Q1 2023 Vera Bradley Inc Earnings Call

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Good morning, ladies and gentlemen, thank you for standing by welcome to the Vera Bradley first 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.

You up for questions. As a reminder, today's conference call is being recorded.

I would now like to turn the call over to Mark D Lie Vera Bradley's Chief administrative officer. Please go ahead.

Good morning, and welcome everyone, we'd like to thank you for joining us for today's 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 1995 as amended.

Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect please refer to today's press release and the company's most recent Form 10-K filed with the SEC for a discussion of known risks and uncertainties investors should not assume that the statements made.

During the call will remain operative at a later time, 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.

Thank you Mark.

Good morning, and thank you for joining us on today's call John Enwright. Our CFO also joins me today.

Total company first quarter revenues of $98 5 million fell below our expectations and resulted in a net loss before certain charges of <unk> 19 per diluted share. We continued implementation of our price increases, which helped to offset logistics and sourcing pressures continue to drive product innovation controlled expenses and completed 10.

$5 million of share repurchases, while maintaining a strong debt free balance sheet.

We are clearly seeing a bifurcation in the spending of our customer base at Vera Bradley direct channel full line revenues were above last year as customers with higher household incomes remains engaged and spent more than last year.

We also saw a healthy year over year rebound in indirect channel revenues.

Inflationary pressures, including rate, including rising gas prices, particularly impacted the spending the Vera Bradley customers with household incomes below 55000.

As well as traffic and spending in our Bureau, Bradley direct channel factory stores for the quarter.

In addition, <unk> e-commerce revenues continue to be significantly affected by the shift in social.

In digital media effectiveness and rising digital media cost for the balance of the year. We are taking decisive actions to strengthen the enterprise and remain highly focused on our two core brands on a company wide basis. We are in the midst of a comprehensive cost reduction and efficiency process. We expect we will complete the identification of cost reductions and continued.

<unk> second quarter, and we anticipate we will realize annual annualized savings in the range of $15 million to $25 million.

We're also continuing to evaluate and execute strategic price increases for both brands to offset rising raw material and freight costs as appropriate.

As you might recall, we began taking some price increases in the fourth quarter of last year.

At the Vera Bradley brand, we remain confident in our core strategy. The brand is fundamentally strong.

Though we have been fighting through macro issues, including rapidly increasing supply chain cost recessionary spending lower household income customers skyrocketing gas prices next.

Potential increases in digital market and cost.

We are continuing to innovate and build on our lifestyle merchandising strategy with a laser focus on protecting the core amplified by targeted marketing.

We are maximizing the travel category, which is nearly back to pre pandemic levels and optimizing our very important upcoming back to campus season.

With strategic project product assortment enhancements.

Of course, we are continuing with successful product collaborations like Disney and just the second quarter, we have introduced partnerships with iconic names like Star Wars.

All men and target and Tupperware.

We are thrilled about expanding our home assortment and adding cloud slip ons minerals toward Vera Bradley footwear franchise, this fall and holiday season.

At PURA Vida, we are evolving our business model from one largely dependent on E Commerce and digital marketing to one that is a true omnichannel business with a more diversified marketing base. This will take time, but we are taking the actions to make this transformation happen and return the brand to growth.

Chief growth Officer, Lockie Andrews has joined PURA Vida, she will work with the team with a primary focus on building a more innovative effective and performance based marketing program by bolstering, our internal marketing and data analytics talent platform.

<unk> is a great addition to PURA vida into our entire organization for perspective expertise greatest thinking will be instrumental in developing PURA vida as full potential as a unique lifestyle brand in this newly created role. She has responsibility for all digital performance marketing direct to consumer sales and merchandise initiatives across PURA vida as channels to distribute.

Yeah.

Working with co founders Griffin Thall, and Paul Goodman, She will not only strengthen the marketing initiatives that you will explore develop and launch new sales channels and drive category growth and expansion over time.

She has a deep background in retail marketing digital strategy technology and data analytics and most recently held key E Commerce and digital post at party City, and then tuck it as well as running a boutique consulting firm for the past 15 years. We are very excited about opening three additional PURA Vida retail store locations. This year building on the success.

Our first store opening in San Diego last summer.

San Diego store continues to exceed our expectations and we continue to experience a double digit differential in our San Diego ecommerce business relative to the rest of the country since the store opened demonstrating.

Demonstrating the power of a retail presence and driving digital sales omnichannel loyalty and spending. So we are very excited about additional store growth.

We will open PURA Vida stores in Irvine spectrum in Orange County, California, and in the high tourist area Myrtle Beach, South Carolina in July .

And in Phoenix and in the Phoenix market in September we look forward to even more store growth in the future.

<unk> future growth will be a balance of online growth and growth in physical distribution channels stores will play a key role in driving new customer acquisition as we continue to diversify our marketing platforms.

We will also continue to build PURA vida customer excitement and engagement through collaborations like Disney Hello, Kitty and the World Surfing League.

Ordering with key Influencers and operating themed collection centered around key events like upcoming sharply.

Now, let me turn the call over to John to review the financial results John Thanks.

Thanks, Rob and good morning, Let me go over a few highlights for the first quarter.

The numbers I will discuss today are all non-GAAP .

For a complete detail of items excluded from the non-GAAP numbers as well as the reconciliation of GAAP to non-GAAP numbers. Please reference today's press release.

Consolidated net revenues totaled $98 5 million compared to $109 1 million in the prior year first quarter.

The consolidated net loss totaled $6 1 million or <unk> 19 per diluted share compared to a loss of $1 7 million or <unk> <unk> per diluted share in the prior year.

Bureau, Bradley direct segment revenues totaled $61 6 million, a seven 6% decrease from $66 7 million last year.

Comparable sales declined 11, 1% in the first quarter.

Hey, Rob Bradley indirect segment revenues totaled $17 million or 11, 2% increase over $15 3 million in the prior year first quarter.

PURA Vida segment revenues totaled $19 8 million, a 26, 8% decrease from $27 1 million last year.

First quarter consolidated gross profit totaled $52 5 million or 53, 3% of net revenues compared to $59 2 million or 52, 2% last year.

Current year rate was negatively impacted by higher inbound and outbound freight expense, partially offset by price increases.

Consolidated SG&A expense totaled $59 6 million or 65% for the current quarter compared to $60 1 million or <unk> 55, 1% last year.

First quarter consolidated operating loss totaled $6 9 million or 7% of net revenues compared to $1 2 million or one 1% of net revenues in the prior year.

Now, let's turn to the balance sheet cash cash equivalents and investments as of April 32022 totaled $64 million compared to $52 7 million at the end of last year's first quarter.

We had no borrowings on our $75 million ABL credit facility at quarter end.

We remain in a strong cash position with a debt free balance sheet.

We will continue to take a conservative approach to cash through disciplined expense management, particularly in the volatile and challenging environment.

Total quarter end inventory was $161 8 million compared to $150 3 million at the end of the first quarter last year.

During the quarter, we repurchased approximately $10 5 million common stock representing one 4 million shares at an average price of $7 35.

$35 $3 million remains available under the $50 million repurchase authorization.

Now, let's shift to our let's shift to our fiscal 2023 outlook.

As we expect the challenging macro economic environment to continue for the balance of the year.

And that it will take time to return the pyramid ecommerce business to growth, we have lowered our outlook for the fiscal year.

All forward looking guidance numbers that I will discuss non-GAAP .

For fiscal 2023, we expect consolidated net revenues of $190 million to $505 million compared to $540 5 million in fiscal 2022.

We expect our consolidated gross margin will range from 54, 5% to 55% compared to 53, 3% last year.

Potential year over year increase is primarily related to price increases partially offset by incremental freight expense.

Consolidated SG&A expense should range from $248 million to $253 million compared to $258 8 million in fiscal 2022.

The reduction in SG&A expense is being driven by cost reduction initiatives and a reduction in compensation expense marketing and other variable related expenses due to the expected sales decline from last year.

We expect consolidated diluted EPS of <unk> 35 to 50.

Compared to <unk> 57 last year.

Net capital spending should total approximately $10 million to $12 million compared to $5 5 million in the prior year.

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

Thank you.

I would like to signal with questions. Please press star.

One on your Touchtone telephone.

If you're joining us today use a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

That will be star one.

You would like to signal with questions.

Our first question will come from all of our Chen with Cowen.

Hi, Tom <unk> on for Oliver Chen a couple of questions on consumer health with regard to price increases.

Could you provide some additional color on where these are occurring across both channel and category.

Are there some areas of the business that are taking prices better than others.

Yeah in terms of prices talk about it maybe first by brand.

PURA Vida that they've had price increases across.

Nearly all of the product categories and that seems to be a good level of acceptance from the consumer.

At Vera Bradley, we've bid more targeted in those price increases really looking at it by item because of the diversity of our assortment there.

And what we're seeing though is that as we've increased price increases that the consumers are accepting it but not <unk>.

With an unlimited acceptance so we're having to be very disciplined and very targeted and will continue to evaluate that and continue to look at prices as we move forward.

But I would say overall the reaction.

Not necessarily been different by channel, but what we have seen as we talked about earlier was just more acceptance. We're spending overall by the higher income customer and obviously a pull back from the lower income customer, but what's been interesting is even looking at for.

Promotional activity, we found that the promotional activity is really not necessary for the high income customer that they seem to be accepting.

The price increases.

Okay great.

Follow up on supply chain disruptions I'd love to hear your thoughts on inventory management through the summer and <unk>.

Additionally, if we reach peak inflation here, how does the overall business new promotional possibilities across categories.

Categories and channel.

I can take the question in regards to supply chain, we continue to see kind of some disruptions in the supply chain, we're not back to pre pandemic levels on on time delivery.

Even with extending our expectation of when that product should be delivered all that being said we are in a good inventory better inventory and with a better inventory position than we were throughout the.

Your last year, and we expect to be in a better inventory position during the summertime.

Given our sales reduction we will be looking at potentially cutting forward purchases.

Given where our current inventory level is.

In regards to promotion Audi as we think about the later in the year as with our kind of our gross margin guidance, we expect promotional lead not to change based on our original expectation, but we'll continue to assess that throughout the summer and throughout the rest of this year.

Thank you that's very helpful.

And one final question on PURA Vida can.

Can you provide some additional detail regarding our strategies for the marketing platform enhancements and any synergies that might be available from the Vera Bradley platform.

Yes, Great question first of all bringing lockean was a critical step if you've been following our story a few years ago, we brought daren hull and who kind of rebuilt the marketing platform at Vera Bradley brought in data analytics and really kind of moved US forward. What we're doing is.

With PURA Vida is basically going down a similar path by bringing lucky in that the PURA Vida team had done an extraordinary job of really leveraging the social media platforms for customer acquisition over the years, we're really best in class, but as this whole.

The whole channel in the World change that's become obviously much less effective.

So now what we're doing is really building out our data platform built it out our first party marketing, but then also.

Starting to expand in stores using stores is another avenue for acquisition will be really critical and then the other thing is as were thinking about the marketing for PURA Vida, it's not just the data, but it's also looking at different channels. Both from a performance marketing and also leveraging even heavier or the <unk>.

<unk> are part of the business because what we're seeing in a lot of the direct to consumer companies with lower <unk> is the importance of kind of re leveraging out the influencer of putting more and more time and energy into the Influencer tribe, so to speak and that is well underway with with really leading that initial.

Dave.

Yeah.

Thanks for your question Sir.

Thank you and our next question will come from Eric better with Cc research.

Good morning.

Good morning, Eric Good morning.

Could you talk a little bit about the collaborations quite obviously was being very <unk> been a little more.

<unk> with them and also there's been a little.

Innovative in terms of things like the at least in Tupperware collaborations how do you where is.

I guess a limit on how far you want to take the collaborations going forward for both PURA Vida.

And for Vera Bradley.

You know rod our collaboration partnerships that we're doing is really about.

Customer acquisition, reaching out to new customers expanding the tribe of customers inside Vera Bradley.

And <unk> and over the last couple of years, we've really had a lot of success in doing that through.

Our Disney partnerships or Harry.

Potter partnerships and most recently through the Star Wars partnership that we find it really brings in new excitement and new customer who discovers our brands, which we think is great. I think you are right that as we think about the Coleman opportunity right moving into some of this outdoor space being in target.

Great to see the brand at kind of the Encap and target it gets a lot of new customers to see it.

As well as thinking about things like tupperware that its way too to get new customers into the brand people that might not be thinking about us from a bag business, but while the pattern loved the brand in a new way to joy and so we think we have to continue to balance that continue to look for new unique partnerships to keep it for.

Rash and keep it exciting.

And I would say that probably the level of collaborations we've been doing is probably around where we would want to be I don't think that will continue to do more and more I think the trick is continue to find more and more powerful ones, but we've been very excited with the ones. We've launched in both brands so far and it had very good customer responses.

Okay.

When we look at.

And you mentioned a little bit the back to campus season, obviously, that's a big season for you than last year.

There were some opportunities that because of the supply chain side of the flows didn't go.

Materialize, great things, we like.

<unk> focus on what should we be thinking about you guys assuming in terms of that season going forward.

So let's talk about two to three weeks.

Yeah, No I think the back.

We are definitely very hopeful on the back to campus season coming up do you think about last year Theres still was a lot of noise shall we say around COVID-19 people going back to school all the stuff that was happening out in the media. So between having some supply chain disruptions have a maybe a lack of singular focus with gifts getting.

Back to school, we think Theres some opportunity as we move into this year, our inventories are in much better position than they were last year and we're anticipating that the customer will have more open to spend overall as they go back to school.

So we are hopeful we feel like we're set up and ready to go.

And then we'll start what we're doing this year or two is really leveraging out at Vera Bradley kind of the.

The streaming TV, we think that's a way to bring new customers into our back to campus business.

Alright, and then last question in terms of the store mix you are now more outlets and the Bureau buried inside your more outlet stores in full price stores and what should we think be thinking about that.

And kind of where is the store and you obviously didn't shrink in the full price store base where is the.

And of course, correct mix of product and the amount of stores that should be out there for beer. Thank you.

Yeah. Thanks, Eric in terms of store mix I think two things as we think about our full line business. What we think about is the omnichannel approach right between our E Commerce business and our full line stores. We think it's important that we have a mix of both we think that brick and mortar plays an important role in that mix and we will continue.

<unk>.

And I think you will see us continue to look at different ways of innovating within our full line.

Portfolio and continuing to look at opportunities.

Particularly I think going forward as we look at new real estate.

Formats opportunities, where customers are I think youll continue to see experimentation there.

At the same time, we do believe that the factory.

Channel.

As an important channel for us.

Obviously, right now with gas prices, there's a cyclical pressure on that channel, but long term, it's been a very good channel for us both from an acquisition and the volume and profitability standpoint.

So we expect that will continue with the focus on the factory channel to kind of balance our full price e-commerce slash brick and mortar strategy.

Great. Thanks, and good luck for the rest of the Neal.

Thanks, Eric Thanks, Robert.

Yes.

And our next question will come from Joe Gomes.

Goldman <unk> with noble capital.

Good morning, and thanks for taking my questions.

Yes.

Good morning, Jeff one Joe.

Okay.

The first question you mentioned.

The household income under 55 were seeing some difficulty there.

Any data.

What percentage.

Percentage of your overall customers that grew.

Group makes up and how has that been shifting over time.

Yes couple of things one it's about 20% of our customers spend is coming out of that customer group.

Over the last two years, we've been focusing on really bringing in the 25% to 35 year old customer.

As we've continued to bring new customers into the Vera Bradley brand and when we started bringing in that younger customer. The average household income was lower in that group than in our traditional customer base. So we've seen that group grow slightly but it's really due to the age. So we think that acquiring that customer in that.

<unk> category is really important to the long term health of the brand.

Cyclical pressure, we're experiencing obviously is painful to go through but again, we do believe that the cyclical one that will change and having that.

Population in our database and attracted to our brand we think will make the brand stronger over the long term.

Okay. Thanks for that and then.

I mentioned about the cost reduction initiatives that you said you hope to identify them.

By the end of this quarter, maybe a little more color.

When do you think those.

Reductions will be implemented and what would you think youll start to see.

The 15% to $25 million of cost savings come through.

That's a great question and first of all we already have begun to take some of the costs out, but what we're really doing is a top to bottom scrub to figure out with the economy potentially being in this lower household income customer really already in a recession and if that continues for a while we felt that bringing down the overall cost.

Structure more what I'll call. The structural cost structure is important so we have been involved already we're in the midst of doing all of that work to look at both the short term actions that will begin to take even now as we're identifying them as well as more of the long term what ill call process improvement one that might take a little bit of time.

Kind of months to implement.

It might take a little bit longer but will begin to continue to push those cost reductions even now, but we will have a lot more clarity on the next call, but we wanted to make sure everybody knew that the work was underway.

To robs point, the last point, there will be able to give a little bit more color on the second quarter call, but the range of 15% to 25%. If you want to think about it that is an annualized number is you can think about for next year that ultimately our structure would be about $15 million to $25 million less in SG&A that would be the intent and we will work through some of that will get some of that benefit.

And the second third and fourth quarter. This year, but we will not get all of that benefit this year.

And then we have other SG&A.

Way in variable cost actions underway as we speak so and we've embedded what we believe will get in benefit this year in SG&A.

SG&A guidance of $2 40 to $2 53.

Okay.

Okay.

Thank you for that and then one last one for me if I may.

One of the things that we've talked about in the past is the potential.

Doing another PURA Vida type of acquisition given the challenges in the market today.

It would seem to be a potentially.

Opportunistic time to make sense of type of acquisition.

Trying to get a feel for what your guys thoughts are given today on the acquisition pipeline.

I think it's a great question and you're right. There's always this balance between the macro environment being more challenging and that can put some pressure on valuations downward which can be opportunistic and so we are watching that but at the same time, we do believe that focusing on getting the expenses out.

Working on the two core businesses really getting those strong in the short term as our number one focus but we continue to keep our eyes open.

The M&A market, so, but right now our heads really kind of head down let's focus on these two brands is get the cost structure right.

And make sure that we really do the best the best we can as we move through this short term recessionary environment.

Great. Thanks for taking the questions.

Thanks, Joe Thanks, Joe.

Thank you. Our next question will come from Steve Marotta with CL King and associates.

Good morning, Robin John can you talk a little bit about the costing increases that youre feeling the offsetting price increases and how that may play out and gross margin in the second third and fourth quarter.

Yes, so the second quarter is going to continue to be under pressure from the inbound and outbound freight expense that we're seeing we're not lapping some of the high points of last year that will be we'll be lapping that next year. So second quarter will definitely have more pressure and it's similar to the pressure you saw in the first quarter and as we think about the back half of the year, we should be.

Lapping some of the higher freight expense and hopefully seeing some benefit with you now.

Inbound and outbound freight expense, if we see some change in the macroeconomic environment, but all that being said, we're also seeing some incremental expense associated with fuel surcharges is hitting kind of our P&L.

P&L I'd expect to be hitting a lot of p&l's right. Now. So that's also going to be a headwind as we kind of manage our way through the rest of this year.

If you think about from a cost increase your question in regards to kind of input cost increase that will be mostly in regards to next year. We will see some the cotton price increases will flow into next year and we're trying to get ahead of that with some price increases.

This year that ultimately will help benefit next year.

That's helpful and besides travel and back to campus. Rob that you had already mentioned are there other categories that you are relatively optimistic about in the second half and if so why.

Yes, I think the other thing that we've been doing is building out what we've called our winning intersections in terms of things like our home category and we're seeing nice growth. There we have the important launches coming up like our cloud footwear launch that will be coming up so.

So we feel really good about what's in the pipeline a lot of innovation coming forward a lot of reason for excitement.

The real balance is how to continue to expand the brand in the manage through this cyclical.

Short term recessionary pressure, but we have a lot of great innovation in the pipeline that will make the brand even stronger as we move forward.

Understood. Thank you I'll take the balance offline.

Thanks, Steve Thanks, Steve.

Thank you and that does conclude the question and answer session I will now turn the conference back over to Rob Wallstrom for closing remarks.

Before I close I would like to thank Jon Kees, who has served with distinction on the Vera Bradley Inc. Board since 2010, and he has held the important roles of lead independent director and chair of the Audit Committee John retired from the board in conjunction with this year's annual shareholders' meeting last month and on behalf of the other directors and the entire <unk>.

Company I would like to express my gratitude to him for his service and invaluable counsel over the last 12 years.

Brian Philip has been named lead independent director she has tremendous institutional knowledge, serving on our board since 2011, and a wealth of industry experience, having served as chief merchandising officer of L. L Bean and holding a variety of roles with other retailers, including Williams Sonoma in the gap brand is currently on the boards of publicly traded.

Coats group and Vista outdoor.

Kristina Cashman on our board for two years has stepped into the role of audit chair.

With this strong financial and accounting background. She has served as the CFO for several companies and currently is the audit Committee chair for publicly held Bassett furniture Industries, Inc.

In closing we are preparing for the macro environment to remain challenging through the remainder of this year and into next year and despite the strength in pure beta store business and the opportunity for new store growth. We know that it will take time to return the e-commerce business to growth is rebuilding the marketing platform and Remixing the marketing program is underway.

We are taking decisive actions that will further strengthen both core brands and our enterprise as a whole not only to successfully manage through this period, but position us for the future. Our teams are focused in our cash position and balance sheet remains strong.

It's too slow periods before and we will.

We look forward to returning both brands the steady growth we will keep you posted on our progress. Thank you for joining us today and we look forward to speaking with you on August 31.

On our second quarter earnings call.

Thank you.

That does conclude today's conference we do thank you for your participation.

Excellent.