Vera Bradley, Inc. (NASDAQ:VRA) Q3 2023 Earnings Call Transcript December 7, 2022
Vera Bradley, Inc. beats earnings expectations. Reported EPS is $0.2, expectations were $0.08.
Operator: Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley third 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. 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 like to turn the call over to Mark Dely, Vera Bradley’s Chief Administrative Officer.
Mark Dely: Good morning and welcome everyone. I’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 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 outgoing CEO, Rob Wallstrom. Rob?
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Robert Wallstrom: Thank you Mark. Good morning and thank you for joining us on today’s call. Our new CEO, Jacquie Ardrey, and John Enwright, our CFO both join me today. Jacquie joined the company in November after most recently serving as President of Grandin Road with previous experience at Harry and David and Hanna Andersson. She has jumped right in and we are excited to have her leading the company into the future. First, let me make a few comments on the quarter. We delivered a year-over-year improvement in non-GAAP EPS largely driven by implementation of our targeted expense reductions. Total revenues of $124 million were modestly above overall expectations and we began to experience some stabilization in our gross margin rate as supply chain challenges moderated and strategic price increases help offset increased raw material and freight costs.
As in past quarters, we are continuing to experience bifurcation in the spending of our customer base. Vera Bradley’s direct full price channel customers with higher household incomes remain more engaged and continue to spend more than customers with lower household incomes, especially in our Vera Bradley factory channel where inflationary pressures impacted traffic and discretionary spending; however, our Vera Bradley indirect channel experienced its third consecutive quarter of year-over-year growth. At our Vera Bradley brand, we are continuing to fuel our innovation pipeline and build on our lifestyle merchandising focus in the core areas of travel, back to campus, everyday, and collaborations. In the third quarter, we continued our powerful product collaborations with Disney and Harry Potter, launched a new rain gear collaboration with Totes, introduced our VB Cloud casual footwear collection, expanded our family sleep and loungewear collection, and made our debut in the metaverse with our NFTs to celebrate our 40th anniversary.
While stores will continue to play an important part of our Vera Bradley distribution strategy going forward, we continue to rationalize our store base, closing underperforming stores as leases expire. We have closed 10 full line Vera Bradley locations this year. Pura Vida’s e-commerce revenues continue to be affected by social and digital media effectiveness and higher costs. This year, we have lowered Pura Vida’s year-over-year marketing spend until we can determine the best ways to maximize the marketing effectiveness, which has had a negative impact on sales. In the third quarter, we did begin to reinvest more marketing dollars than we spent in the first and second quarters, and we saw a positive impact on ecommerce sales trends, although still negative compared to the prior year; however, at the same time we experienced a negative trend in Pura Vida’s wholesale revenues.
Our number one priority is to build a more diverse, innovative, effective and performance-based marketing program to drive Pura Vida ecommerce sales. We are in the process of implementing a comprehensive customer data platform for Pura Vida to build a single coherent, complete view of each customer so that we can better target and personalize marketing and become less reliant on third party marketing. This should be complete by early next year. In the meantime, we are continuing to work with our micro influencers, expanding our TikTok presence, launching impactful ads on connected TV, optimizing SMS, and aggressively exploring other methods to effectively reach our customers. We opened our new Pura Vida full price stores at Broadway at the Beach in Myrtle Beach, South Carolina in August and at the SanTan Village in metro Phoenix in September.
Stores can play a key role in driving new customer acquisition as we continue to diversify our marketing platforms, and they demonstrate the power a retail presence has in driving digital sales, omnichannel loyalty and spending. So far, all of our Pura Vida full price retail stores are trending to exceed their first year sales projections. On the Pura Vida product front, we continue to build customer excitement and engagement through collaborations like Disney, Harry Potter and Hello Kitty, partnering with key influencers and continuing innovation like the expansion of our demi fine and stone jewelry collections and extension of our apparel offerings. Now let me officially introduce our new CEO, Jacquie Ardrey. Jacquie?
Jacquie Ardrey: Thanks Rob. Although I’ve been with the company just a few short weeks, I’m convinced that both our Vera Bradley and Pura Vida brands have untapped potential in the marketplace. While I expect the macro environment to remain unpredictable, our teams are focused and our cash position and balance sheet remain solid. I look forward to working closely with our leadership teams to develop and execute solid growth plans, leverage our many opportunities especially in the areas of merchandising and marketing, and deliver consistent, sustainable growth and value to our shareholders over the long term. I look forward to talking to you more about our go-forward plans during our year-end earnings call in March. Now let me turn the call over to John to review the financial results. John?
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John Enwright: Thanks Jacquie, and good morning. Let me go over a few highlights for the third quarter. The numbers I will discuss today are all non-GAAP and exclude the charges outlined in today’s release. For a complete detail of items excluded 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 $124 million compared to $134.7 million in the prior year third quarter. Consolidated net income totaled $6.3 million or $0.20 per diluted share compared to $6.2 million or $0.18 per diluted share last year. As Rob noted, the increase in EPS was primarily attributable to expense leverage due to the cost reduction initiatives. Vera Bradley direct segment revenues totaled $80.1 million, a 7.6% decrease from $86.6 million last year.
Comparable sales decreased 9.6% in the third quarter. Vera Bradley indirect segment revenues totaled $22.3 million, a 6.7% increase from $20.9 million in the prior year third quarter, reflecting an increase in certain key account orders partially offset by a decline in specialty account orders. Pura Vida segment revenues totaled $21.7 million, a 20.3% decrease from $27.2 million last year. Third quarter gross margin totaled $65.6 million of 52.9% of net revenues compared to $72.3 million or 53.6% of net revenues last year. The current year gross profit rate was negatively affected by higher inbound and outbound freight expense, deleverage of overhead costs and channel mix changes, partially offset by price increases. Third consolidated SG&A expense totaled $57.6 million or 46.4% of net revenues for the current year third quarter compared to $63.7 million or 47.3% of net revenues in the prior year.
As expected, current year expenses were lower than prior year primarily due to cost reduction initiatives and a reduction in variable related expenses due to lower sales volume. The company’s third quarter consolidated operating income totaled $8.2 million or 6.6% of net revenues compared to $8.7 million or 6.5% of net revenues in the prior year. Now let’s turn to the balance sheet. Total quarter end inventory was $178.3 million compared to $148.3 million at the end of third quarter last year. Total current year inventory was higher than prior year primarily due to approximately $17 million in incremental logistics costs burdening overall inventory, as well as incremental Vera Bradley factory inventory related to lower than expected revenues.
Cash, cash equivalents and investments as of quarter end totaled $25.2 million compared to $75.3 million at the end of last year’s third quarter. The company had no borrowings on its $75 million ABL credit facility at quarter end. A key reason for our lower cash position is due to the inventory build of $30 million over last year. We will continue to take a conservative approach to cash, particularly in this volatile and challenging environment. Now let’s shift to our fiscal 2023 outlook. We expect the fourth quarter macroeconomic environment to continue to be unpredictable. The Pura Vida business will continue to be challenging, inflationary pressures will continue to impact Vera Bradley’s customers with lower household incomes, particularly in the factory channel, and there will be continued pressure on gross margin.
All forward-looking guidance numbers that I will discuss are non-GAAP. For the fourth quarter, we expect consolidated net revenues of $136 million to $141 million compared to $149.6 million last year, and a consolidated gross margin rate of 49.5% to 50.5% compared to 50.9% last year. The expected decrease is primarily associated with incremental targeted promotional activity and deleverage on overhead costs, partially offset by price increases and lower year-over-year freight expense. Consolidated SG&A expense of $61 million to $63 million compared to $67.1 million in the prior year. The reduction is primarily driven by cost reduction initiatives and lower variable related expenses due to expected sales decline. Consolidated EPS of $0.16 to $0.20 compared to $0.17 last year.
For the full year, our updated expectations are consolidated net revenues of $489 million to $494 million compared to $540.5 million in fiscal 2022, a consolidated gross margin rate of 51.9% to 52.1% compared to 53.3% in last year. The expected year-over-year decrease is primarily related to incremental inbound and outbound freight expense, incremental targeted promotional activity, and deleverage on overhead costs partially offset by price increases. Consolidated SG&A expense of $242 million to $244 million compared to $258.8 million in fiscal 2022. The reduction in SG&A expense is being driven by cost reduction initiatives and variable expenses. Consolidated diluted EPS of $0.22 to $0.26 compared to $0.57 last year. Net capital spending of approximately $10 million compared to $5.5 million in the prior year.
Operator, we will now open up the call to questions.
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