarily related to mass sales, partially offset by a rebound in especially in key account orders and other.
Product categories that were negatively impacted by COVID-19 in the prior year.
PURA Vida segment revenues totaled $34.0 million, a <unk>, 8% increase over $40.0 million in the prior year.
Second quarter consolidated gross profit totaled $84.0 million or 54, 6% of net revenues compared to $85.0 million or 64% of net revenues in the prior year.
Keep in mind that in the prior year, we expanded our year over year gross margin by approximately 300 basis points through the sales of cotton masks, which was not replicated this year.
The current year rate was negatively impacted by higher cost for inbound and outbound freight expense.
In addition, the lower margin rate reflects higher tariffs from previously duty free countries, where we source products, whose GSP duty status duty free status expired at the beginning of the year.
As has happened numerous times in the past, we believe Congress will retroactively reinstated duty status of the tariffs.
Have been assessed so far this year on average. This is this is negatively impacting us approximately 1 million per quarter.
Consolidated SG&A expense totaled $68 million or 46, 2% of net revenues for the current year second quarter compared to $64.0 million or <unk> 44, 5% of net revenues in the prior year as.
As expected our current year SG&A expenses were higher than the prior year, primarily due to expense reductions related to COVID-19 last year.
Our second quarter consolidated operating income totaled 100.
Totaled $17.0 million or nine 1% of net revenues compared to $22.0 million or 16% of net revenues in the prior year.
Let me talk about our forward outlook.
The retail environment continues to be uncertain and future financial performance is difficult to predict.
We are updating our estimates for fiscal 2022 based on our second quarter performance current business trends and consideration of certain macro industry and economic conditions that could impact the company's sales and gross margin performance for the balance of the year.
We are continuing to see volume and traffic increases over prior year levels can expect to control our operating expenses.
However, like many retailers, we are facing supply chain headwinds, including manufacturing delays extended transit times and substantial projected inbound and outbound freight expense increases.
Keep in mind that all forward looking guidance numbers are non-GAAP.
While we are not providing quarterly guidance, let me give some directional commentary on the third quarter.
We expect year over year revenues to increase by high single digits for the Vera Bradley brand and by over 20% for PURA Vida.
We also expect continued gross margin pressure related to ongoing supply chain challenges and incremental freight expense as well as at GSP issue.
We are forecasting the GSP savings to flow through the P&L in the fourth quarter, but the third quarter margin will continue to be under pressure until GSP is renewed by Congress.
For fiscal 2022, we have updated our annual expectation as follows.
Consolidated net revenues of $550 million to $565 million net.
Net revenues totaled $471.0 million in fiscal 2021.
Free cash flow between 50% to $55 million compared to $15 million last year.
Consolidated gross profit percentage of 54, 6% to 55, 3% compared to 57% in fiscal 2021.
The expected rate decline relates to an abatement in mass penetration this year, coupled with ongoing supply chain challenges and a substantial increase in freight costs. The retroactive reinstatement of GSP is included in our current year gross margin estimate.
Consolidated SG&A expense of $260 million to $266 million compared to $233 million in fiscal 2021.
The expected SG&A increase was primarily related to beer Bradley stores being opened for the full year.
Non comparable compensation in cares act savings in fiscal 2021.
In general variable increases associated with higher sales expectations.
Consolidated.
Operating income of $40 to $46 million compared to $34 million in fiscal 2021.
Consolidated consolidated diluted EPS of <unk> 80 to 95.
Based on diluted weighted average shares outstanding of $40.0 million and an effective tax rate of approximately 21%.
Diluted EPS totaled <unk> 63 last year.
Net capital spending of approximately $8 million to $10 million compared to $12.0 million in the prior year, reflecting investments associated with new factory locations and technology and logistic enhancements.
Now, let me turn to the balance sheet.
Cash cash equivalents and investments at quarter end totaled $81.0 million compared to $78.0 million at the end of last year's second quarter and $70.0 million at last fiscal year end.
We had no borrowings on our $75 million ABL credit facility at quarter end.
Total quarter end inventory was $148 million compared to $138.0 million at the end of the second quarter of last year.
Quarter end inventory was higher than prior year, primarily due to incremental PURA Vida inventory.
We expect year over year inventory should be down by approximately 5% by the end of fiscal 2022.
Rob.
Thanks, John.
As a reminder for fiscal 2022, the four key growth drivers for our company are one driving our digital first strategy by evolving the digital distribution of our products and further refining and utilizing digital experiences to serve our customers too.
Enhancing our product innovation pipeline collaborations and category extensions to attract new customers and increase share of wallet with existing customers three.
Three building our community through.
Through marketing and by creating an impactful positive brand movement that not only enhances lives, but deepens our customers brand loyalty.
And for evolving our distribution channels by focusing on future growth opportunities and addressing the changing retail environment and the consumer marketplace.
Let's begin with Vera Bradley as I mentioned at the end of last quarter. We were looking forward to continuing recovery of our travel and campus segment of the business in the second quarter.
Research indicated that nearly three quarters of Americans plan to travel this summer loan and sales of our travel products have indeed been robust exceeding our 2019 levels on.
On the other hand, although overall back to school market has been strong sales for non tech and accessory elements did not return to pre pandemic levels.
Similarly at Vera Bradley, we saw growth in our back to campus business over 2020, but sales did not exceed the 2019 levels.
Like many in the industry, we faced supply chain disruptions that cause delivery delays throughout the quarter. We have experienced on average delays of 30 days or so before a full assortment of goods was available for each of our product launches.
Unfortunately, we do not expect this situation to improve in the fall season, we are working diligently to mitigate the situation as best we can but expect shipping delays and freight expense increases to continue for the near future.
On the product front, we continue to be excited about our innovation pipeline and the development of new fabric offerings, which are important to not only increase the share of wallet with our existing customers, but to attract new customers to Vera Bradley.
We remain very optimistic about our new recycled cotton collection and look forward to offering new new solid colors seasonally.
Solid galaxy grade purple and Red will launch this fall we will offer navy in the spring and we will expand our black sails next summer or.
Our partnership with Lana Condor during the launch of the Cotton re imagine collection helped bring a younger and more diverse customer to the brand.
We continue to build on the momentum in our other alternate fabrications like performance twill in our factory exclusive Ultra light collection.
We're constantly researching and innovating to bring our customers more eco friendly options and we are committed to updating 100% of our fabrics to more sustainable alternatives by 2025.
We had another exciting quarter for product collaborations are classic accessories outdoor collection of furniture covers Seaton amount covers accent pillows umbrella and rugs launched in June in addition to being available on <unk> Dot Com classic accessories dot com and in select Vera Bradley stores. This collection can also be PERC.
Just online through leading retailers such as weight their Amazon Lowe's and home depot.
And we launched the always popular Disney and Harry Potter many collections during the quarter.
In the marketing area. The substantial investments we have made in date data science business analytics and customer data capture in the past.
Continue to pay off and are reflected in our marketing efforts and results.
As expected our customer count continued to grow our customer journey centered activations and customer level personalized messaging are meaningfully engaging new customers and aiding in the reactivation of lapsed customers across our full line and factory stores.
We are driving more engagement in social media, specifically, specifically, we are employing more user generated content.
Have grown our Influencer and ambassador programs continue to enhance our social storytelling and have expanded social selling.
We are expanding our tick tock engagement continuing to grow this platform to strengthen our gen Z customer acquisition.
These tactics are along with our quality media placements continue to drive brand awareness with year over year media impressions up over 200%.
Fueled by our cotton re imagine campaign with Lana Condor summer.
Summer travel collections back to school essentials and collaborations.
We are proud that our marketing efforts are increasingly reflective of our commitment to a more diverse and inclusive audience.
We are honored to continuing amplify our VB cares mission in August we entered the third consecutive year of partnership with blessings in a backpack to support the nonprofit mission of providing food millions development tree school children across America, who might otherwise go hungry.
<unk> with the help of our customers we have donated over 750000 to the organization and this month the Vera Bradley Foundation for breast cancer begins its series of annual fundraising events.
To support the groundbreaking research being conducted at the Vera Bradley Foundation Center for breast cancer Research at Indiana University School of Medicine and Indianapolis.
To date the foundation has contributed over $36 million to the Foundation center for breast cancer research.
Our digital business has become a larger portion of our revenue overtime and stores continue to support this omnichannel strategy.
We want our customer to have a seamless shopping experience digital sales are typically higher in the markets, where we have a retail presence and the average omnichannel customer spends over three times more than the single channel customer.
Many customers have missed in person interactions and many are seeking shared experiences.
We continue to focus on enhancing and reinventing the customer experience in our full line stores.
And certain digital shopping perk that gained popularity during the pandemic remain popular.
Like appointment selling buy online pickup in store and curbside pickup we are continuing to improve the profitability of our <unk> fleet by focusing on our highest potential stores, optimizing and localizing, our assortments and rationalizing our existing portfolio through select closures we.
We have closed three full line stores, so far this year and expect to close up to two more of this fiscal year.
It will bring our total full loan closings to 44 since the beginning of fiscal 2018.
We have opened four new factory stores, so far this year and expect to open two more by the end of October.
During the quarter, we fully implemented after pay across all Vera Bradley channels, allowing customers to pay for their purchases and installments, gaining higher units per transaction and increased sales.
We are also now excited have distribution of Vera Bradley on target plus marketplace.
Which is great exposure for our brand.
And as sustainability and retail continue to gain traction so does our partnership with threat App, which launched earlier this year.
Now, let's switch to PURA Vida.
Yeah.
Even though PURA vida business temporarily slowed in the second quarter due to the iOS update we believe we are positioned to generate a 15% to 20% revenue growth for the second half of the year driven by our new product launches wholesale growth the marketing initiatives and adjustments, we have put into place and our new store openings.
One of the critical initiatives, we completed during the quarter was our project Novus ERP integration at PURA, Vida, which unified our technology platform companywide, allowing for enhanced capabilities in sourcing customer service CRM data analytics and accounting among other areas. This.
This critical infrastructure enhancement has strategically positioned PURA vida for future growth.
Innovation at PURA Vida continues.
Continues to be key to our growth in addition.
And to continually adding new designs and elements to our jewelry collections.
We also have diversified well beyond jewelry, we are truly building a lifestyle brand.
A great example of the extension of the PURA Vida lifestyle was the April launch of our April of.
Of our apparel collection of Ts and hoodies so.
So far the top styles have been PURA vida logos tight <unk> and surf graphics.
Now we are broadening our size ranges styles and logos.
We believe this is a significant revenue opportunity going forward.
We launched backpacks and May and last month, we introduced our fund affordable hack collection.
Items like apparel backpack and have not only appeal to our existing customers.
But are driving new customers to the PURA Vida brand.
In July we collaborated with Disney on an exciting launch of Disney theme, jewelry, and hair accessories, which PURA Vida and Disney enthusiasts equally Love. This fund collection brought new fans to our brand and we have been very pleased with the response to date, we have a few other high profile product collaborations and licenses.
The partnerships that will launch this fall stay tuned.
We worked with the popular lifestyle Influencers savant.
During the quarter to launch a style pack that generated strong volume and appeal to a broader age demographic.
Just last month, we introduced our jewelry collection with other bank Star and Influencer, Madison Bailey, which is appealing to a more diverse customer.
As mentioned earlier, the recent Apple update impacted PURA Vida E Commerce revenues since we have historically relied on various platforms like Facebook and Instagram to reach our potential customers to drive sales are.
Our team has worked diligently to dive deeper into customer analytics and diversify a portion of our marketing resources to other platforms like Tictoc podcast and Youtube.
Yes.
As a result, we began to see PURA Vida DTC sales volume build throughout the balance of the second quarter and into the beginning of the third quarter.
Since its inception, PURA Vida has demonstrated expertise in engaging customers building loyalty and introducing new devote into the PURA Vida lifestyle. We're continually focused on looking for new ways to creatively engage our customers drive new customers to our brand design more inclusive marketing and generate more efficiency in <unk>.
Paid advertising.
On the distribution front, our first PURA Vida store opened in San Diego's Westfield UTC mall.
In mid August and is off to a great start surpassing our initial plans.
Stores, allowing us to showcase the PURA vida lifestyle with a full array of existing products and new product innovations receive and valuable customer feedback and host influencer events.
From the brand's social media followers count alone, we know how love PURA Vida is however, we saw another level of the brand's power by the overwhelming response from PURA Vida community of enthusiasts.
They experienced the PURA vida lifestyle in person at the store.
We saw lines up to three hours for most of the opening day, the feedback and sales have been beyond our expectations. We certainly believe there are opportunities to expand the PURA Vida store concept to other locations. We are also thrilled that we have rolled out PURA Vida shop in shops in 'twenty three Vera Bradley full line locations featuring.
A full assortment of jewelry items and the PURA Vida charity bracelets program has been rolled out in all Vera Bradley's full line and factory locations.
We've been very pleased with the results thus far.
Our wholesale growth remained strong as we continue to add new wholesale partners. We've added over 250, new accounts. So far this year, which has exceeded our expectations and now Dillard's will be joining nordstrom's as a PURA Vida department store distributor.
We continue to significantly expand our presence in existing retailers with larger in store presentations and we are experiencing solid growth in core product categories with our wholesalers.
Our current wholesale accounts on average have place larger and more frequent orders than in fiscal 2020.
As many have experienced a strong resurgence in traffic.
In summary.
We continue to drive our digital first strategy, we have made strategic shifts and investments to pivot us to a digital first company evolving into a customer centric data driven technology enabled and digitally focused enterprise, which allows us to effectively engage with our customers and offer a seamless shopping experience.
Second quarter E Commerce sales grew over 20% over fiscal 2020.
Over one third of our consolidated revenues are now generated from ecommerce sales and excluding our factory stores over half of our total sales are driven by e-commerce.
We are continuing to enhance our product innovation pipeline collaborations and category extensions as.
As evidenced at Vera Bradley by the launch of our cotton re imagine collection. The introduction of other ultra alternative fabrics, our commitment to sustainability and countless product collaborations and the continual newness and excitement and PURA vida jewelry collections as well as expanding into the new PURA vida lifestyle categories, such as apparel.
<unk> and accessories.
We are building on our community through marketing.
Bureau, Bradley continues to engage and grow its customer base through analytics, social media and VB cares efforts and PURA Vida has demonstrated expertise and it's engaging customers building loyalty and introducing new devote into the PURA vida lifestyle via Instagram Tictoc broadcasts.
And evolving our distribution channels, we are continually looking for new ways to reach our customers and to reinvent the shopping experience from our Vera Bradley Dot com website redesign to partnering with right up to the opening of our first ever PURA Vida store.
Operator, we will now open up the call to questions.
Thank you if you would like to ask a question. Please signal by pressing star followed by the one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Then press Star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for questions.
Okay.
And we'll go first to Mark <unk> with Baird.
Great. Thank you good morning, and thanks for taking my question.
Just to start out John I apologize, if I missed it but could you give us some color around Europe, Brad the ecommerce sales.
Q2, the growth rates versus 2019.
Just a second cause I don't remember off the top of my head. So if you want to go to next question I'll get that information for you.
It sounds great with respect to back to school any.
Any more detail on how the season progressed through August we've heard other brands talk about potential for an elongated season. This year, just wondering if youre seeing any indications of that and then separately any indications that delta variant is affecting the trajectory of the recovery in your travel categories.
Yes, Mark I can take that I think first of all from back to school. We also expect that there'll be a more elongated back to school season.
And again, we've seen growth over last year for sure in the back to school categories.
But we just haven't got back up to the 2019 levels, which seems to be what we're seeing in.
The rest of the market in terms of kind of these accessories and non tech categories.
Regarding the Delta variant.
It's been interesting as we saw traffic continuing to improve quarter I mean month after month throughout the quarter. When we got to mid July you saw that improvement slow.
And it's kind of stabilized as we've moved through August so there has been.
A softening of the upward trajectory, but still overall, we still think the consumer is strong.
In terms of the travel category, we're still seeing a lot of travel happening out there. So we haven't seen a major suppression in the travel category, yet and so we're watching it closely but at this point, we're still hopeful that the travel category. We will continue to be solid as we move through the year.
And Mark in regards to your question regarding e-commerce compared to 2020 results in the second quarter, it's up about approximately 40%.
And when you compare to last year is down about 30%, but don't forget last year. There was a significant mass volume it went through that channel.
Right. Okay. Thank you then.
Any.
Details you can share on AUR trends on that.
You are seeing and then I think the company effectively took some price increases a couple of years ago, and offset impacts of tariffs I'm wondering if you see opportunities to raise price today to offset some of these freight pressures and general inflation in AUC.
In regards to AUR trends, we are seeing year over year AUR go up. So we are definitely seeing some benefit associated with that in regards to kind of price increase we are having conversations internally to talk about kind of what and if we can take some price increases and what product categories that we should take those price increases internally.
To pass through some of the challenges we're seeing in the supply chain.
We anticipate doing price increases we just wanted to make sure that we're surgical in how we approach it.
More information will come on that in the following quarters.
Okay makes sense. Thanks for all the detail I'll hop back in the queue.
Thanks, Mark Thanks, Mark.
We'll go next to Eric <unk> with SCC research.
Sure Good morning, guys.
Good morning.
Could you talk about longer term, what we should be thinking about in terms of the Bureau Bradley store base.
And.
Let's talk about that first.
Yes, so from a store based perspective, we continue to see opportunity too.
Reduce some of the full line doors that are underperforming.
And we still believe we still have growth opportunity in the factory channel now, while we think we're going to reduce the full line doors, we're definitely looking at opportunities to look at it.
<unk>.
While re sizing it looking to open up new opportunities for up they were badly. So we will be shedding some kind of current full line doors, but ultimately looking for opportunities to open up some doors and discrete locations.
And I know that.
You have a lot of cash right now.
What are your thoughts in terms of acquisitions buybacks utilization of the capital.
As we've come into two right now we're focused on having conversations in regard to M&A activity and we have Rob and I are certainly taken some meetings and certain having having conversations around that so thats. Our primary focus in regards to kind of where we think there we would utilize capital, but theres certainly an opportunity as well.
<unk> talked with the board.
Use our cash in the best way possible and we do have an open program from a share repurchase perspective. So if we think thats. The right thing to do we still have the opportunity to spend about $30 million for remainder of this year and cash button share repurchases, if we determine that the right way to use our cash.
Okay guys. Good luck in the back half.
Thank you Eric.
We will go next to Oliver Chen with Cowen.
Hi, Thank you Hi, Rob Hi, John.
Oliver.
And the FDA changes.
What are your thoughts on what will happen next in terms of pursuit of other platforms and.
How they may or may not be risk in terms of fixing that industry wide challenge.
Also second on frightened tariffs why were they worse than you expected and what do you think that risk factors are going forward unless it's definitely been an industry.
Tissue.
I am a little surprised that it was worse than you expected, but also.
Not surprised in some regions too thank you.
Yes, so I'll handle the second part of the question and I think Rob will update the first part of the question in regards to why the freight and tariffs were worse than we had initially anticipated at the beginning of the year. We had in regards to GSP, we had expected it to happen in the first half of the year that the renewal we expected to happen in the first half of year with ultimately everything thats going on within.
Washington D C. There's not been much movement. There is a couple of bills that the house has and as well as the Senate and.
And there just hasnt been agreement. So we believe that ultimately we will see GSP get passed and it will be retroactive.
We thought it would have happened by now so we're just assuming it will happen by the end of the fourth quarter.
In regards to freight expense everything we are hearing is beginning either we thought the issue was going to kind of.
The challenge is going to be kind of through the summer months and ultimately we're going to get some relief during the summer going into peak, we just haven't seen that and I think a lot. There's a lot of different challenges. There. So we are seeing COVID-19 spikes in some of our factories, which have closed down some of our factories, which makes just delivery challenge getting deliveries on time challenging we've seen some port closures in <unk>.
Asia, which just means we have then ultimately longer lead times getting here to the U S. And then the dwell time in kind of La long Beach Port it's back up to where it was in February and then outside of that there's other challenges in warehouses and actually moving product through rail. So I think all of the challenges have compounded.
And our expectation at the beginning of the year and even at the beginning of the second quarter was some of that was going to abate and now we don't see that abating at all this year and we think it's going to be.
Some of the challenge into <unk>.
Some part next year and it could be the full year next year or so.
And I think from an expense standpoint, one of the challenges we have Oliver as it's been it's been difficult. So we've moved some of our product air and our product with the lower AUR and higher volume size and moving via air is a very expensive alternative so we're trying to really.
Work through the complexity of what do we move to air where do we leave on boat how do we manage through that process, but thats why I think theres been a higher flow through of that expense that we anticipated we did not anticipate using areas.
Predominantly as we have at this point.
On the Apple piece in terms of what's going on there I think one thing that we're seeing with PURA Vida is first they've always been good at migrating their marketing platforms. They were strong on Facebook. They became the dominant force on Instagram that moving now into tick tock. So they do a nice job.
Migrating continuing to evolve there starting to lean into podcasts and other areas Youtube to continue to diversify the second tender that we wanted to do is help them.
Get even stronger data analytics leverage some of the learnings that we've been able to have over at Vera Bradley to look at some traditional <unk>.
Marketing channels. In addition to kind of the forward digital channels and have a broader base and as we begin to do that.
Leveraging their SMS E mail.
Some of the just digital advertising, Google search SCO maximization, we think there's some opportunities for them to have a broader marketing platform and we're seeing those early <unk>.
Steps begin to pay off as the business momentum is recovering as it moved through second quarter into third quarter and the only thing I would add to that as we continue to open stores. We only have one store open procure PURA vida, but as we continue to open stores, we'll have more opportunity for first party marketing because we'll have more information about the customer.
Yes.
Okay. That's really helpful. So related to the trends youre seeing the inventory positions. If you could brief us on.
Those at both brands Vera Bradley and PURA Vida and how are you feeling with that inventory and back to school period versus holiday. Thank you.
Yes, so from a PURA Vida perspective inventory is probably on the high end is higher than we probably would like it to be if you remember last year, we had some challenges actually getting production in and we over index for that and ultimately we're working through some of that inventory. So I would say PURA vida as well set up for holiday to have enough inventory for holiday and I don't have any concerns there.
<unk> not been able to suffice kind of any sales growth there.
In regards to Vera Bradley PURA <unk> inventory is actually a little bit flattish to down from where it was last year.
We are broken in a few different places so as we continue to work through getting product here for holiday we are.
As Rob indicated we are looking at airfreight and airfreight associated with launches that need to be on time, So think about that as holiday launches to have a defined amount of time to be here. So we're trying to ensure that we have the right product here on time, but overall inventory from the overall inventory from a fair value perspective is probably okay. There's just certain.
<unk> that we have to kind of ensure that we get here on time in order to hit the holiday sales.
Okay, what about store traffic more generally.
Does it continue to be volatile.
Or are you thinking about it longer term versus.
The traffic and our sales per square foot productivity levels versus 2019.
Yes, so fairless traffic perspective, it's been fairly consistent over kind of if you think about the first two quarters in aggregate, but we saw a slowing down near the end of July in both the factory and full line business. They both slowed down.
As if that delta became a little bit more rampant.
In August we are seeing kind of go back to kind of where it was prior to that so I think generally speaking I think we would see kind of traffic at the same levels as it has been for the.
Hopefully for the full part of this year would be fairly consistent down from where it was kind of call. It Q2, and Q1 for a year. If you think about kind of a sales per square foot.
The hope would be kind of as we move into next year.
Yes.
<unk> continues to get up as people continue to feel more comfortable we would help from a factory perspective that we get back to kind of a more normalized sales per square foot and that kind of will be able to generate kind of the same level of sales that we were back in 2019, and as we evolve the product lines and as we evolve from a full line perspective, what we're selling in the.
Productivity at the start we would hope we can get back to that level as well.
Thank you and lastly on the merchandize margins and promotional environment. What are you seeing now.
Average unit retail trends full price selling and also how might you expect.
Holiday that proceed as it can be a little different in that environment. Thank you.
So from a promotion Ali perspective, we are fairly consistent from where we were last year that our intention is to stay fairly consistent and in both brands.
So we would expect kind of maintain margin. If you think about it to be fairly consistent with where we were last year from a.
And I don't remember the second part of your question Oliver.
The promotional environment and how akamai.
My how you might plan for the holiday period as well.
Yes, yes, so I don't see any significant adjustment from our current plans from a holiday perspective in either brand I think we're well positioned from an inventory as I said in from a PURA Vida perspective, as we look at fair Battle will have to think about kind of as we bring in new launches as we bring a new category of products.
If we need to be less promotional depending on kind of where inventory sits.
Okay. Okay. Thank you very much best regards.
Thanks Oliver.
And as a quick reminder, if you'd like to ask a question that is star one at this time we.
We will go next to Steve Marotta with CL King <unk> associates.
Good morning, Rob and John Rob is it possible for pure PURA Vida to effectively get back on to Facebook and Instagram with workarounds and if so how long would that take.
Just for clarity Steve they are both there.
They are continuing to advertise on both platforms. They continue to be very important it's just that the targeting of individual customers with all of the changes is not as effective as it once was so youre not getting the same type of return on the advertising dollars.
So the overall kind of conversion reach so the teams continue to work on that continuing to refine the models, it's getting stronger and I think with time, we will.
Get better and better at it but it just we do believe that it is critically important to be able to supplement the strong Instagram and Facebook marketing with other advertising form so that we have more diversification in the marketing portfolio.
Okay.
John can you quantify airfreight in the first half and the second half.
Yes from a dollar perspective, I won't give that but ultimately we're going to see more significant dollars worked through the P&L in the second half of the unit versus the first half of the year.
Okay Fair enough. Thank you I'll take everything else offline. Thank you.
Thanks, Steve.
We will go next to Dana Telsey with Telsey group.
Hi, Good morning, everyone. As you think about when the change with the Apple iOS platform platform shift.
What are the markers that you're looking for to show that it's improving or do you just have to transition to something else and just never expect it to get back to the levels that it had been.
I think a couple of things David first of all what are we watching I mean, what we're really watching is.
Kind of a combination of on those two platforms. What is the conversion from the advertising what is the reach what has the customer acquisition costs. The return on AD spend kind of key metrics that we're watching and we're seeing some improvement in those we do not anticipate getting back to the height of.
Of that and we do believe that it becomes more important that we diversify our marketing spend so it will continue to be the dominant source of marketing for PURA Vida.
But we expect to have more diversification as we move forward.
Got it and do you see.
With the optimal presentation that youre looking for what do you want it to be as a percentage and when do you expect to achieve it.
Right now I think we're still working on what would be the optimal number but what we expect we've already seen a reduction in our amount of advertising. That's been spent on Facebook and Instagram by over 10% reduction in total spend so far in the quarter.
We expect that that probably will continue as we move into fourth quarter.
And then we're just going to have to watch in terms of how effective we've become with the new algorithms on Facebook and Instagram and how effective the other platforms are so we don't have an exact target yet, but we would probably expect with time as we get into next year under 75% of our spend would be.
<unk>.
With Instagram and Facebook.
Got it and then lastly, just on you mentioned that you're testing the shop in shops of PURA Vida and the Dr. Bradley Test what are you learning from that would you go forward is it bringing a different customer than the euro.
Right now what we're finding is that our customers engaging with that with the.
What we did let me just back up what we did in most of our stores as did the charity bracelets program.
And that's just doing is engaging.
Our customer our current Vera Bradley customers coming in and they're not necessarily coming in for the bracelet, but when they are in our stores. They are seeing it picking up an incremental sale.
In our factory stores were doing a combination of the full price charity bracelet program, which has been very successful even in our factory stores as well as adding in some liquidation product which is also work.
So I wouldn't say that it's as much a new customer acquisition opportunity as a wallet builder and our current Vera Bradley's stores, which we think is just again a good a good sign.
Got it thank you.
Thanks Dana.
And we'll go next to Oliver Chen with Cowen.
Hi, again.
Another question about supply chain, so as you think longer term.
The factors that Youre seeing now.
Give you.
Give you an impression that you should change your supply chain or not in terms of what you look to do and on your details and factory closures, which which regions is that affecting most and what percentage of your supplies from those regions. Thanks.
So in regards to the.
The factories and what we're thinking of right. So we are looking at is there opportunity for other <unk>.
Country of origin opportunities to think about versus southeast Asia. So we're definitely looking into that.
Some of the challenges, but still the vast majority of our product likely will still come from southeast Asia, and if we were to move it and so some of the challenges associated with the freight and just a delivery and what's happening kind of here in the <unk> as well as on it as well as kind of in the rail yards in the warehouses I think we will just.
Take some time to clean up I don't see a significant change around that we've looked at opportunities to move from different ports and to see if that would speed up.
Our ability to get the product here and it really wouldn't all ports are challenged right. Now. So we are assessing opportunities for changes in countries of origin to see if we can speed up kind of some of the factories, but thats really a long lead thats not going to be a fix from a material perspective next year, that's something we'll have to look at it from a more strategic perspective.
Some of the countries that were closed were Vietnam, Indonesia, and so Vietnam is a fairly significant portion of your call it kind of mid.
Mid teens from a factory perspective kind of where we get our product so that being closer to up to 2% to five weeks has kind of.
Made it more challenging just to hit our delivery dates.
Indonesia was closed for a couple of weeks and that is becoming a bigger part of our.
Our production facilities.
As we've moved our production out of me and a lot of that is moving into Indonesia.
And over time, it will be probably one of the larger countries for us.
Sure.
And again that was only closed a few weeks so the more critical one was kind of Vietnam.
And I think one thing that we've been able to do across their breath for a while and beginning to do at PURA. Vida is just have a flexible supply chain.
So when we have shocks that hit for example, we had.
<unk> production in Myanmar, which we moved out into other countries that we continue to just be flexible thats part of the reason why we're moving more into Indonesia.
And as John says over the years ahead, we think there'll still be adjustments in the supply chain as we continue to work.
Okay.
Thanks for those details very helpful.
Rob as you think about airfreight.
What is your general framework for which products would be more suitable for that expensive load in and why.
Yes first of all the number one factor is those products that are super time sensitive.
So give you an example of that could be something like a holiday pattern right. We would hate for holiday pattern to be four to six weeks late and really condensed the holiday selling season.
The good news is that most of our product has a more seasonal point of view.
So those are the things that we're not accelerating but if there is a really important marketing initiative, if theres something thats hyper seasonal those are the areas that we're looking at we obviously look more too.
Towards the end to take up a little less cubic space, but even in some of those cases, we might have to bring in bringing some of those larger products and via air If it's time sensitive from a.
Fabrication or our launch standpoint.
Okay, great. Thank you very much.
Thanks Oliver.
And there are no further questions in the queue at this time I'd like to turn the conference back over to Mr. Rob Wallstrom for any closing remarks.
Thank you we have an extraordinary culture and outstanding team loyal customers and a clear vision to be a purpose driven multi lifestyle brand high growth company, our strong cash position debt free balance sheet and capacity to generate free cash flow will allow us to continue to invest in our two powerful brands and seek.
Our prudent acquisitions of other comfortable affordable purpose driven brands over time.
This year, we expect to deliver double digit revenue growth over both fiscal 4041.
Post healthy operating income growth over the prior two years and generate free cash flow of over $50 million. We have an exciting future ahead, and we believe we have the opportunity to create value for all of our stakeholders I would like to thank the Vera Bradley PURA Vida and corporate teams for their resourcefulness tenacity and extraordinary work as we accomplish so.
Much while continuing to navigate through this challenging environment.
Thank you for your time and interest in Vera Bradley, Inc. We hope you can join us for our third quarter call on December eight.
And that concludes today's conference. Thank you for your participation you may now disconnect.
Yeah.
Sure.
Yeah.
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