VRA
#Thank you, <UNK>.
Good morning, everyone, and thank you for joining us on today's call.
<UNK> <UNK>, our CFO, is also on the call.
Excluding charges, third quarter EPS of $0.23 was meaningfully ahead of our $0.13 to $0.15 EPS guidance.
This was primarily due to our ability to implement certain expense reductions in conjunction with Vision 20/20 more quickly than originally expected, along with diligent expense management.
Third quarter revenues were within our guidance and our gross margin rate was slightly below.
As we discussed last quarter, Vision 20/20 is an aggressive plan to turn around our business over the next 3 years.
Vision 20/20 will restore brand and company health by strategically moving to a less clearance-driven business model and meaningfully reducing our SG&A expenses.
In addition to resetting customers' pricing expectations and restoring our full price business by significantly reducing the amount of clearance product available on verabradley.com and in our full-line stores, we are also focusing on streamlining and building more discipline into our overall assortment offerings.
Of course, we will also remain keenly focused on our customer and on providing innovation, newness and creativity in our product offerings and our marketing initiatives and in both our online and in-store customer experiences.
As a reminder, we will implement the majority of the Vision 20/20 product and pricing initiatives beginning in fiscal 2019.
As a result, we expect that our revenues will be negatively impacted by $30 million to $50 million next year from this year's revenue base.
As a side note, while reducing clearance activity will have a long-term positive effect on our gross margin, there will be offsetting pressure on gross margin in the short to moderate term as our channel mix changes and we take inventory levels down and experience related deleveraging of overhead cost.
As a key part of Vision 20/20, we also expect to reduce our annual net SG&A spending by up to $30 million, excluding charges, from our baseline fiscal 2017 level of $236 million by rightsizing the organization to better align with the reduced size of the business.
Certain cost reductions have already begun and are reflected in our third quarter results and in our fourth quarter guidance.
We expect that a total of $20 million to $25 million of the annualized SG&A reductions will be made by the end of fiscal 2019, with about $11 million of those reductions completed in fiscal 2018.
We are still finalizing our operating plans for next year, and we'll provide more complete guidance for fiscal 2019, in conjunction with our year-end earnings release on March 14, 2018.
Vision 20/20 is setting the right course for the future of Vera Bradley by restoring our brand health, improving operating performance and producing continued solid cash flow.
I'll give you an update on our current initiatives as well as some additional color on Vision 20/20 after <UNK> reviews our third quarter results and our fourth quarter outlook.
<UNK>.
Thanks, Rob, and good morning.
Let me go over a few highlights for the quarter.
The current and prior year non-GAAP third quarter numbers I will discuss exclude the charges outlined in today's release.
Net revenues of $114.1 million were in line with our guidance of $112 million to $117 million.
Direct segment revenues totaled $83.2 million, a 3.4% decrease from $86.1 million last year.
Comparable sales decreased 7.4%, which was partially offset by new store growth.
Comparable sales continued to be negatively impacted by year-over-year declines in store and e-commerce traffic.
Indirect segment revenues decreased 23.8% to $30.9 million from $40.6 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, our gross margin rate for the quarter was 56.8% compared to 57.6% last year.
The 80 basis point decline primarily related to increased promotional activity in our factory stores and channel mix changes, partially offset by a reduction in product costs, all of which caused our gross margin rate to fall below the low end of our guidance range of 57.1% to 57.6%.
Excluding charges, SG&A expense totaled $52 million or 45.5% of net revenues compared to $61.2 million or 48.3% last year.
The rate was meaningfully lower than our guidance of 50.8% to 51.3% due to diligent expense management and the implementation of certain expense reductions in conjunction with Vision 20/20 more quickly than originally expected.
In addition, approximately $1 million of marketing and other expenses budgeted for the third quarter are now expected to be incurred in the fourth quarter.
Excluding charges, total operating income totaled $13 million or 11.4% of net revenues in the current year third quarter compared to $12 million or 9.5% of net revenues in the prior year.
Direct operating income was $17.6 million or 21.2% of net revenues compared to $17.7 million or 20.6% of net revenues last year.
Indirect operating income was $12.2 million or 39.6% of net revenues compared to $16.9 million or 41.7% of net revenues in the prior year.
Net capital spending for the third quarter and 9 months totaled $2.9 million and $8.9 million, respectively.
During the third quarter, we repurchased approximately $2.9 million of common stock or 347,000 shares at an average price of $8.47.
This brings our 9-month repurchase total to $6.3 million or approximately 721,000 shares at an average price of $8.69.
As of the end of the third quarter, we had approximately $16.1 million remaining under the repurchase authorization that is scheduled to expire on December 31 of this year.
In November, our Board of Directors authorized the extension of the repurchase program through December 31, 2018.
Quarter end cash, cash equivalents and investments totaled $108.1 million compared to $83 million at the end of last year's third quarter.
We had no debt outstanding at quarter end.
Quarter end inventory was $100.1 million compared to $95.7 million at the end of last year's third quarter, and at the low end of guidance of $100 million to $110 million.
Let's shift focus to our outlook for the fourth quarter and full year.
Keep in mind that the current year estimates exclude certain store impairment, severance, consulting or other charges, and the prior year numbers exclude the previously disclosed store impairment and severance charges and the release of certain income tax reserves.
For the fourth quarter, we expect net revenues of $127 million to $132 million compared to prior year revenues of $134.8 million.
We expect Direct segment net revenues to be flat to down low single-digits compared to the prior year, including a comparable sales decrease, including e-commerce, in the low to mid-single-digit percentage range.
Based on recent trends, we believe our Indirect net revenues will be down in the high teen percentage range.
Our gross margin for the fourth quarter is expected to range from 55.4% to 55.8% compared to 55.7% in the prior year.
SG&A as a percentage of net revenues is expected to range from 42.8% to 42.9% for the fourth quarter compared to 44.6% in the prior year, excluding charges.
Expense leverage is expected despite the declining sales due to expense management and implementation of Vision 20/20 savings.
We expect diluted EPS of $0.30 to $0.33.
Excluding charges, diluted EPS was $0.28 in last year's fourth quarter.
We expect inventory to be in the $90 million to $95 million range at the end of fiscal year compared to $102.3 million at last year's fiscal end.
For the full year, we expect net revenues of $450 million to $455 million compared to $485.9 million last year.
Our revenue guidance assumes Direct segment net revenue to be down low single digits compared to last year, with comparable sales, including e-commerce, down in the mid-single-digit percentage range.
Indirect net revenues are expected to decline approximately 20% for the full year.
Our gross margin for fiscal 2018 is expected to range from 55.8% to 55.9% compared to 56.8% last year.
The expected decline relates to increased promotional activity at the company's factory stores, channel mix changes and adjustment taken against slow-moving inventory, partially offset by a reduction in product cost.
SG&A, as a percentage of net revenue, is expected to range from 48.6% to 48.7% for the fiscal 2018 compared to 48.5% last year, excluding charges.
Modest deleverage is expected due to softer sales.
We expect diluted EPS, excluding charges, for the full fiscal year to range from $0.57 to $0.60.
Before charges, diluted EPS totaled $0.72 last year.
We expect our net capital spending will total approximately $10 million to $12 million for the full year, primarily related to new factory store openings, full line store renovations and continued technology investments.
Let me turn the call back over to Rob, who will give us an update on business and more details on Vision 20/20.
Rob.
Thanks, <UNK>.
Let me update you on a couple of product and distribution developments before I talk more about Vision 20/20.
On the product front, we continue to be most excited about our reinvention of cotton, which remains 50% of our business.
Customers are responding to our newly introduced iconic cotton collection, featuring micro quilted, added functionality and innovation and several new updated silhouettes.
We are pleased that our RFID all-in-one crossbody was selected as one of Oprah's favorites things this holiday season, and we are very happy with the sell-through.
We are also pleased with the progress we are making in licensing.
We are strategically layering in licensing opportunities to reach new markets and customers.
From bedding to phone cases, we continue to see an exceptionally positive response from the market in terms of placement in both existing and new distribution.
Our latest entry into medical uniforms has been very positively received.
We also tested our flash sale site concept in October.
The event was a success, and we will use learnings from this experience to strategically execute other events in the future.
The flash site will allow us to segregate certain clearance sales from verabradley.com.
On the full line store front, we have continued to upgrade our most productive stores, with about half of our current 112 store base featuring our updated design standards.
We opened a full line pop-up store in September in Faneuil Hall in Boston, and we have been very happy with the results in this high-traffic location.
We closed 2 full-line stores so far this fiscal year, San Francisco and Thousand Oaks, California, and expect to announce 3 or 4 additional closures by the year end.
On the factory side, we opened 6 stores this year, bringing our factory count to 52, and our new factory stores are performing well.
We expect to add about 6 new factory stores per year over the moderate term.
On another note, as you might recall, we have a very small wholesale presence in Japan with a licensed partner.
In mid-2018, we will be exiting Japan.
At this time, we believe it is important to focus on strengthening our core domestic operations through the implementation of Vision 20/20.
We continue to believe that there are opportunities for international expansion in the long-term, particularly as we remove the excess clearance activity from verabradley.com and focus our product assortment on our casual, comfortable and affordable lifestyle.
Now let me turn to Vision 20/20.
During the third quarter, we made a lot of progress solidifying our detailed Vision 20/20 plans, and we are continuing that work into the fourth quarter.
As you know, the key focus areas for Vision 20/20 are moving to a significantly less clearance-driven business model and reducing SG&A expenses, which should position Vera Bradley for the long-term improved brand and company health.
Of course, driving brand desirability through product and marketing innovation remains top of mind for our team.
On the product and pricing front, we will focus on 3 key areas.
First, we will significantly reduce the amount of clearance product available on verabradley.com and in our full-line stores.
This will help to reset our customers' pricing expectations and restore our full-price business.
You will see this change begin in spring of next year.
Implementing a limited number of flash sale events throughout the year will help with this effort.
Second, we have already begun to narrow our current product offerings by eliminating unproductive or incongruent categories and SKUs from our assortment.
For example, we are discontinuing our Northbrook full leather collection, fragrance and jewelry by spring of next year.
As we reduce clearance and narrow our offerings, inventory levels will begin to come down next year.
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 Beautiful Solutions, but also reflect our signature attributes of comfortable, casual and affordable.
Over the last several months, in conjunction with outside consultants, we have done a lot of work around our patterns, determining the DNA and isolating the characteristics of our most successful prints.
Conversely, we have determined commonalities amongst our least popular patterns, and 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 next year.
On the SG&A front, in the third quarter, we took actions to rightsize our corporate infrastructure to better align with the reduced size of our business.
As we go forward, we will continue to look for other corporate efficiencies, lower marketing expenses and optimized return on spend and take a more aggressive stance on reducing store operating costs.
In addition, we are forecasting to close up to 50 underperforming full-line stores by the end of fiscal 2021, primarily as leases expire.
We have done a good job reducing cost of sales over the prior 3 years by shifting to lower-cost manufacturing, better raw material sourcing and distribution efficiencies, and 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.
By continuing our focus on product and executing Vision 20/20, we expect that our business and brand will become healthier, operating performance will improve and cash flows will remain solid over the next 3 years.
Operator, we will now open up the call to questions.
So the ---+ from a comp perspective, we don't disclose kind of the difference between full line and factory, but ultimately, factory still is a better comp than our full line business.
We saw ---+ from a traffic perspective, we saw, into late October and into early November, some improvement in our traffic in both full line and in factory.
Yes, so <UNK>, ultimately, marketing is going to be slightly flat to down-ish in the fourth quarter from a spend perspective.
And we're continuing to focus on kind of more ---+ I think we've talked about lower funnel versus higher funnel kind of spend into the fourth quarter, so more transactions.
We're trying to convert some more consumers.
So as you think about our marketing spend in fourth quarter and those lower funnel activities, it's really targeting our digital spend to really connect with the customer.
It's also working on a lot of customer journeys with our existing customer base and really being much more specific and trying to drive to conversion as opposed to only focusing on kind of top side brand building.
Yes, <UNK>, thank you for the question.
First of all, in terms of the indirect part of our business, that as we think about Vision 20/20 implementation and really reducing the clearance activity on verabradley.com, we believe that, that will be one of the key catalysts to begin to improve the trends that we've seen in indirect.
The amount of clearance activity that we've had online, we believe, has been destabilizing to our indirect channel.
So that's part of it.
We're also continuing to work with our indirect partners, whether they are department stores or whether they are part of our specialty channel, to really look at each door of distribution and doing some pruning and tightening that up.
We want to make sure that we're very focused in the distribution.
It has been encouraging for us to see on the department store side that the department store partners who are the most full-priced oriented and less promotional with the brand have actually been having stronger results.
And so that really helps us, as we kind of go forward, continue to narrow our focus and really look for opportunities to restore the brand health.
Yes, and in terms of the overall thoughts on the handbag market, I think a lot of what we've been seeing in research is, yes, maybe a [some less] negative that's been happening now in the handbag market, which is encouraging to see.
We have still seen some erratic performance as we look at data out of NPD in terms of kind of month-to-month, some ups and downs.
But we do think that we had seen such a negative movement on hand bags over the last 18 months that we do feel we're beginning to see ---+ beginning to hit the bottom on maybe the handbag decreases and seeing some improvement in that trend.
But I still think we have a little ways to go before we see a real robust handbag market again.
Yes, I mean, we're not giving specific guidance.
But we expect the Vision 20/20 benefit will have some longer-term benefits versus the short term.
So in FY '19, we'll see some deleverage based on the reduced inventories working through kind of our DC, but ultimately, that some of the cost savings that were ---+ [initially] will be more in the back half and into really FY '20.
So we are expecting gross margin next year to be similar to what we are today.
Similar, yes.
Is it possible that you can give a rough breakdown of the $20 million to $25 million in annualized cost savings from an SG&A standpoint.
How much would that be from stores, from headcount and from other expenses.
Can you give a rough estimate in some ---+ a couple of buckets there.
Yes.
So if you think about just kind of the size of kind of the totals, ultimately, largest total is going to be through a labor reduction, ultimately, whether that's corporate and stores combined.
Then we'll have some incremental savings in ---+ associated with marketing.
As we bring some marketing efficiencies in-house from a creative perspective, we'll see some savings associated with that and also kind of a refocus on kind of where we'll be spending our dollars.
And then the next larger bucket really is broken down probably between kind of the store closures, the stores that we're going to close as well as kind of some discretionary spend that we're not going to do.
So think about that as either whether it's teeny or looking at contracts associated with consultings.
So at a high level, I can't give you yet the exact dollars, but kind of the buckets is more weighted towards this salaries and between stores and corporate.
That's very helpful.
One of the question, as it relate to lead times, I believe, that part of the initiative over the last 12 months was to lower the time from design to delivery.
Can you talk a little bit about an update there, where you are and how far you think you could go over the next 12 months.
Yes, absolutely.
Two things, as we've continued to diversify our supply chain, we actually have 2 different initiatives working, and they do work against each other a little bit.
So as we've moved from China and diversified into places like Vietnam and Cambodia and Myanmar, that, that's puts a little bit of pressure on the development time line.
But where we've really focused a lot of that is in our factory division, which we have a little bit more ability to accept the increased lead time.
In terms of if you think about our full price business, what we've really been working on is separating what we'll call our core product development cycle from our chase-ability, and really moving more of our inventory to chase-ability, so that we have less upfront investment, and we're chasing the inventory back in, which makes us much more responsive to what's going on with the consumer.
So we have had opportunities to test and learn and do things very rapidly, in some cases, kind of a 4-month time frame from concept to market.
But in terms of the overall core of the business, we're still in a 12-month plus development cycle because of prints.
The print development cycle, in and of itself, takes time.
And that's the piece that we're working on reducing and why we've been investing so much energy behind it as we've gone through the Vision 20/20 work.
Do you have a target for 12 months from now.
In 12 months plus now from design to delivery, do you have a target for 12 months from now.
In terms of the overall time frame, it's not our primary focus right now.
Our primary focus is getting the product really right, getting our assortments back around our prints being really effective, our design being really effective.
And as that works through, we will get closer.
We are finalizing our targets as we talk about how much of the inventory that we're kind of chasing versus long lead, and we can get more color around that as we get into next year.
Well, thank you, everyone, for joining us today.
Happy holidays, and we look forward to speaking to you on our year-end earnings call on Wednesday, March 14.
