Vera Bradley, Inc.
Q4 2022 Earnings Call Transcript

Published: 9 Mar 2022

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley Fourth Quarter and Fiscal Year-End 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 is -- today’s conference call is being recorded. I would now like to turn the call over to Mr. Mark Dely, Vera Bradley's Chief Administrative Officer. Please go ahead.

[Mark Dely:]

Good morning, and welcome, everyone. We'd like to thank you for joining us for today's call. Some of the statements made during our prepared remarks and in response to your questions may constitute forward-looking statements made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect. Please refer to today's press release and the company's most recent Form 10-K filed with the SEC for a discussion of known risks and uncertainties. Investors should not assume that the statements made during the call will remain operative at a later time. We undertake no obligation to update any information discussed on today's call. I will now turn the call over to Vera Bradley's CEO, Rob Wallstrom. Rob?

[Rob Wallstrom:]

Thank you, Mark. Good morning, and thank you for joining us on today's call. John Enwright, our CFO, also joins me today. At the beginning of the year, we set out to further enhance our two strong brand franchises, Vera Bradley and Pura Vida, and drive revenue and earnings growth through four-key strategies

[John Enwright:]

Thanks, Rob, and good morning. Let me go over a few highlights for the fiscal year. The numbers I will discuss today are all non-GAAP. For complete detail of items excluded from the non-GAAP numbers as well as a reconciliation of GAAP to non-GAAP numbers, please refer to today's press release. Consolidated net revenues totaled $540.5 million for the year, an increase of 15.4% over $468.3 million in the prior year. Consolidated net income of $19.7 million or $0.57 per diluted share compared to $21.4 million or $0.63 per diluted share in the prior year. Vera Bradley Direct segment revenues for the current fiscal year totaled $354.9 million, a 22.7% increase over $289.3 million in the prior year. Vera Bradley Indirect segment revenues for the fiscal year totaled $66 million, essentially flat with $66.5 million in the prior year. Pure Vida segment revenues totaled $119.6 million, a 6.3% increase over $112.5 million in the prior year, primarily reflecting a rebound in wholesale account orders from the prior year that were negatively impacted by COVID-19, partially offset by a decline in e-commerce revenues. Gross profit for the current fiscal year totaled $287.9 million or 53.3% of net revenues compared to $266.8 million or 57% of net revenues. In the prior year, we significantly expanded our gross margin by approximately 200 basis points through sale of cotton masks, which was not replicated this year. The current year-end margin was negatively affected by approximately 145 basis points for higher freight costs and approximately 70 basis points for the GSP issue. For the fiscal year, SG&A expense totaled $258.8 million or 47.9% of net revenues in the current year compared to $233 million or 49.7% of net revenues in the prior year. As expected, current year expenses were higher than the prior year, primarily due to expense reductions related to COVID-19 last year that are no longer applicable. Year-over-year expense leverage was achieved on higher revenues. For the fiscal year, our operating income was $30.1 million or 5.6% of net revenues in the current year compared to $34 million or 7.3% of net revenues in the prior year. Now let's turn to the balance sheet. Net capital spending for the fiscal year totaled $5.5 million compared to $5.7 million in the prior year. Cash and cash equivalents as of year-end, totaled $88.4 million compared to $65.5 million at prior year-end. We had no borrowings on our $75 million ABL credit facility at year-end. Total fiscal year inventory was $149.2 million compared to $141.4 million at last fiscal year-end. During the fourth quarter, we repurchased approximately $5.6 million of our common stock at an average price of $8.63, bringing our year-to-date purchases to $7.7 million. In 2021, our Board approved a new $50 million share repurchase authorization, which expires in December 2024. We anticipate we will repurchase the entire $50 million well before the expiration date. Over the last seven years, we repurchased nearly $115 million of the company's stock equating to 9.3 million shares. Now let's shift to our outlook for fiscal 2023. We are providing estimates for fiscal 2023 based on current trends and expectations, taking into consideration certain industry economic headwinds such as continued freight and digital marketing increases. All forward-looking guidance numbers that I will discuss are non-GAAP. For fiscal 2023, our expectations are as follows

[Rob Wallstrom:]

Thanks, John. As we look to fiscal 2023 and beyond, we remain focused on four key strategies

[Operator:]

Thanks. Thank you. We'll go first to Oliver Chen with Cowen.

[Oliver Chen:]

Hi. Thanks everybody. Good morning.

[Rob Wallstrom:]

Good morning.

[Oliver Chen:]

Vera Bradley guidance -- the Vera Bradley guidance, what are your thoughts on the pricing relative to channel in terms of what's incorporated in the low to mid-single? And then on the topics, you gave a lot of great details on both supply chain and privacy, what's ahead for risk factors for both? Have those conditions stabilized and what's incorporated in your guidance in terms of those issues? They're both pretty different. Would love your thoughts. Thank you.

[Rob Wallstrom:]

Yes. Thank you, Oliver. In terms of guidance, as we think about revenue growth at Vera Bradley and price increases, we do expect that the price increase overall for the entire assortment will be close to the overall revenue growth. So another way of thinking about that is the primary driver of the growth will be through price increasing. We believe that those price increases should cover off what we anticipate to be the incremental freight cost, and we are expecting incremental freight costs this year as that continues to kind of work through the product assortment. And then in terms of the marketing with privacy, we know that there's continued to be digital pricing increases. But we believe that the changes in the algorithms we're hoping we're through the worst part of it, but there's still more work to be done. At Pura Vida, the way we're really talking about Pura Vida's platform, is they were very, very focused on the social media kind of larger Facebook platform for marketing. And now we're really working on bringing in talent, bringing in analytics like we did at Vera Bradley a couple of years ago to really balance out that marketing platform, to make sure that we're leveraging out influencers, more traditional avenues like looking at and evaluating direct mail campaigns and other ways to be more focused on first-party marketing as opposed to being so reliant upon third-party marketing. So we have a lot of developments that are under work over there, and we'll be bringing more detail this year.

[John Enwright:]

The only thing I would add to the question in regards to logistics, ultimately, we've seen it get better and only slightly better. We still expect this year to be a very challenging year. As you know, with everything that's going on in the ports, everything that's going on in the macro environment, we anticipate and we've built into our guidance what we believe is the appropriate amount of kind of cost our logistics network. But just to give you a sense of the scale of the increase, if you think about pre-pandemic, are now a container, our contract container cost is about 4x what it used to be in previous years, in historical previous years, pre-pandemic. So it's obviously a significant amount. That number could range out depending on things if we're going to buy things on spot. But right now, we anticipate and we've guided towards, we believe everything is built into our numbers.

[Oliver Chen:]

Okay. And you mentioned on price that you know you --

[Rob Wallstrom:]

Oliver, just one more thing that we failed to mention, I just want to make sure we did mention is that the way we have done guidance, is we're not building in any relief on GSP. So if GSP were to get past, that could be an incremental benefit.

[Oliver Chen:]

Okay. That's very helpful. And then in your remarks, you had mentioned you issued increased prices earlier. It's not very easy necessary for you to change prices given your distribution channels. How will you approach price increases across the portfolio, as you look surgically and measure elasticity? And what do you think the market appetite is for that?

[Rob Wallstrom:]

That's a great question. And you're right, Oliver, the change in the prices definitely is not easy for us, just based upon how we deliver the diversity of our supply chain and the fact that most of our product is continuation in style. So it was one of the reasons we were not quick. And we didn't want to respond too quickly, because of that challenge. But it was a decision that we made last year, we started to work through deliveries to make sure that we can change prices as they come in. We've been working on being more fluid and rapid in our price change and ability as we go forward to shorten that timeline. So we think that, that's really a key. And then, what we're doing is, we are monitoring as we begin to change prices. We have started to change prices, a few of our factory items we did at the end of the year in Vera Bradley. We also started to taking price changes in Pura Vida. So far, we have not seen any negative reaction from the consumer. So we're hoping that we see that continue as we continue to raise prices, but throughout the first half of this year.

[Oliver Chen:]

Okay. Rob, on the channel strategy at Vera Bradley, what channels do you see the most opportunity as you think about outlet relative to your retail and wholesale partners? And then, last question. You have a really strong position in terms of capitalization. I know you mentioned potential dividend, but what's on your mind regarding returning capital to shareholders as well as building a bigger platform? Thanks.

[Rob Wallstrom:]

Thanks, Oliver. I think in terms of distribution, what I would say is a few different things that we have going on. One, we do think that the factory division, our e-commerce business and even e-commerce wholesale, so places like Amazon probably provide the more upsized growth. But we do believe that full-line still plays a real critical role for them, particularly as everybody begins to travel, we think that full-line is an area that we're looking at. But I would say the other three are the bigger growth areas. As you think about capital, you're right, we do have a very strong balance sheet, very good cash flow. It gives us a lot of ability. As we've said, we always want to make sure we're funding our growth first as our first priority in terms of capital allocation. But second, we do continue to evaluate, what's in the marketplace as we know valuations were higher last year. So you didn't see us do anything last year, but we continue to evaluate the market, but we want to make sure we're we remain highly, highly disciplined from a valuation standpoint. But we also do believe that returning capital to shareholders is going to be an important part of our story. We've seen that last year with our share repurchase, the $50 million share repurchase plan that we announced. And we think that's important. And we are having conversations with the Board of exploring all the other opportunities, including something like the future dividend. So I'm sure there'll be more that we'll talk about that in the future.

[Oliver Chen:]

Okay. Thanks very much. Best regards.

[Rob Wallstrom:]

Thanks Oliver.

[Operator:]

We'll go next to Eric Beder with SCC Research.

[Eric Beder:]

Good morning.

[Rob Wallstrom:]

Good morning, Eric.

[Eric Beder:]

Good morning. Could you talk a little bit about -- so your -- the logistics is going to remain an issue. What are your steps are you taking to ensure kind of that the stores have a continuing flow of product and that product is there in the depth that it can be?

[Rob Wallstrom:]

It’s a great question, Eric. So Eric, we're looking at opportunities, as you know, to airfreight some product and as we look at in-stock levels, in-stock was challenged in the fourth quarter. So we've been looking at air freight -- additional air freight above and beyond what we spent last year to get to a better position. We're also looking at utilizing different ports and bringing our product in through different ports and having the ability to truck things in a little bit more seamlessly versus taking things through L.A. and then taking it through kind of the train through Chicago down into Fort Wayne. So we're looking at kind of all of our options in regards to making sure we get to a better place from an in-stock level.

[John Enwright:]

I think the other big one, though, too, Eric, is that what we did last year, what we were starting to have in the delays we actually started placing orders earlier, extending the time between the ex-factory date and the date that we should be receiving the goods, and we should begin to see some of that benefit begin to flow through as we close out the first quarter and move into the second quarter. So that's one action that we took last year. It just takes a while to ripple through the supply chain.

[Eric Beder:]

Great. When you look at the collaborations, I know that you ramp those up at Pura Vida. And to, I guess, some extent at Vera Bradley. How do you look at keeping those fresh, making sure that they're relevant and if they continue to bring in kind of the customers you wanted to?

[Rob Wallstrom:]

It's a great question, Eric. In terms of collaborations and keeping it fresh, part of it is making sure that we're looking at these partnerships and a lot of them have a very broad access in terms of IP licensing. So as you think about the different franchises, whether it's Disney, as you think about the World of Disney, there are a lot of different franchises inside of it. So we're exploring that. And how we continue to bring freshness, because to your point we do believe that freshness really becomes a key aspect of it. So even as we talk about some of these partnerships that we're continuing, as you see these collaborations come out this next year, I think you'll see a lot of really new exciting franchises that we'll be collaborating with.

[Eric Beder:]

Great. And last question, over the last basically three or four years, you've kind of changed pretty much all the fabrications at Vera Bradley. What should we be thinking -- and you've talked about innovation news, you've done that. What's your thinking about the next round here as you kind of lever kind of basically creating a whole different set of fabrications here for the Vera Bradley too?

[Rob Wallstrom:]

So in terms of -- you're right, that from a fabric innovation standpoint, we have done a tremendous amount of work over the last couple of years with introducing ReActive, Cotton ReIMAGINED, Performance Twill. And we feel it gives us a really good base from a fabric innovation standpoint. And we'll continue to do some minor adjustment there, but we think we have a very good fabric base. I think as we think about how are we going to move forward with innovation. One is, what we talk about in category extensions. So you're seeing us continuing to extend out. We've had success as we've been bringing home products into market, home decorative type of products in the market, expanding in apparel, particularly around things around the cozy categories, our flip-flop, slipper and what's happening on the footwear part of the business. I think you'll see a lot of innovation coming out of -- those three areas would be really important to us as we move forward. I think the third area that you're going to see us continue to bring innovation in. It's just how we think about fabrics and patterns and how they interrelate and how to bring more novelty and new ways of looking at our patterns and mixing our patterns as we go forward to just bring some more freshness. So, I think there's a lot of exciting things in the innovation channel still at Vera Bradley.

[Eric Beder:]

All right, guys. Thank you and good luck for the rest of the year.

[Rob Wallstrom:]

Thanks, Eric.

[John Enwright:]

Thanks, Eric.

[Operator:]

We'll go next to Steve Marotta with CLK & Associates.

[Steve Marotta:]

Good morning, Rob, John and Julia. John, as far as GSP goes, could you describe the magnitude of that on the headwinds? If you said that in the prepared remarks, I missed it. In other words, if there was a magic wand, tomorrow it gets passed, what would be the tailwind to gross margin in the near term?

[John Enwright:]

Yes, about a full point of margin to the company if it gets passed. Obviously, if it's retroactive all the way back to the duty we paid last year, we would pull that out, but it could be about 2 points worth of benefit.

[Steve Marotta:]

That's really helpful. And also, if you provided any quarterly or partial year guidance, I missed it. Could you go over how you think the sales and earnings will be weighted through the year?

[John Enwright:]

Yes. So we did not provide any quarterly guidance given some of the volatility in the world right now. So ultimately, we're sticking with an annual guidance number.

[Steve Marotta:]

Would you like to take the opportunity to give us a little thoughts on your --

[John Enwright:]

Not at this time.

[Steve Marotta:]

Okay. Fair enough. And lastly, Rob, you mentioned in the prepared remarks about strengthening the marketing teams, I believe, at both Pura Vida and Vera Bradley. Can you talk a little bit about -- is there anything else that you can do? I know it's a little like pushing on a string given the fact that one big marketing door has closed, but are there others that are being tested, that could be levered that might be opportunities for a little bit of upside from a direct-to-consumer standpoint? Thanks.

[Rob Wallstrom:]

Thanks, Steve. So first of all, to clarify, with Vera Bradley, over the last couple of years, we have been building up the marketing team, not only the team, but the tools, the processes, the analytics. And we've continued to see really nice results from that. Now what our plan really is to do is help to take a lot of those learnings and best practices at Vera Bradley and to let Pura Vida leverage those. So, how do we go ahead and enhance the talent that we have there that was really focused on social media, advertising and get a broader look at how we leverage marketing in totality, how we bring in the additional tools, what I would call really the first-party marketing tools. And so we're going to be kind of building more strength into the Pura Vida marketing team as we go into this year, really taking the lessons that we learned at Vera Bradley and leveraging a lot of the assets that we currently have at Vera Bradley, both from a talent standpoint as well as a process standpoint. In terms of other ways of driving business at Pura Vida due to the challenges we have right now as we work through this marketing, one of the things that we believe will be critical as you've seen in a lot of DTC companies, is the importance of stores. We're very encouraged by what we've seen with the first store in San Diego. We've had very, very strong results there. And what's been exciting is not only very strong four-wall results, but seeing those results lift the e-commerce business and really help the customer acquisition and growth with the customer in the San Diego marketplace. And if we see that continue as we open up three more stores this year, we think that we have the ability to ramp up that growth and store growth for Pura Vida, which could become a very important part of not only the growth story, but also the marketing customer acquisition story as we move forward. So that's definitely one of the prime areas we're looking at to drive additional customer acquisition and focus for the brand.

[Steve Marotta:]

Terrifically helpful. Thank you.

[Rob Wallstrom:]

Thanks, Steve.

[Operator:]

At this time, there's no further questions. I will turn the call back to Rob Wallstrom for additional or closing remarks.

[Rob Wallstrom:]

Thank you. We are committed to being a purpose-driven multi-lifestyle brand, stable growth company, generating strong cash flow. Our solid cash position, debt-free balance sheet and ability to generate free cash flow has positioned us to continue to invest in our two lifestyle brands, seek out accretive acquisitions of other cash-generating purpose-driven brands over time and returning capital to shareholders through continued share repurchase or future dividends. Although, fiscal 2022 had its challenges and fiscal 2023 still be filled with inflationary challenges, we have a solid long-term vision for the future of our company and a clear path to achieve our goals. Our team is focused, our balance sheet is solid, our brands are strong, and we are positioned for long-term stable growth. We remain excited about the opportunities for Vera Bradley, Inc. Thank you, and we look forward to speaking with you on June 1 on our first quarter earnings call.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.