VRA
#Thank you, <UNK>.
Good morning, everyone, and thank you for joining us for today's call.
I am joined today by <UNK> <UNK>, our CFO.
I want to take a minute to welcome Kevin Korney to our leadership team.
Kevin joined Vera Bradley in January as our Chief Merchandising Officer.
Kevin has nearly 20 years of apparel, accessory and footwear merchandising experience with several well-known retailers.
Most recently, he served as VP of Global Merchandising for Converse.
And prior to Converse, Kevin served as a Senior Divisional Merchandise Manager for Fossil where he worked with our Chief Creative Officer, Beatrice Mac Cabe.
Kevin gained prior experience with Dallas Cowboys Merchandising, The Walt Disney Company, Nautica, Ralph Lauren and Gap.
And Kevin's leadership, strategic and analytical and creative skills make him a great fit for Vera Bradley in this important role.
Now let's turn to the results.
From both the fourth quarter and the year, we are pleased that revenues were at the high end of our guidance and our gross margin rate exceeded our expectations.
In addition, expense management was a key factor in achieving our results.
Allow me to take a minute to highlight several of our fiscal 2018 accomplishments.
In the product arena, we reinvigorated and reinvented cotton, which remains the most important piece of our business, customers are responding to our newly introduced iconic cotton collection, featuring micro quilting added functionality and innovation and several new updated silhouettes.
We expanded our licensing program by launching technology-related products, swimwear, beddings, stationery, hosiery and medical uniforms, which is important to extending our brand and reaching new customers and markets.
We continue to see an extremely positive response from the market in terms of placement in both existing and new distribution.
For example, our smartphone cases are offered in 2,500 AT&T stores, and Vera Bradley bedding is available in over 200 Bed, Bath & Beyond locations.
On the distribution front, we launched our new re-platformed verabradley.com website, part of our Digital First strategy, which is key to our long-term growth.
In order to reduce clearance sales on verabradley.com, we created a new online outlet site and conducted our first 2 flash sales in October and January.
We continued to strengthen our store base by completing design upgrades on a number of our go-forward full-line stores with nearly 40 full-line stores now reflecting our new design aesthetic and an additional 14 stores featuring updated signage and fa\xe7ades; opening a new full-line pop-up store in Boston's Faneuil Hall, a high-traffic tourist destination; continuing to grow our factory business by opening 6 new stores; and rationalizing and improving the profitability of our base by closing 5 underperforming full-line stores and 1 underperforming factory store.
We also made the decision to exit our small wholesale presence in Japan to better focus on strengthening our core domestic operations.
In marketing, we increased brand awareness with our Digital First strategy by leveraging social media channels and partnering with key influencers.
We continue to strengthen our balance sheet by generating over $40 million in operating cash flow, increasing our cash and investment balance to nearly $140 million and reducing our inventory levels by 14%.
Most importantly, we laid out the framework for our future with Vision 20/20 and started the implementation, which is what I will discuss in more detail after <UNK> reviews our financial performance.
<UNK>.
Thanks, Rob, and good morning.
I'd like to discuss the quarter and the year.
Current and prior year income statement numbers exclude severance, store impairments, consulting and other charges outlined in today's release.
As a reminder, the current year fourth quarter and full year results included an extra week that contributed approximately $4.1 million in net revenue and an estimated $0.01 in diluted EPS.
Let me go over a few highlights for the quarter.
Current year fourth quarter net revenues of $132 million were at the high end of our guidance range of $127 million to $132 million.
Prior year fourth quarter revenues totaled $134.8 million.
Excluding charges, non-GAAP fourth quarter net income totaled $11.8 million or $0.33 per diluted share, at the high end of our guidance range of $0.30 to $0.33.
This compares to $10.1 million or $0.28 per diluted share last year.
Current year fourth quarter Direct segment revenues totaled $110.4 million, a 1.4% increase over $108.9 million in the prior year fourth quarter.
Comparable sales, including e-commerce, decreased 4.6% for the quarter, which was more than offset by new store growth.
As expected, Indirect segment revenues decreased 17% to $21.6 million from $26 million in the prior year fourth quarter, reflecting a reduction in the number of specialty accounts, coupled with a reduction in orders from both specialty accounts and certain key accounts.
Excluding charges, fourth quarter gross profit totaled $74.3 million or 56.3% of net revenues compared to $75.1 million or 55.7% of net revenues in the prior year.
The year-over-year 60 basis point improvement primarily related to reduction in product cost, which caused the percentage to be above our 55.4% to 55.8% guidance range.
Excluding charges, fourth quarter SG&A expenses totaled $57.1 million or 43.2% of net revenues compared to $60.2 million or 44.6% of net revenues last year.
SG&A expenses were lower than the prior year primarily due to diligent expense management and savings realized in conjunction with Vision 20/20.
The fourth quarter rate was modestly higher than the guidance of 42.8% to 42.9%, primarily due to the timing of savings associated with Vision 20/20.
Excluding charges, our fourth quarter operating income was $17.4 million or 13.2% of net revenues compared to $15.2 million or 11.2% of net revenues in the prior year.
Direct operating income was $26.8 million or 24% ---+ 24.3% of net revenues compared to $25.7 million or 23.6% of net revenues last year.
Indirect operating income was $7.6 million or 35.2% of net revenues compared to $9.4 million or 36.3% of net revenues in the prior year.
Now let's move on to the results for the full year.
Current year net revenue of $454.6 million compared to $485.9 million in the prior year and at upper end of our guidance range of $450 million to $455 million.
Excluding charges, we posted net income of $21.5 million or $0.60 per diluted share compared to $26.8 million or $0.72 per diluted share last year.
Our EPS was at the high end of our guidance range of $0.57 to $0.60.
Direct segment revenues totaled $351.8 million, a 1% decrease from $355.2 million in the prior year.
Comparable sales, including e-commerce, decreased 6.7%, which was nearly offset by new store growth.
Indirect segment revenues decreased 21.3% to $102.9 million from $130.8 million in the prior year, reflecting a reduction in the number of specialty accounts, coupled with a reduction in orders from both specialty accounts and certain key accounts.
Excluding charges, gross profit totaled $255.1 million or 56.1% of net revenues compared to $276 million or 56.8% of net revenues in the prior year.
The year-over-year 70 basis point decline primarily related to increased promotional activity in our factory stores, channel mix changes and the second quarter adjustment against slow-moving inventory, partially offset by product cost.
The full year gross profit rate was modestly higher than the guidance of 55.8% to 55.9%.
Excluding charges, full year SG&A expenses totaled $221.4 million or 48.7% of net revenues compared to $235.5 million or 48.5% of net revenues in the prior year.
SG&A expense dollars were lower than the prior year, primarily due to diligent expense management and savings realized in conjunction with Vision 20/20.
The SG&A rate was in line with our guidance.
Excluding charges, operating income was $34.5 million or 7.6% of net revenues compared to $41.9 million or 8.6% of net revenues in the prior year.
Direct operating income was $68.9 million or 19.6% of net revenues compared to $75.3 million or 21.2% of net revenues last year.
Indirect operating income was $37.1 million or 36.1% of net revenues compared to $51 million or 39% of net revenues in the prior year.
Now let me turn to the balance sheet.
Net capital spending for the fourth quarter and fiscal year totaled $2.9 million and $11.8 million, respectively.
Capital spending for the fiscal year was within our $10 million to $12 million guidance range.
During the fourth quarter, we repurchased approximately $1.6 million of our stock equating to 214,000 shares at an average price of $7.70, bringing the fiscal year total to $7.9 million equating to 934,000 shares at an average price of $8.47.
As of the fiscal year-end, we had approximately $13.4 million remaining on our share repurchase authorization.
Cash, cash equivalents and investments at year-end totaled $138.4 million compared to $116.5 million at last fiscal year-end.
We generated operating cash flow of $42.6 million in fiscal 2018, and we continue to have no outstanding debt.
We have carefully managed our inventories, and as a result, year-end inventory was $87.8 million, a 14.1% decline from $102.3 million at last fiscal year-end, below guidance of $90 million to $95 million.
Rob.
Thanks, <UNK>.
As we enter fiscal 2019, continue to implement Vision 20/20 and focus on getting healthy, we will be monitoring and reporting on 4 key elements: progress on restoring full price selling, retaining our customer base, delivering our SG&A and cost of sales reductions and cash flow generation.
As you know, Vision 20/20 is our aggressive plan to turn around the business over the next 3 years.
Vision 20/20 really is a three-pronged approach designed to restore brand and company health by: one, moving to a less clearance-driven business model; two, meaningfully reducing our SG&A expense structure; and three, continuing to focus on our product design and refining our creative process.
Innovation remains top of mind.
The first 2 areas are designed to get us healthy, but all 3 will lay the foundation for further growth of the business.
On the product and pricing front, we will focus on 3 key areas.
First, in February 2018, we began significantly reducing the amount of clearance product available on verabradley.com and in our full-line stores.
This will help to reset our customer's pricing expectations and restore our full price business.
Part of this strategy includes implementing a limited number of flash sale events throughout the year.
Second, we are focusing on our best performers and narrowing of our current product offerings by eliminating unproductive or incongruent categories and SKUs from our assortment.
For example, we are discontinuing fragrance and jewelry this year.
As we reduce clearance and narrow our offerings, inventory levels will continue to come down.
Lastly, we are focused on building tighter assortment guardrails around introducing new categories, patterns and pricing, assuring the right fit for our brand and that our products not only provide thoughtful solutions but also reflect our signature attributes of comfortable, casual and affordable.
We have thoroughly analyzed our historical pattern performance, determining the DNA and isolating the characteristics of our most successful prints.
Conversely, we have determined commonalities among our least popular patterns.
We are confident we can apply the findings from this comprehensive analysis to drive more pattern success going forward, and you should see these changes by fall of this year.
The majority of the product and pricing initiatives are being implemented this year, and we believe these changes will negatively impact our year-over-year revenues by $30 million to $50 million, which is reflected in our guidance of $405 million to $425 million.
Of course, we will continue to focus on stimulating full price selling through our top 10 styles, our solid business and our signature categories like Back to Campus and travel.
Innovation and adding new color, styles and silhouettes are key.
We will also continue to look for appropriate brand extensions through licensing opportunities.
We just announced our plans to roll out a licensed sleepwear and loungewear connection next year and expect to add even more categories in the future.
As we reduce revenues, we also expect to reduce annual SG&A spending by up to $30 million from our fiscal 2017 baseline spending of $236 million before severance, Vision 20/20 and other disclosed charges.
This expense reduction process began in the fall of fiscal 2018, and we expect that $20 million to $25 million of the annualized SG&A reductions will be implemented by the end of fiscal 2019, which is reflected in our SG&A guidance of $210 million to $215 million.
Reductions will come through rightsizing our corporate infrastructure to better align with the size of our business, lowering our marketing spend by focusing on efficiencies while keeping our most loyal customers engaged and taking a more aggressive stance on reducing store operating costs and closing underperforming full-line stores.
We are forecasting to close up to 45 additional full-line stores by the end of fiscal 2021, primarily as leases expire.
About 15 closings will take place this fiscal year, the remaining SG&A reductions will be made following fiscal 2019 and are primarily related to start closings in the out years.
As of year-end, we had 109 full-line stores and 51 factory stores.
We will open 6 new factory locations this year, 4 in the first quarter: Lake George, New York; Charleston, South Carolina; Baraboo, Wisconsin; and Gulfport, Mississippi; and 2 in the second quarter in Hershey, Pennsylvania; and Tinton Falls, New Jersey.
We have reduced cost of sales over the prior 3 years by shifting to lower-cost manufacturing, improved raw material sourcing and enhancing distribution efficiencies.
We believe there are incremental sourcing and supply chain opportunities in fiscal 2019 and beyond.
These savings can help offset the natural overhead deleverage that will occur as we reduce inventory levels and as our channel mix changes.
These factors are considered in our flat to slightly up gross margin guidance.
And <UNK> will provide more details on our outlook for fiscal 2019.
<UNK>.
Our guidance reflects Vision 20/20 and issues that Rob just outlined.
Keep in mind that all guidance numbers are non-GAAP.
Prior year non-GAAP numbers that I will reference exclude the severance to impairment consulting, tax reform legislation and other charges outlined in today's release.
Current year non-GAAP estimates exclude similar items.
For the first quarter, we expect net revenues of $84 million to $89 million compared to prior year fourth quarter revenues of $96.1 million.
We expect Direct segment net revenues to be down in the mid- to high-single digit range compared to the prior year, including a comparable sales decrease from, including e-commerce in the high-single-digit to low teen percentage range.
We believe our Indirect net revenues will be down in the mid- to high-teen range during the quarter.
We expect our gross margin will be flat to slightly up compared to the 54.8% in the prior year first quarter.
SG&A expense is expected to range from $51 million to $53 million compared to $56.4 million in the prior year first quarter.
We expect our first quarter diluted loss per share will be $0.08 to $0.10 compared to a $0.09 loss in the prior year first quarter.
We expect inventory to be in the $85 million to $95 million range at the end of the first quarter compared to $105.4 million at the end of the first quarter last year.
For the full year, we expect net revenues of $405 million to $425 million compared to $454.6 million last year.
Our revenue guidance assumes Direct segment net revenue to be down by high-single digits to a low teen percentage range compared to last year, with comparable sales, including e-commerce, down in the low- to mid-teen percentage range.
Indirect net revenues are expected to decline in the high-single-digit to low-teen percentage range for the full year.
Our gross margin for fiscal 2019 is expected to be flat to up slightly compared to the 56.1% last year.
We expect SG&A expense to total between $210 million and $215 million for the year compared to $221.4 million last year.
We expect diluted EPS, excluding charges, for the full fiscal year to range from $0.35 to $0.45.
Before charges, diluted EPS totaled $0.60 last year.
We expect to generate $40 million to $50 million operating cash flow in fiscal 2019.
We expect our net capital expenditures total $10 million for the full year, primarily related to factory store openings and continued technology investments.
Let me turn the call back over to Rob who will give us an update on our focus areas with fiscal 2019 and Vision 20/20.
Rob.
By continuing our focus on product marketing and distribution and by executing Vision 20/20, we expect that our business and brand will become healthier, operating performance will improve and cash flows will remain strong over the next 3 years.
We are laying the foundation for a stronger company and brighter future.
I am very optimistic about the future of our company.
The Vera Bradley brand is unique, strong and resilient.
Our loyal customer base continues to expand, and both license and international parties continue to show strong interest in our brand.
We look forward to returning to solid growth.
Operator, we will now open up the call to questions.
So as we think about the comp for the full year, I think it won't really have any disproportionate impacts for any particular quarter, <UNK>.
As you think about e-commerce, we'll ---+ we're ---+ we've been taking ---+ we're going to take clearance out of e-commerce, and it should have kind of ratably, over the course of the year, the same impact.
Yes.
<UNK>, a couple of things.
One, it is early, right.
We took most of that reduction just beginning in the first part of February.
So we're still looking at all of those results.
I will tell you, the one thing that we're keeping a very close eye on is watching the full price business and what we have seen, and which is reflected in our guidance is that we have seen an improvement in our full price trend.
As we've hit February and we've reduced the clearance, so we are seeing an upswing in the full price trend, which is encouraging.
But obviously, very early innings in this, but that's exactly what we're going to be monitoring as ---+ how we migrate the customer to our various channels as we go through this year.
Right now, we're taking a conservative approach when looking at kind of share repurchase.
We've ---+ as you know, we've bought back every quarter since we've had the share repurchase plan in place, and we still have about $13.4 million of authorization in place.
But as we work through Vision 20/20, we want to kind of see kind of how the vision ---+ the first quarter of the year kind of really goes, and then we'll continue to kind of look at kind of share repurchase program for the remainder of the year.
Thank you, <UNK>.
So a couple of things, as we look at comps, we know that this year, we'll be taking all of the clearance process, which is really suppressing the comp performance this year.
What we're going to be tracking very closely is the full price performance in our stores and verabradley.com, that, that's the first place that we would begin to expect to see the positive momentum.
And then as we get out of this year and move into next year, then obviously, we believe we'll be in a better position to move to a more positive performance in our direct channels.
We expect our direct channels will show the positive momentum before indirect just because the way the indirect channels will watch the performance.
We expect that our indirect partners are hoping to see their full price business begin to improve.
As they do that, we expect that their orders will get stronger in the back half of the year.
But a lot of those orders will not start shipping until the next fiscal year.
So we don't expect any meaningful change in trend in our indirect channel until we get into the next fiscal year.
Yes, <UNK>.
I'll start with your second one first, then I'll move to products because that will be a little bit longer conversation.
But on the online outlet so far, we have been happy with the initial performance.
And I would tell you, one of the things that we've been most happy about is our ability to use it to clear our excess clearance inventory in a very, very quiet manner.
So we are not publicly advertising the online outlet.
It's ---+ you have to know about it, you have to kind of be in our database, we're really focusing our solicitation to our customer base only on our hyper-promotional customers.
So it's really a very clean way for us to liquidate some inventory.
We have very strong rules in place internally on that.
We're going to hold and kind of cap the volume that we're doing on the online outlet because we do not want that to be a growth vehicle for the company.
It is just a liquidation channel for the company.
So we feel very good about the initial results and what we've seen in the customer base so far on that.
In terms of the product area, what to expect around product, a few things.
I think you're going to see us continue to bring innovation to market around fabrications.
It's been very interesting as we've gone through this journey over the last couple of years and watching what the customer's responding to, been a lot of interest in solid fabrics.
So our denim collection that we have right now is performing very well, our velvet collection we had in fourth quarter was performing very well.
And we believe that the solid classification continue to grow, but particularly in this whole fabric area.
So I think you'll continue to see innovation from us around fabrications.
You're going to continue to see real focus in the travel category.
We've really worked through and upgraded our rolling luggage program, and you're going to see as we roll out this year new products in that category, we expect travel to become more and more important for us.
And as we get into back-to-school, you're going to see more innovation in our Back to Campus business, a little bit wider backpack assortment, a little broader price point assortment, more excited about while the innovation is coming in Back to Campus.
And we do believe that this cotton category for us continues to be our foundation, our distinction.
And we're really excited about the prep work and because the prints are very important to us.
I think we've had erratic performance in our prints for a while, and so we spend a lot of time really analyzing that.
And we feel much more confident that we understand how to bring prints to market more successfully in a way that's very distinctive and very Vera Bradley right from the DNA heritage standpoint and very, very consumer focused on our different target customers.
So that's kind of a recap of what I would say around the product area.
Yes, great question.
I think 2 ways of answering it.
In terms of overall mix, we are adding kind of at all 3 levels.
There's certain things that we're doing on the top end.
Our rolling luggage obviously, is driving a much higher AUR than our average.
So we're ---+ that will be a positive push.
At the same time, we are looking at things like our backpack category where we think we've been missing an opening price point backpack.
So we will be introducing an opening price point backpack as we get to Back to Campus.
So in terms of the overall mix of the assortment, the AUR, from a ticketed standpoint, we don't expect a major movement.
But as we put more of the focus on full-price selling, we should expect to see the AUR improve.
So I didn't catch your first question.
But at the end of this year, I mean, we have about 45 stores to close over the next 3 years.
Ultimately, it's going to be about 15 per year.
I didn't catch the end part of your question.
Can you just repeat it.
Okay.
In the first part of your question, ultimately, we have ---+ each store that we close is not going to be a material amount of kind of revenue that will kind of ---+ we'll see come off the revenue line.
We'll be able to offset that roughly with our factory door opening.
So we would expect to see growth collectively from a comps store growth and out ---+ as well as total growth in years ---+ in Vision 20/20 outside of FY '19.
In regards to from a recapture perspective, we haven't seen any significant recapture any of our channels currently.
The one we've hoped to see the most recapture would be in e-commerce, but so far, we haven't seen a significant amount.
But just remember, we've only closed 5 doors, so it hasn't been a significant sample size yet.
That's a great question.
As we ---+ I'll start with the second half first in terms of where we were successful because that will help explain the future.
One thing we definitely did find over the last few years as we pursued the different marketing programs and the product expansion, we were seeing the best growth in kind of that 20- to 35-year-old area, but not in a significant way to totally change the mix of our consumer.
So we continue to have a very, very broad consumer base, definitely overpenetrated young, little underpenetrated in the 20 to 35, been a little overpenetrated again in kind of the 40 plus.
But we're going to continue to really focus on this multigenerational aspect of our brand.
So we still will be targeting this 20- to 35-year-old customer, but at the same time, making sure their advertising is much more kind of multigenerational.
So I would expect to see a lot more from that ---+ from us as we go out through the year.
In terms of ---+ overall, from a products and assortment standpoint, one thing we did find is we just need to make sure that this casual, comfortable, affordable lifestyle is really key, and that's key to both our younger customer, our kind of 20- to 35-year-old customer and our older customer.
They all are looking for something that really has a more casual bit to it, has an affordable bit to it.
And one thing we learned is we looked at things like our leather business that we've been working on is that our most success in leather was when it was really focused on looks that were a little bit more casual, a little less dressy, kind of the sharper price points.
And that's a great area of learning for us.
So I think you're going to find that our assortments are just going to be much more consistent, much more focused as we move through this year.
Well, thank you for joining us today.
And we look forward to speaking to you on our first quarter call on June 6.
