Q2 2020 Earnings Call
Good day, you're currently on hold for that Thier, Bradley's second quarter fiscal 2020 earnings conference call.
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Good day and welcome to the Vera Bradleys second quarter fiscal 2020 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Mark The Lai Chief administrative officer. Please go ahead Sir.
Good morning, and welcome everyone, we'd like to thank you for joining us for Vera Bradley's second quarter call. Some statements made on today's call during our prepared remarks and in response to your questions may constitute forward looking statements made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect please refer to today's press release and the company's most recent Form 10-K filed with the FCC for discussion of known risks and uncertainties investors should not assume that these 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 will now turn it over to Vera Bradley CEO , Rob Wallstrom Rob.
Thank you Mark good morning, everyone and thank you for joining us on today's call John in right. Our CFO also joining me today.
Vera Bradley's comparable sales full price selling and customer count were all up again in the quarter. However, the overall retail environment and the handbag market in particular remain challenging.
We have been most affected in the indirect channel is our partners continue to feel the pressure of this difficult retail environment and therefore, our total indirect sales fell slightly below our expectations. Additionally, gross margins continued to be pressured by increasing tariffs and higher international and domestic shipping costs.
As you might recall the first stage of vision 2020, what's to restore the branding company health and we continue to build upon the progress we have made so far during the first half of this year. We once again improved the quality of sales and our full line stores and on Vera Bradley dotcom by increasing comparable full price selling in these two channels by approximately 10%.
This is on top of a 20 plus percentage increase in the first six months of last year.
This is your two of our three year journey, and we are keenly focused on expanding our customer base and increasing both sales and profitability as a reminder, our key areas of focus for fiscal 2020 our.
Number one growth our goal for the Vera Bradley brand is to return to positive sales growth. This year and we're off to a solid start in the first half with comparable sales up 3.3%.
In line with our expectations and despite a challenging north American handbag market. This improvement is being driven by compelling innovative product supported by targeted marketing and customer engagement.
Customer count is also up year over year.
Number two operational excellence, we are investing in technology strengthening business processes and addressing Chinese tariffs during the second quarter. We began a two year process of Replatforming, our enterprise resource planning and other key information systems to become more streamlined nimble and efficient in our technology and business processes by the end of this fiscal year, our production exposure in China will it drop to less than 25%.
From approximately 54% last year beginning in the fourth quarter of this year, we will begin to see the gross margin benefit of moving production to the generalized system a preferences our GSP countries.
Number three ownership, we will continue to reinforce our culture as an ownership based model, where every associate can drive value creation to their individual and team efforts and once again, we received best in class engagement scores during our annual Associate survey and we continue to have industry, leading customer service scores. Both underscore how our culture is a prime asset and one that is key to our long term growth plans.
We also continued to strengthen Vera Bradley's position as a unique lifestyle brand with our second quarter acquisition of a majority interest in pure EBITA bracelets pure Veeva is based in California and is rapidly growing digitally native at a highly engaging lifestyle brand that deeply resonates with its loyal consumer following.
The PURA Vida brand has a differentiated and expanding offering of bracelets jewelry and other lifestyle accessories.
Vera Bradley in pure of either are highly complementary businesses and have many similarities including.
Devoted emotionally connected than multi generational customer basis.
Alignment as casual comfortable affordable and fun lifestyle brands.
Positioning as gifting and socially connected brands.
And strong entrepreneurial cultures.
We will share resources and knowledge to grow our brands together PURA Vida is a great strategic fit for us due to their strong expertise in branding and social marketing strategies as well as robust competencies in e-commerce and subscription models selling.
And PURA Vida has already started to utilize Vera Bradley's infrastructure and back office support capabilities to nurture its growth.
Now I will turn the call over to John to review the financial results and outlook John .
Thanks, Rob and good morning, Let me go over a few highlights for the quarter.
The financial performance for the current year second quarter, and six months I will discuss our non-GAAP and exclude purely the acquisition related expenses, including transaction costs inventory step up amortization and intangible asset amortization as well as expenses related to the re platforming of information technology systems outlined in today's release.
The performance includes results for pure view for the stub period.
Which is July 17th through the end of the quarter.
Second quarter consolidated net revenues totaled $119.8 million for the current year second quarter, which included 5.4 million of net revenues from pure Vito.
Excluding purity to Vera Bradley net revenues totaled $114.4 million.
0.7% increase over the 113.6 million in the prior year second quarter.
Excluding charges consolidated second quarter net income attributable to beer Bradley incorporated total $8.7 million or 25 cents per diluted share, which included approximately a penny of accretion attributable to pure Anita.
For the prior year second quarter, we posted net income of $9.3 million or 26 cents per diluted share.
Current year second quarter Europe Bradley direct segment revenues totaled 94.4 million, a 3.7% increase over $91 million in the prior year second quarter.
Comparable sales increased 2.1% for the quarter.
As expected comparable sales were negatively impacted by the year over year reduction of approximately $3 million of clearance sales for the quarter.
Primarily affecting ecommerce sales.
Indirect segment revenues decreased 11.4% to $20 million from $22.6 million in the prior year, reflecting reduction in orders and then the number of specialty and department store count as well as well as inbound shipping delays.
Excluding the inventory step up amortization gross profit totaled $68.4 million or 57.1% of net revenues compared to $65.7 million or 57.9% in the prior year second quarter.
In Europe , you to increase the current year second quarter non-GAAP gross margin by 20 basis points.
As expected improvement in full price selling in sourcing and operational efficiencies were more than offset by the impact of Chinese tariffs and increased shipping costs.
Excluding the pure viewed and transaction costs intangible asset amortization and information technology Replatform Replatforming charges, SGN expense was $57.8 million or 48.2% of net revenues in the current year second quarter compared to $53.8 million or 47.3% in the prior year second quarter.
Pure via contributed $2.4 million of SGN expenses. Excluding these additional expenses for your Bradley SNA expenses were higher than the prior year, primarily due to related.
New factory store openings and variable expenses to drive revenues, but were within the guidance range of $55 million to $56 million.
For the six months consolidated net revenues totaled $210.8 million, which included $5.4 million of net revenues from pure beta compared to $200.2 million last year.
Excluding charges the company's consolidated net income attributable to Vera Bradley incorporated for the six months totaled 6.9 million or 20 cents per diluted share, which included approximately a penny of accretion attributable to pure Vito.
For the prior year six months the company posted net income of $7.9 million or 22 cents per diluted share.
Direct segment revenues for the six months totaled 165.5 million, a 5.7% increase over the $156.6 million in the prior year.
Comparable sales increased 3.3% for the period full price selling our full line stores and on Vera Bradley Dotcom increased approximately 10% for the six months.
Indirect segment revenues for the six months decreased 8.7% to 39.9 million from 43.7 million in the prior year, reflecting a reduction in orders from both specialty accounts in certain key accounts as well as inbound shipping delays.
Excluding the inventory step up amortization gross profit for the six months totaled 118.8 million or 56.4% of net revenues compared to $114.4 million or 57.1% of net revenues in the prior year.
The inclusion of peer Buda benefited a currently or non-GAAP gross margin by approximately 10 basis points.
As expected improvement in full price selling in sourcing and operational efficiencies were more than offset by the impact of Chinese tariffs and increased shipping costs.
Excluding purely the transaction costs intangible asset amortization in information technology re platforming charges at Jena expenses totaled $111.2 million or 52.8% of net revenues in the current year six months compared to $104.5 million or 52.2% of net revenues in the prior year.
Pure via contributed pure view that contribute $2.4 million of SJ expenses.
Now, let me turn to the balance sheet net capital spending for the second quarter and six months totaled 4.7 million and 8.1 million respectively.
During the second quarter, we repurchased approximately 2.2 million of our common stock or 197000 shares an average price of $11.34.
At quarter end, we had approximately $42 million remaining under the $50 million share repurchase authorization.
Cash cash equivalents and investments as of August Threerd, 2019 totaled $70.5 million compared to 144.8 million at the end of last years second quarter.
The reduction from the prior year as related to the July 2019 acquisition, a pure reviewed for approximately $70 million to $75 million in cash.
We continue to have no debt outstanding total quarter end inventory was 130.7 million, which included $26.2 million pure view that inventory.
Excluding pure theater, our quarter end inventory was $104.5 million compared to 86.3 million at the end of the second quarter last year.
The inventory was at the high end of our guidance range of 95 to 105 million, primarily due to the acceleration of quarter end receipts in order to minimize the impact on Harris.
Now, let me take a couple of minutes to review our outlook for the third quarter and full year.
All forward looking guidance numbers that I will discuss our non-GAAP and include expected PURA Vida performance.
Prior year numbers exclude pure beta.
Full year gross margin estimate and diluted EPS numbers exclude the previously disclosed charges related to the acquisition of pure data and information technology systems Replatforming charges as well as any additional purchase accounting adjustments related to pure beta.
For the third quarter, we expect net sales of $122 million to $129 million, which includes estimated pure BITA revenues of $23 million to $25 million.
Prior year third quarter revenues totaled 97.7 million.
For the quarter, we expect Vera Bradley's direct segment net sales to increase in the low to mid single digit range, including low single digit positive comparable sales, we expect beer braddy indirect net sales will be flat to up in the low single digit range for the quarter.
We expect our third quarter gross margin will be between 57.5% to 57.9% compared to last year's third quarter rate of 58.5% sourcing and operational efficiencies are expected to be more than offset by the impact of China tariffs.
The inclusion of per your view that should have a positive impact on the consolidated gross margin.
Third quarter as an expense is expected to range from $62.5 million to $64 million compared to last year's extra expense of $51.9 million, reflecting incremental expenses associated with new factory store locations and approximately $11 million of estimated expenses related to pure Buda operations.
We expect third quarter diluted EPS of 16 to 20 cents, reflecting accretion of approximately five cents from pure beta.
Diluted EPS was 12 cents in the prior year third quarter.
We expect inventory to be in the $120 million to $130 million range at the end of the third quarter compared to $96.3 million at the end of last years third quarter.
Included in this estimate is approximately $20 million of peer review the inventory.
For full year, we expect net sales of 490 to 505 million, which includes estimated pure beta revenues of $65 million to $70 million.
Net revenues totaled $416.1 million last year.
This sales estimate estimate reflects the removal of approximately $5 million of additional Vera Bradley cleaner sales this year.
3 million in the second quarter in the balance in the fourth quarter.
Our full year revenue guidance assumes that Vera Bradley direct segment net sales will increase in the low to mid single digit range compared with the prior year, including a low single digit increase in comparable sales. We expect the Vera Bradley indirect net sales will be flat to down in the low single digit range for the full year.
We expect our gross margin for fiscal 2020 will be between 57.4% to 57.6% compared to 57.3% last year.
Sourcing and operational efficiencies are expected to be fully offset by the impact of Chinese tariffs.
The inclusion of pure BITA should have a positive impact on consolidated gross margin.
We expect restaurant expenses to total between 242 and $246 million for the year compared to $212 million last year.
Reflecting incremental expenses related to new factory store locations, partially offset by full line store closures.
Approximately $27 million to $28 million of the estimated expenses relates to pure b to operations.
We expect full year diluted EPS will range from 86 to 93 cents, which maintains prior beer Bradley annual guidance of 67 to 74 cents.
Plus accretion from the pure Buda acquisition.
Diluted EPS last year totaled 59 cents.
And then on tariffs, we estimate terrace will negatively affect gross margin by approximately 80 basis points for the year equating to about eight cents per share.
We expect capital expenditures will total approximately $13 million compared to $8.1 million last year, reflecting investments in new factory stores and technology and logistic enhancements, we expect to generate $45 million to $55 million of operating cash flow in fiscal 2020, which includes the benefit of pure beta.
Rob.
Thanks, John .
We are off to a solid start in returning to positive sales growth. This year with our year to date, 3.3% comparable sales increase we are engaging our current customers and bringing new customers to Vera Bradley with our compelling and innovative product supported by our marketing efforts and customer experience initiatives.
On the product front, we continue to build dominance in our key franchise areas like travel campus beach and gifts as well as our top 10 items.
Our back to school selling period is underway and the sales of backpacks and lunch bags are exceeding last year newness for the season includes are clearly colorful collection larger school backpacks and smaller fashion backpacks and slayings.
We have a lot of innovation and newness to showcase this fall last month, we launched performance 12, the rise of the Athleisure movement has made customers purchasing decisions increasingly driven by performance performance Twill is a lightweight durable water repellent and our newest definition of a beautiful solution.
This is our first launch in a series of innovative performance fabrics.
Also in August we enhanced our signature duffel franchise by adding more sizes in shoulder straps and our innovative lay flat doubtful will debut in November .
We will offer two small capsule collections. This fall our funded playful cat's Meow capsule collection will launch this month im pretty poses paying our paint capsule for breast cancer awareness month will debut in October our special limited time capsule collection centered around seasonal periods or novelty add excitement and a sense of urgency for our customers to shop.
We will continue to innovate and add sustainability elements to our products are reactive collection made of recycled plastic bottles is our sustainable update to lighten up and will be introduced in 2020.
Offering limited edition collections and collaborations with unique partners increases our brand exposure and provides momentum to our growth. We have entered into several high profile product collaborations this year.
The Vera Bradley plus being its collection launched in April continues to perform above expectations at target.
The collection features a popular Vera Bradley design on a selection of Gillette Venus is core and special edition shaving products in May we debuted a collaborative drink ware and accessories collection with Starbucks Asia Pacific. This collection has been very successful and is helping us broaden our international brand awareness and expand our reach.
In July Vera Bradley plus Crocs debuted our limited edition footwear collection, which combined Vera Bradley signature bright florals, and Paisley designs with crocs world renowned comfort.
Most styles and sizes sold out almost immediately.
Interestingly about 30% of the customers that purchased crocs on our web site, we are new to our brand.
Two weeks ago, we debuted our Cobranded Vera Bradley plus pure view that backpack, we partnered together to build the perfect back to school backpacks, using Vera Bradley's best selling iconic campus backpack silhouette and a print inspired by the distinctive west coast vibes of the PURA Vida lifestyle.
The backpack for goes Vera Bradley's traditional quilted cotton and instead features a unique cotton Linden slob yarn fabrication.
We think the Vera Bradley plus pure Iveta iconic campus backpack collaboration is the perfect way to celebrate our new partnership with each purchase of this backpack customers receive a complimentary PURA Vida original bracelet.
Building off the success of the last two extremely popular Disney collaborations. This fall we will once again partner with Disney theme Park merchandise to create another limited edition novelty pattern in collection.
Disney and Vera Bradley are a perfect fit we're both committed to creating memorable and fun customer experiences and we know that many of our Vera Bradley fans are also huge Disney enthusiast.
Today, we announced another exciting collaboration Harry Potter.
Vera Bradley's design team will collaborate with Warner brothers consumer products to create a Vera Bradley plus Harry Potter back to campus in Durham line, featuring bags accessories stationary drink Ware Tech products, Bath, and betting which will launch in June 2020.
Vera Bradley plus Harry Potter Cozy capsule, featuring a fleece robes slippers and this year drove like it will launch in November 2020, just in time for holiday gifting, we're thrilled to partner with Warner Brothers consumer products to create a magical fund collection that will appeal to all generations.
Additionally, we appreciate and support the messages of diversity acceptance hope and quality that our woven throughout the Harry Potter and Wizard World works is these closely aligned with Vera Bradley's values, we know that many of our Vera Bradley fans are also wizard world devote teas, who will love these amazing products.
Our ability to attract such amazing partners like Gillette, Venus, Starbucks Crocs, Disney and Warner Brothers consumer products is truly a testament to the strength in wide appeal of our brand. All of these collaborations are also an extension of our goal to offer beautiful solutions to our customers. We are working with other iconic internationally known brands and other exciting future product collaborations.
Let's now turn to marketing.
Our digital and marketing teams are focused on accelerating our digital and customer growth. We have completed the in sourcing of our customer data science team added to our business analytics team and completed the rollout of our new customer data platform. We are actively using the insights we gained from our robust customer data to adjust our marketing mix on a real time basis.
We are excited by the results we are seeing from these investments in customer data and digital media and digital media and new customer visits have improved year over year.
As has revenue directly derived from these initiatives looking at the overall impact of these investments across our channels. We saw a double digit increase year over year and new customers for the brand. We will continue to mine, our customer data and optimize our marketing spend for the back half of the year.
Brand collaborations and Influencer engagement continue to be important for the brand and we saw significant results in the quarter.
Our collaborations with Gillette Starbucks in Crocs, all show, a heightened strength and relevance of our brand and generated enormous medium bus media impressions increased more than 300% over last years second quarter.
As we reinforce our position as a total stakeholder focused and socially conscious organization marketing and social media engagement plans are critical in this endeavor, we continue to strengthen our community support and charitable initiatives under the umbrella of VB cares.
We are identifying areas, where we can make a meaningful impact, particularly on the lives of women and children.
We are taking a stance for change and often invite our customers to participate with clear call to action.
This summer we donated thousands of Vera Bradley Beach sales to the fresh air fun, a not for profit agency that support summer camp experiences for children from the New York City is low income communities.
We are continuing our partnership with blessings isn't backpack for a second consecutive year blessings in a backpack mobilizes communities individuals in resources to provide food for millions of elementary school children across America, who might otherwise go hungry.
Through blood sensitive backpack, we are donated 50000 backpacks to children in need throughout the US. We are also in the midst of hosting several backpack packed in event school carnivals annual back to school distribution events in select markets, including New York, Los Angeles, Chicago, Nashville, Charlotte in Panama City, Florida.
Each event will culminate in backpack giveaways and some events will feature celebrity appearances, including Misty Copeland principal dancer, The American Ballet Theatre, Dale Earnhardt, Jr. Racing legend, and NBC Sports Motor Sports analyst.
Lauren Atlanta country music singer and songwriter and many more.
In August we also launched an awareness in fundraising campaign benefiting bless incident backpacked in our stores and on Vera Bradley Dotcom and with a minimum $10 donation to blessings in a backpack customers received a free Vera Bradley many backpack key chain to show their support for the organization.
Through this effort our customers helped us raise over $70000 for the organization in the month of August .
Activities supporting the Vera Bradley Foundation for breast cancer go on all year, but October is especially significant since it is breast cancer awareness month.
We will be offering.
Especial merchandising in store events with the support of our customers, we expect to raise over $2 million this year and since the inception of the foundation, we have raised over $32 million to fund advanced breast cancer Research at Indiana University is comprehensive cancer Center.
Moving on to distribution.
Our goal is to grow sales in each of our channels in fiscal 2020, and our full line stores, we are focusing on our highest potential stores enhancing the customer experience further localize in our assortments and adding more compelling display windows. We are also testing alternative vehicles to sell our full line products, including pop up shops in airport vending machines, which will launch this fall.
We continue to rationalize and strengthen our full line store base, we closed five underperforming full line stores in the first six months of the year and expect to close about five more this year. This will bring our total store closings to 25 since the beginning of fiscal 2018, and we can potentially close up to an additional 15 following this fiscal year.
At the end of the quarter, we had 95 94 full line stores.
This year, we are working to maximize factory performance by refining our pricing model and adding six new locations.
Five of which have already opened in addition, we are relocating and expanding three of our best performing factory stores, the move and expansion of Severeville, Tennessee was complete.
In July the larger Destin, Florida store opened in August .
And the Branson, Missouri location relocation to a larger space will be completed in October .
At the end of the quarter, we had 62 factory stores.
We continue to focus on creating an engaging customer experience in both our full line and factory stores on Vera Bradley Dotcom, and our fulfillment operations and in our customer service Department.
Our robust voice of customer initiative, and our new customer service model rolled out into our full line stores once again drove industry, leading customer satisfaction scores in the quarter.
In the specialty channel, we are focused on our top accounts and Reengaging lapsed customers.
We are paring back our distribution in the department store oriented to focus on the most productive locations. Vera Bradley is currently represented in about 450 Department stores.
Our brand is resilient our team is experienced in creative that our future is exciting.
Over the last year, we have made significant progress in restoring our companys uchealth and have begun to return to growth we are looking forward.
To completing our vision 2020 journey and beginning to focus on the years beyond and we are very excited about the peer review the acquisition and the potential growth of that brand.
Operator, we will now open the call to questions.
Thank you the question and answer session will be conducted electronically. If you would like to ask a question. Please press star followed by the digit one if you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again star one and we'll pause for just a moment.
And our first question, we'll hear from Mark of wider with Baird.
Great. Good morning, Thanks for taking my question.
Rob These collaborations have been really interesting I'm curious if you could talk a little bit more but what youve been learning so far.
Specifically is there anything, particularly surprising with respect to the profile of the customer that you're tracking to the brand and as you look like your core customer or do you think youre expanding the tens of it.
Good morning, Mark. Thanks for the question no. We are absolutely very excited by these collaborations I think one thing that has been.
Probably extra exciting is the fact that all of these collaborations the results that we've seen across the various channel whether it's Starbucks, whether it's through Gillette Venus and target whether it's through across the consumer response has just been kind of overwhelming.
Both in those channels as well as in our own channel, So where it really I think just points to the vibrancy of the brand and how strong the brand is.
We are also seeing as we look at the customer file we are attracting a new customer to the brand and you're really seeing it show up in our brand awareness right. Our brand awareness, our aided brand awareness scores keep going up year after year and so we're really excited about what this means for the brand as we go forward.
Thank you and then a lot of these product and marketing initiatives have really been focused on the full price business and you're clearly seeing some nice success. There curious how the strategies are touching touching the factory business and what's giving you the confidence in the sustainability and growth in the factory channel.
Yeah, Mark I mean, we definitely are focus into collaborations on our full price business part of our strategy and vision 2020 was really to get.
Strong growth for our full price channel and kind of move from this strong clearance focus. So our collaborations are definitely focused on full price, but I do believe that as brand awareness goes up the brand becomes stronger that that also plays to demand in factory channel as customers are out shopping the factory channel.
We've been very pleased with how our factory stores had been perform in the first half of the year. We've taken a very focused approach in that channel 95% of the product is made exclusively for it very focused on key items Q fabrication.
And really making sure that we're managing the promotional environment very tightly and that strategy is paying off for US right now in factory and you're seeing us as we're continuing to expand our top stores that we believe we still have more growth opportunity in factory.
Great. Thanks, and then just switching gears for a moment to pure Vito.
It looks like the new outlook incorporates about $60 million to $65 million in revenue for the back half I mean, that's about equal to the full year revenue in calendar 18, you discussed back in June .
I'm wondering as we update our models is any further detail you can provide and how you're thinking about the annualized contribution from pure Vito and the growth trajectory you're anticipating over the next couple of years.
Hey, Mark this is John so yet the back half the year, we anticipate actually to be about 65 to 70 million, which would basically be a 100% of what happened.
In the prior year.
The way were thinking about and ultimately we're not giving guidance for next year, but we do anticipate significant growth year over year. This year.
And would expect nice growth over the coming next two to three years associated with the brand. So on average you can think about the brand growing close to 50%. This year and we do expect to be a little bit less than that kind of the out years.
Thanks for all the detail and best of luck.
Thanks, Thanks Mark.
Next we'll move to Oliver Chen with Cowen and company.
Hi, Thank you regarding the indirect channel what are you seeing in this channel and what are your thoughts about the distribution footprint and what you expect going forward.
As it can be challenging channel the forecast and the inventory management is a little bit different. Thank you.
Thanks Oliver.
When you look at our indirect channel, there's obviously a lot of different pieces. So the biggest chunk of that is our indirect specialty channel. So let me talked about that first.
First of all what they're feeling is a little bit of the same pressure I think that we're seeing in department stores, just the general retail environment has been challenging for them.
But we're actually encouraged by what we're seeing and what we're hearing from them that they are giving us very positive feedback in terms of the Vera Bradley performance and their channel.
They are seeing much.
Improvement in terms of full price sell through profitability. So theres definitely a lot of positivity, particularly with our best accounts.
And we're just working through the challenges that that channels facing.
But overall were feeling that that's an important part of not only our past, but our future. So our partnership with the specialty channel. We think continues to be important but there. Obviously is a lot of change that goes on there with all the.
Smaller stores, new ones coming in every year some going out.
So it just takes.
A lot of focus from our team to make sure that we focus in on that channel. So that's one.
The second piece of it as the Department store World. The Department store World I think as we've all seen has been under pressure.
I think handbags in particular has been under pressure and the department store World.
Quite often seems to follow trends. So we're looking at that and making sure that we're just very focused in there our strategy behind Department store selling was always about new customer pickup in new customer acquisition and so as we're looking at that we think running continue to fine tune the store count another word might be tightening up that store count and make sure that we're focusing on the most appropriate stores in the stores that can really bring an additional new customers to the brand.
So that would be the second piece third piece I think becomes though.
The rest of the channel or Amazon business is performing very well, we're excited about what's happening in the e-commerce side of the wholesale world. So we're going to continue to expand in that area.
And then lastly, the smaller piece of our business, but in liquidation that theres definitely a lot of liquidation ambac product out in the market today and so there's definitely some pressure on that side of the business in terms of availability.
Of liquidation, but for us that's okay, because we've been pulling down our clearance we have been focusing less on it but there is some pressure on that side of the business also.
Yes, as we think about what's happening in the industry would love your thoughts on on traffic and traffic trends and volatility across a full price versus outlet as well as the thoughts on liquidation that's been very promotional in the marketplace. What are your expectations for how your merchandize margins may trend.
From a traffic perspective, we're seeing from a a full price perspective, being a little bit softer than kind of our factory business.
But ultimately we anticipate we anticipated that when we put together.
Forecast and our plan.
So traffic has been down roughly about 4% year over year.
If we think about kind of our merchandise margins as we move forward I don't anticipate.
Significant.
Changes from the first half of the year in regards to how promotion we're going to be in the back half of the year. So I would think as we've built into our forward looking guidance for the third quarter and for the year, we've taken consideration to how we look at our promotional activity as well as some of the input costs in any shipping costs associated with that so I think we've kind of we feel more comfortable ultimately with our margin.
Coming through the second quarter and the impact as Rob mentioned in the guidance is.
Remarks.
For GSP benefit, we'll see kind of in the back half of the year most significantly in the fourth quarter for the GSP for margin I think Joyce and I would add to what John saying as we talk about our marketing team and our data science team and becoming more and more analytical one of the areas that we're definitely placing a lot of that analytical focus is in the promotional effectiveness.
How do we really fine tune into promotional activity, how do we take the targeted approach.
Whether it's by category or customer geography store, so we're becoming much more micro focused and our promotional activity, which we think will help us move through this period of.
Promotional activity.
On on pure Aveda.
There is a huge opportunity to really leverage their digital expertise as well as our young customer base, what should we monitor in terms of how you will.
How you will.
Embrace that across your organization large.
Yes, I know all of our you're you're definitely pointing to one of the areas, where we think that there's real synergies. So our teams are working together to really learn from what peer reviewed is done.
Im really focusing on how do we improve the effectiveness, particularly with our younger customer.
And so a lot of what pure reviewed has done is really done a great job of engaging that youve customer, which has always been such an important part of our brand. So if you think about what is the focus I would say there is really three key areas. One is on social media.
They've done a great job this year basically doubling their Instagram following and we think that Theres a lot to learn from them on the social media side. The second is moving our marketing to much more of a user generated content slashing influencer generated content experience, you're going to see more authenticity coming through our media over the next 12 months and then I think lastly, and also importantly, as just looking at web site and the different capabilities the different tools they are using.
That they are being more forward and being on the shopify platform that theyre, taking advantage of a lot more of the innovation is happening in the.
E Commerce World and we're expecting to leverage a lot of those learnings, particularly as we move through our technology program and join them on the Shopify plus platform.
Thank you and lastly regarding product you made some great updates to some of your classic silhouettes.
How is the customer response, Dan what are your thoughts on balancing changes to your core versus layering in newness and managing risk as well as innovation.
Great question, Oliver and so a couple things I think one we are continuing to see strength in our core and our really our hero products in terms of plans like our campus backpacks and doubles and things that were traditionally don't for one way that we're driving innovation through just those core items is using fabrications. So that we keep those products even feeling fresh.
But you're right that there definitely is this balance between bringing newness to the market as well as keeping our heritage going.
And as we look at newness, we are trying new silhouettes, a great example of a big successful as we broaden our sling backpack during the second quarter, which we had never had a slowing in our line it far exceeded our expectations and that really reinforced our belief that our customers, becoming more and more what I'll call silhouettes focused in functional focused as opposed to just pattern focus.
So I think that becomes really critical the other thing that you're seeing US do is as we talked about November with a duffel franchise, bringing and lay flat technology. It's a great way of really updating something that is so iconic for us, but I will tell you that this new lay flat design is.
Great I'd say, our customers are actually going to be a lot, but I personally am a big fan and using it all the time.
And the other one that we talked about as performance twill and what's interesting with our performance for launch we put it out and marketed August and then with the launch this week, we're focusing even more on it on those on the website.
Not only is it a great new fabrication, but we are really trying to balance both heritage items, which are going to see as well as new design. So for example in our performance 12 dental it was our campus backpack one of our best sellers, but the other thing was we designed to do work tote.
That we really listen to build some innovation and that the customer was asking for and Thats been another surprise winter.
So our customer wants us to balance both heritage and innovation.
Thank you best regards.
Thanks Oliver.
And as a reminder, if you would like to ask a question. Please press star followed by the digit one.
Next we'll move to Steve Marotta with CLK associates.
Good morning.
And John as far as security.
Steve We can't really hear you can you speak up more.
There's a little bit better.
That's a little bit better.
Maybe this letter.
Yes.
All right.
Can you talk a little bit about peer reviewed is accretion from an earnings standpoint, any sort of seasonality that's associated with.
With that acquisition in other words, it's adding 20 cents. This year is there.
Is there a first half loss that might be incorporated as we think about our next year numbers.
Steve. This is John So did you say is there a first year loss that we should think about I just want to make sure I heard the question right.
For the first half.
Fair enough. So the answer that question is no ultimately they have some seasonality in their business its fairly similar to our seasonality where they do have a nice summer business close to kind of our back to school business as well as a holiday season business. So.
As you pointed out we expect accretion close to about 20 cents in the back half of this year and as you kind of model. It out for next year, and we'll give obviously more guidance in a few months in regards to what we expect for next year.
But I wouldn't anticipate any kind of reduction in the first half of your from your I guess, obviously it was just can be we anticipate accretion in the first half.
I think one way to think about it is that.
The profitability and the way their business model works since it's a low overhead business and a lot of its marketing and sales that the flow through relative to the sales is not.
Super different season over season, so, yes, I think you're going to see a little bit smoother earnings flow that maybe you've seen some retail businesses, because theres not a big fixed cost base that you're leveraging out in fourth quarter.
So, we'll obviously give more guidance next year.
This is definitely a very healthy business and very accretive.
Okay.
That's helpful and just reiterating your China exposure you mentioned it was 54% last year, 25% that you spoke about Thats a run rate at the end of the year correct. That's not the blended rate for the entire year.
No thats actually at a blended rate of the total purchases that we had made out of China. This year will be roughly about 25% are little bit less than that and we anticipate that we're going to move that down a little bit next year.
Okay.
That's very good and were there any incremental tariffs associated with this September 1st.
Upping to that 5% to 25 to 30.
Yes, theres incremental tariffs associated with kind of the September onest for list for us. So we had product that was being excluded from terrorists. When it was list three so now all the products that we purchase out of China will have tariff as of December 15th once they implement the incremental tariffs associated with a broken up the store between September Onest in December 15, so by the end of the year. If there are no changes we will have.
Incremental tariffs for 100% of our purchases out of China.
Okay. That's helpful. Thank you very much.
And at this time that will conclude the question and answer session I would like to turn the call back over to Rob Rob Wallstrom for any additional or closing remarks.
Thank you very much for joining us on todays call. We are very pleased with the progress we have made since we launched vision 2020.
Although the current North American handbag market is challenging we are steadfastly focused on the future and on delivering growth in revenue profit and shareholder value.
Don't forget to sign up for our Investor and Analyst day in our Soho store on Thursday October Threerd grip, and Dol and Paul Goodman pure Venus founders will be there along with members of the Vera Bradley management team, including Beatrice Mckay, our Chief Creative Officer, and Darren Hall, our Chief customer officer. So if you are interested contact Julia Bentley, our vice president of.
Of Investor Relations at Jay Bentley at Vera Bradley Dotcom. Thank you for your time.
And that will conclude today's call. We thank you for your participation.