Vera Bradley Inc (VRA) 2022 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley Third Quarter Conference Call. (Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Mark Dely, Vera Bradley's 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 earnings 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 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 it over to Vera Bradley's CEO, Rob Wallstrom. Rob?

Thank you, Mark. Good morning, and thank you for joining us on today's call. John Enwright, our CFO, also joins me today. We posted a consolidated year-over-year third quarter revenue increase of 7.9% and a 5.7% increase over the pre-pandemic levels of fiscal 2020. Vera Bradley brand revenues have continued to gain momentum quarter after quarter as customers have responded to product innovation and collaborations supported by data-driven targeted marketing. Third quarter Vera Bradley brand comparable sales rose nearly 8% over last year and nearly 6% over fiscal 2020.

Pura Vida sales returned to double-digit growth in the quarter, up 11.7% over last year. Pura Vida's e-commerce revenues were still suppressed by the Apple iOS 14.5 update put in place earlier this year that lessen the effectiveness of Facebook and Instagram advertising. These 2 platforms have been the primary marketing vehicles to drive Pura Vida sales and shifting the marketing platform is underway. On the other hand, our Pura Vida first store in San Diego continue to run well ahead of expectations, and we expect to open 3 to 5 additional stores next year. Pura Vida's future growth will be expanded by balancing growth online and in physical distribution channels.

Like much of the industry, we continue to experience supply chain challenges and significantly increased freight cost that put meaningful pressure on gross margins in the quarter. We estimate these incremental freight expenses including air freighting product negatively impacted diluted EPS by approximately $0.05 for the quarter and $0.10 for the 9 months. We have begun to take strategic retail price increases across both our brands to mitigate some of these inflationary and supply chain pressures. Those price increases began in this year's fourth quarter and will continue over the next few quarters.

In addition, more specific to Vera Bradley, the lower margin rate reflects higher tariffs from previously duty-free countries where we source products as duty-free status under the generalized system of preferences, otherwise known as GSP, was not renewed at the beginning of the calendar year by Congress. In the past, Congress has retroactively reinstated the duty-free status of such tariffs to the beginning of the year. We anticipate that the GSP status will be renewed once again, but we cannot guarantee if and when this will occur. This delay in renewal of GSP negatively impacted diluted EPS by approximately $0.03 for the quarter and $0.06 for the 9 months.

Even with the current supply chain and GSP challenges, on a year-to-date basis before certain items, non-GAAP EPS of $0.41 is ahead of last year and even ahead of where we were in fiscal 2020 prepandemic. We are confident that both the Vera Bradley and Pura Vida brands have meaningful long-term growth opportunities well beyond their core product categories, even though headwinds and uncertainties lie ahead.

Our 4 key growth drivers continue to be: elevating our digital first strategy; enhancing our product innovation pipeline, collaborations and category extensions; expanding our customer community through marketing and deepening our customers' brand loyalty; and number four, evolving our distribution channels. We have a healthy cash position, a debt-free balance sheet and an ability to generate free cash flow that will allow us to continue to invest in both our lifestyle brands and seek out acquisitions of other comfortable, affordable, purpose-driven brands over time.

Our team has driven, our brands are strong, and we are positioned for long-term growth. We remain focused on our vision to be a purpose-driven multilifestyle brand, high-growth company. Now let me turn the call over to John to discuss our financial information.

Thanks, Rob, and good morning. Let me go over a few highlights for the third quarter. The numbers I will discuss today are all non-GAAP. For a complete detailed 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 $134.7 million for the current year third quarter an increase of 7.9% over $124.8 million in the prior year and a 5.7% increase over $127.5 million in the pre-pandemic third quarter of fiscal 2020. For the current year third quarter, total company consolidated net income was $6.2 million or $0.18 per diluted share compared to $10.2 million or $0.30 per diluted share in the prior year.

Current year third quarter Vera Bradley Direct segment revenues totaled $86.6 million, a 10.8% increase over $78.2 million last year. Comparable sales increased 7.8% over the prior year and 5.6% over fiscal 2020. We permanently closed 9 full-line stores and opened 6 factory outlet stores in the last 12 months. Vera Bradley Indirect segment revenues totaled $20.9 million, a 6.4% decrease from $22.3 million in the prior year third quarter, reflecting a reduction in orders primarily related to a lower volume of mass sales and a reduction in sales to certain key accounts, partially offset by a rebound in specialty account orders in other product categories that were negatively impacted by COVID-19 in the prior year.

Pura Vida segment revenues totaled $27.2 million, an 11.7% increase over $24.3 million in the prior year, driven by an increase in wholesale account sales. Third quarter gross profit totaled $72.3 million or 53.6% of net revenues compared to $73.8 million or 59.1% of net revenues in the prior year. Last year, we expanded our gross margin by approximately 230 basis points through sales of Cotton Max, which were not replicated this year. This year, the rate was also negatively impacted by higher costs for inbound and outbound freight expense by approximately 155 basis points.

In addition, the lower margin rate reflects higher tariffs from previously duty-free countries whose GSP duty-free status expired at the beginning of the year. This impacted gross margin by approximately 95 basis points. Due to uncertainties surrounding Congress' future actions regarding retroactive reinstatement of tariffs, we no longer expect any of the benefit in the fiscal year.

SG&A expense totaled $63.7 million or 47.3% of net revenues for the current year third quarter compared to $59.4 million or 47.6% of net revenues in the prior year. As expected, current year SG&A expense were higher than the prior year, primarily due to expense reductions related to COVID-19 last year which are no longer applicable.

Third quarter consolidated operating income totaled $8.7 million or 6.5% of net revenues compared to $14.4 million or 11.6% of net revenues in the prior year.

Let me talk about our fourth quarter outlook. The retail environment continues to be uncertain, and future financial performance remains difficult to predict. However, we are providing estimates for the fourth quarter based on current trends and expectations in consideration of certain macro industry and economic conditions that could impact the company's sales and gross margin performance for the balance of the year. We are continuing to see volume and traffic increases over prior year levels and expect to control our operating expenses. However, like many retailers, we continue to face supply chain headwinds, including manufacturing delays extended transit times and substantial projected inbound and outbound freight expense increases. This is factored into our guidance. Keep in mind that all forward-looking guidance numbers referenced below are non-GAAP.

For the fourth quarter of fiscal 2022, our updated expectations are: consolidated net revenues of $155 million to $160 million; net revenues totaled $142.4 million in the prior year fourth quarter; a consolidated gross margin of 51.6% to 52.1% compared to 54.7% in the prior year fourth quarter. The expected rate decline relates to ongoing supply chain challenges and incremental costs for inbound and outbound freight expense. The retroactive reinstatement of GSP is not included in the current year gross margin estimate. Keep in mind, the benefit of GSP was included in our previous estimates and in prior year gross margin.

Consolidated SG&A expense of $68 million to $69 million compared to $63.3 million in the prior year fourth quarter. The expected SG&A increase is primarily related to general variable increases associated with higher sales expectation.

Consolidated diluted EPS of $0.24 to $0.29 compared to diluted EPS of $0.31 last year. Based on fourth quarter expectations, our updated expectations for the fiscal year are: Consolidated net revenues of $546 million to $551 million, net revenues totaled $468.3 million in fiscal 2021; free cash flow of $45 million to $50 million compared to $15 million in the prior year; a consolidated gross margin of 53.5% to 53.6% compared to 57% in fiscal 2021; the retroactive restatement of GSP, which would equate to approximately $4 million to $5 million in gross profit or 70 to 90 basis points is not included in the current year gross margin estimate.

Prior year gross margin was impacted by mass sales, which improved margin by approximately 200 basis points; consolidated SG&A expense of $260 million to $261 million compared to $233 million in fiscal 2021; consolidated operating income of $34 million to $37 million compared to $34 million last year; consolidated diluted EPS of $0.65 to $0.70, diluted EPS totaled $0.63 last year. The retroactive reinstatement of GSP would equate to an additional income of approximately $0.09 to $0.11 per diluted share in the current year. Net capital spending of approximately $6 million to $8 million compared to $5.7 million in the prior year.

Now let me turn to the balance sheet. Cash, cash equivalents and investments at quarter end totaled $75.3 million compared to $77.3 million at the end of last year's third quarter and $65.5 million at fiscal year-end. We had no borrowings on our $75 million ABL credit facility at quarter end. Total quarter end inventory of $148.3 million compared to $141.6 million at the end of third quarter last year. Quarter-end inventory was higher than prior year due to additional Pura Vida inventory. We expect year-over-year inventory should be down in the low single-digit range by fiscal year-end.

During the third quarter, we resumed our stock repurchasing activity, purchasing 214,000 shares for approximately $2.1 million. This month, the Board of Directors approved a new $50 million share repurchase authorization plan that expires in December 2024. Rob?

Thanks, John. Let's begin with an update on the Vera Bradley brand. Vera Bradley demonstrated solid third quarter comp growth over fiscal 2021 and 2020 and has experienced 3 quarters of sequential improvement in comp sales growth despite supply chain disruptions. With domestic traveling continue to strengthen, the travel category remained robust, exceeding both last year and fiscal 2020 levels. As expected, the back-to-school season was elongated this year and lasted well into the third quarter. With the second and third quarters combined, back-to-school revenues were up substantially over last year as expected and nearly flat with fiscal 2020 levels, so we were pleased with our back-to-school performance.

Customers are responding to our continual pipeline of product and fabric innovation. We saw year-over-year growth in Cotton, Performance Twill and ReActive and continued traction in our factory ultra-light collection. We remain very optimistic about recycled cotton and look forward to offering new solid color seasonally. We're constantly researching and innovating to bring our customers more eco-friendly options, and we remain committed to updating 100% of our fabrics to more sustainable alternatives by 2025.

We expanded our apparel collection, adding graphic tees, proper jackets and vest, leggings and a larger selection of pajamas to our already popular Cozy Collection of sleepwear and robes. We had another exciting quarter for product collaborations, including Harry Potter and Disney. Our Disney Bonjour Belle [cap sold] was wildly successful with Beauty and the Beast fans everywhere.

For the holidays, we are ready to go with a wide selection of giftables at all price points, ranging from key chains to duffels to robes to our popular throws. And in November, we introduced our first-ever collaboration with the beloved Peanuts brand on a Snoopy-themed holiday collection, featuring 3 limited edition patterns, including a line of Cozy Sleepwear for the entire family. Our customers love novelty, and Peanuts has been a big hit so far this holiday season. I will also note that the supply chain and delivery delays remain challenging, and we do not see this abating in the near term.

In the marketing area, the substantial investments we have made in data science, business analytics and customer data capture continue to reap benefits and are reflected in Vera Bradley's results. We are driving more engagement on social media. Specifically, we are employing more user-generated content, have grown our influencer and ambassador programs, continue to enhance our social storytelling and social selling, and have expanded Facebook Live and Reels. We are continuing to expand our TikTok engagement, garnering over 2 million views and over 13,000 average engagements per post in the third quarter. These tactics, along with our quality media placements, PR efforts and targeted TV ads, continue to drive brand awareness with year-over-year media impressions up nearly 40% to over 4.6 billion, fueled by our new product launches, collaborations and BB Care's initiatives.

We are also proud that our marketing efforts are increasingly reflective of our ongoing commitment to diversity and inclusion. Our customer journey-centered activations and customer-level personalized messaging are retaining existing customers, meaningfully engaging new customers and aiding in the reactivation of lapsed customers across our full line and factory stores at a much higher rate than in the past.

Our active customer count in the third quarter has also eclipsed the third quarter of fiscal 2020, representing growth in the foundation of the Vera Bradley brand during the pandemic. Our customers have been progressively returning to in-store shopping and our customer base is evolving to become younger and more diversified attributable to our focus in marketing efforts and product innovation and collaborations. All along, we have continued to advance our VB Cares mission.

Of course, October is particularly special for us because of breast cancer awareness month. The Vera Bradley Foundation for Breast Cancer conducts a series of annual fundraising events to support the groundbreaking and life-saving research of the Vera Bradley Foundation Center for Breast Cancer Research at Indiana University School of Medicine. This year, the foundation was able to contribute another $1.5 million to the center, bringing total contributions to date to $37.5 million.

Turning to distribution. Our digital business continues to lead our growth while being supported by our store base. Our verabradley.com business grew by nearly 60% over fiscal 2020 levels. Digital has become a key driver of our revenues over time, but stores continue to support this omnichannel strategy. During the third quarter, store traffic continued to improve and our comp store revenues nearly attained our pre-pandemic levels. Our goal is for our customers to have a seamless customer-led shopping experience.

Digital sales are typically higher in markets where we have a retail presence, and the average omnichannel customer spends over 3x more than the single channel customer. We continue to focus on enhancing and reinventing the customer experience in our full-line stores and certain digital shopping [perks] that gain popularity during the pandemic have remained popular, like [appointment] selling, buy online, pick up in store and curbside pickup.

We are continuing to improve the profitability of our full-line fleet by focusing on our highest potential stores, optimizing and localizing our assortments and rationalizing our existing portfolio through select closures as appropriate. However, this remains a fluid process. For example, at the beginning of the year, we expected to close up to 10 locations this fiscal year, but have cut that number in half due to a combination of favorable store performance and successful lease negotiations. Vera Bradley continues to expand its options for customers to shop. We opened 2 new factory stores in the quarter, bringing our total openings for the year to 6. In addition, we opened a factory pop-up test store in the Phoenix market. We ended the quarter with 72 full-line stores and 75 factory locations.

We launched our Canadian website as our first international localized website experience, which is managed internally. We continue to be excited about alternative payments such as Afterpay, allowing customers to pay for their purchases and installments, which is driving higher units per transaction and increased sales. We added Chewy.com as a new distribution partner for our line of pet products and opened a Vera Bradley store in the LAX Airport as part of our travel expansion focus.

Now let's switch to Pura Vida. As I previously noted, we were pleased to see Pura Vida sales return to double-digit growth in the quarter of nearly 12% over last year. However, this fell short of our expectation of 15% to 20%. Pura Vida's e-commerce revenues were still suppressed by the Apple iOS update that impaired the effectiveness of Facebook and Instagram advertising, Pura Vida's primary marketing vehicles to drive sales.

On the other hand, our first Pura Vida store that opened in San Diego's Westfield UTC mall in mid-August continues to perform very well, far surpassing our expectations. So we are planning to open more Pura Vida stores across the country next year. We hope to have 2 open by summer. The San Diego store is allowing us to showcase the Pura Vida lifestyle with a full array of existing products and new product innovations, especially as we expand into new product categories like apparel, which now makes up about 10% of the store sales volume. As we have experienced a double-digit improvement in our San Diego e-commerce business relative to the rest of the country since the store opened, demonstrating the power a retail presence has in driving digital sales, omnichannel loyalty and spending. Pure Vida's future growth will be expanded by balancing growth online and in physical distribution channels. Stores will play an important role going forward in new customer acquisition as we continue to diversify our marketing platforms.

Our wholesale growth remains strong as we continue to add new partnerships. We've added over 350 new accounts so far this year which has exceeded our expectations. This fall, Dillard's joined Nordstrom as a Pura Vida department store distributor. We continue to significantly expand our presence in existing wholesale accounts with larger in-store presentations and are experiencing solid growth in core product categories with these retailers.

Our current wholesale accounts, on average, have placed larger and more frequent orders than in fiscal 2020 as many have experienced a strong resurgence in traffic.

In the product area, like Vera Bradley, innovation and collaborations will continue to play a key role in Pura Vida's growth. In addition to continually adding new designs and elements to our jewelry collections, we also have diversified well beyond jewelry. We are truly building a lifestyle brand. A great example of the extension of the Pura Vida lifestyle was the spring launch of our apparel collection of (inaudible) and tees, which continues to gain momentum. So far, the top styles have been the tie-dye, surf graphics and the Pura Vida Live Free logo. Now we are broadening our size ranges, styles and logos and we'll be introducing bottoms next year. We believe this is a meaningful revenue opportunity going forward. Apparel not only appeals to our existing customers, but drives new customers to our brand.

Our Hello Kitty collaboration and collection of rings, bracelets and necklaces have been a big hit with Hello Kitty super fans. And of course, Disney's Princess enthusiasts are thrilled with our collection of jewelry featuring their favorite characters from Jasmine to Cinderella. Both collections have brought new customers to our brand, and we have been very pleased with the response to date. Additionally, our much awaited Pura Vida plus Harry Potter collection just launched this week and is already off to a great start.

In August, we introduced our jewelry collection with Outer Banks star and influencer, Madison Bailey, which is appealing to a more diverse customer. We have a few other high-profile collaborations and licensing partnerships that will launch in the months ahead. Stay tuned for those.

Now turning to marketing. Since its inception, Pura Vida has demonstrated expertise in engaging customers, building loyalty and introducing new devotees to the Pura Vida lifestyle. As I mentioned earlier, the spring Apple update impacted Pura Vida e-commerce revenues since we have historically relied heavily on various platforms like Facebook and Instagram to reach our potential customers to drive sales. Our team has worked diligently to dive deeper into customer analytics and building a more diverse and balanced marketing program like growing our SMS subscriber base, onboarding a new e-mail marketing agency and spreading a portion of our marketing resources to other platforms like TikTok, podcast and YouTube.

We know it will take time to gain traction with these other platforms. We are continually focused on looking for new ways to creatively engage our customers and drive new customers to our brands in a cost-effective manner, which is undoubtedly becoming more and more challenging and expensive for both our brands. Since the company's 2009 acquisition of Pura Vida, Pura Vida has been instrumental in sharing its digital expertise with Vera Bradley as Vera Bradley meaningfully enhanced its social media effectiveness and brand awareness. Conversely, Vera Bradley will be able to help Pura Vida leverage more traditional channels like direct mail and e-mail as they continue to diversify their marketing campaign.

In summary, we remain focused on our 4 key growth drivers. One, we continue to drive our digital first strategy. We have made strategic shifts and investments to pivot us to a digital-first company, evolving into a customer-centric, data-driven technology-enabled and digitally-focused enterprise, which allows us to effectively engage with our customers and offer a seamless shopping experience. Over 1/3 of our consolidated revenues are now generated from e-commerce sales. And excluding our factory stores, over half of our total company sales are driven by e-commerce.

Two, we are continuing to enhance our product innovation pipeline, collaborations and category extensions. At Vera Bradley, this is evidenced by the launch of our COTTON ReIMAGINED collection, the introduction of other alternative fabrics, our commitment to sustainability and countless product collaborations like Harry Potter, Disney, Crocs and Peanuts. Pura Vida is producing continual newness and excitement in the core jewelry category and expanding into new lifestyle categories such as apparel and accessories as well as entering into exciting product collaborations with Disney, Hello Kitty and Harry Potter.

Number three, we are building our community through marketing. Vera Bradley continues to engage, diversify and grow its customer base through analytics, targeted marketing and VB Cares efforts. Vera Bradley's customer count grew by nearly 20% over last year, essentially bringing us back to pre-pandemic levels, and social media followers continue to grow with Facebook at nearly 2 million, Instagram approaching 600,000 and TikTok climbing. Pura Vida has demonstrated expertise in engaging customers, building loyalty and introducing new devotees to the Pura Vida lifestyle, with total customer growth to double digits over fiscal 2020, more than 2.2 million Instagram followers and over 450,000 Tiktok followers, a little more than the year after launch.

And number four, evolving our distribution channels. We're continually looking for new ways to reach our customers and to reinvent the shopping experience, from redesigning our verabradley.com website to partnering with Afterpay, to launching our Canadian website at Vera Bradley, to opening our first ever retail store and broadening our department store and wholesale relationships at Pura Vida. The future for both brands will be a powerful combination of digital and brick-and-mortar. Operator, we will now open the call to questions.

(Operator Instructions) We'll take our first question from Mark Altschwager at Baird.

So it looks like you're continuing to make some nice progress with marketing efforts at Vera. Can you give us just a little bit more detail on the customer file growth? I guess any learnings regarding the engagement of newer customers, curious where there are any particular categories or fabrications that are really outperforming with newer customers.

Yes. I think in terms of our new customer count, one thing that's really driving it is, one, all of the new collaborations we're doing. The partnerships with new brands is bringing new customers in, which has been exciting to see. We've also been seeing that our customer is getting younger, which we think is also a positive inside that customer file. So overall, we've been very pleased with the progress we've been making on the Vera Bradley side. And the other thing I think that we mentioned earlier, but just to reiterate, is not only younger, but the customer is also becoming more diverse as we've been diversifying our marketing efforts, which again is great to see and really builds towards the long-term health of the customer file.

That's great. And then on gross margin, so a lot of near-term pressures and cross currents, as you outlined. As we think about next year, just any perspective on what gross margin could look like into '22, calendar '22, I guess, how you're thinking about ongoing supply chain costs versus ramping benefits from the price increases. Obviously, understanding that GSP is a swing factor here, but how should we be thinking about those other cross currents over the next few quarters?

Yes. Thanks, Mark. This is John. I think as we look at planning for next year, we're taking into consideration all the supply chain costs you're expecting freight to be similar to this year. In some cases, you could see some acceleration in the first half of the year compared to the first half of the year last year. And then to normalize [into call] the back half of the year. We do believe that the freight expense is going to be with us for at least another 12 months. To the point of GSP, that is a swing factor if approved.

Obviously, that will have a sign benefit to margin next year. But those are the reasons we took some price increases within the fourth quarter and looking for additional price increases offset it. So we'll come out with a plan and some guidance in our March release. But ultimately, we do think there's going to be continued cost pressure on the freight side. There's also, we believe, going to be some inflationary cost pressure on the product side as well, given some price increases that the vendors within Asia are looking for. So we're working with them to ensure we're paying appropriately, but we think there will be some inflationary pressures, too.

I think the way that I would add on that, Mark, is as we said, trying to balance out all of the inflationary pressures on price with pricing increases. As John talked about, we started taking price increases. We started first with Pura Vida, and they started out with some increases in the beginning in July. As we've been monitoring that, we've seen overall good customer acceptance of that. We started doing some limited price increases in Vera Bradley and has seen similar reaction. So we have a program set out over the next few months to continue that process. That will be a key lever we need to pull to help improve the gross margin pressure as we move forward.

We move next to Oliver Chen with Cowen.

Regarding pricing, what's happening now versus the strategy going forward? And how are you thinking about what makes sense in the portfolio? And on the inventory front, it sounded like there was more Pura Vida inventory. How is the Vera Bradley inventory level relative to the freshness and what you're seeing with demand? And also, as you work through the Pura Vida inventory, what are the key strategies you're undertaking to do that?

So maybe I'll address the pricing one and then I'll let John talk about the inventory one. But from a pricing standpoint, what we're trying to do within both brands is make sure that we are very thoughtful and targeted in our price increases. So we're going through and looking at each item. In both brands, there's a high level of continuative product. So it makes the price changing a little more challenging because we needed to change prices on existing and future inventory. But we basically have been rolling that out over the next 6 months. And again, like I said, we're going to take a very focused approach to how we price those items, right? It's very much by item with a lot of research behind it.

So I think that's the first thing we're looking at. And then we're continuing to look at how do we continue to evaluate promotional activity going into next year. And I think that's the other thing that we're spending some more time on. As many of you might remember, a few years ago, we took a lot of the clearance business out of Vera Bradley and really have been running a very clean business. So we didn't have as many -- as much opportunity to reduce that activity this year. But we are beginning to look at, particularly in the factory channel, what are the opportunities to look at the promotional activity and improve margins.

And in regards to inventory year-over-year, I think it's a tale of kind of 2 brands, right? So if you think about the Pura Vida brand, we certainly are higher than we want to be right now and higher than we were last year. And we're putting forth some efforts for -- to sell some of that inventory through some of the Vera Bradley stores to give another distribution point to sell. We're looking at opportunities with other partners from a wholesale perspective to sell some of the inventory. And we have created certain deals during the quarter to move through some of that inventory, and we'll think about doing that through next year as well. But we want to make sure we don't devalue the brand by doing that too often through the Pura Vida website. So we'll take a fairly consistent approach of how we've done it in the past with the Vera Bradley brand when we were "a little bit over inventory" and take our time to work through it because some of the product really doesn't become obsolete, so we have the ability to sell over time.

The Vera Bradley product, I think we're in a position where year-over-year, definitely not an increase in inventory. I would say over time, we'll probably call it last 3 months, we're out of stock of some stuff that we were -- we thought we'd be in a better place through the holiday just because containers are stuck in certain locations, so there was an anticipation. We flew and air freighted things in that we wanted definitely here, but there was expectation for other product categories in those styles to be here that have just been hung up. We expect to get those in soon, but ultimately, as the supply chain continues to be a little bit challenging, things are taking a little bit longer than we initially anticipated to get product here.

Okay. That's very helpful. And on the delayed renewal of GSP, what was -- any context you have on why that might have happened relative to your prior expectations? I know there's a lot of uncontrollable variables there. Would love any color.

Yes. So I think I'm sorry, I didn't hear the last part.

The relevant countries that, that applied to would be helpful as well.

Got you. Yes. So the relevant countries that it applied to from our supply chain is Cambodia, Indonesia and Myanmar, as we procured from this year. During the full year, right, there was every indication that the Congress is going to work on renewing this. And we were much more hopeful at the beginning of the year. Became a little less throughout the year that it was going to get passed, but still believed everything we're hearing, and I think we're still hearing that it's going to get passed in some from. Just the house has a different perspective than the Senate does on kind of what they want to put into the bill.

So with everything that happens in Congress, it's just things take a little bit longer than you anticipate. So at the end of -- when we released third quarter guidance or full year guidance at the end of the second quarter, we still anticipate it to happen this year, given the fact that it's December and still hasn't happened, our expectations have changed and don't anticipate happening this year, and we hope it will happen early part of next year. But right now, we're not planning for it to happen. We're assuming it's not going to happen, so we're making decisions based on that.

Okay. And IDFA has been a difficult situation for a lot of people across the industry. And what are your thoughts on where you are with that and the strategies you're undertaking. What are the main strategies within your control? And what do you see happening with the marketing spend as well as effectiveness that we should know about?

Yes. I think we missed the beginning, but let me make sure I have it right, Oliver. I think it was about the iOS update and what's going on with digital cost. And I think in terms of our strategy against it is making sure that we really are continuing to diversify our marketing platform becomes the key word, right? So if you think about some of the things that Vera Bradley has done, as they've been doing things like connected TV and other avenues, also looking at things like direct mail. I think one thing that I'm seeing happen in retail, and I think it's both in the marketing arena and in the distribution arena, that this mixture of digital and maybe what we would consider more traditional methods is going to be the key to success as we go forward, right? This -- the digital space is changing, costs are going up.

So you have to balance the digital spend, become much more targeted, have a lot more data, a lot more first-party data but balance that with some more traditional outreach opportunities, how do you get customers excited through other avenues, whether that is something like a direct mail or connected TV, events. We've been very successful in Pura Vida with doing events in stores and getting crowds in that new store. And so we think all of that becomes part of the new platform as well as just using stores as a major customer acquisition opportunity. So again, more complicated, more balanced, need to make sure you have the data and science behind it. But I think what's exciting for us is that we can kind of keep cross leveraging our skills between our brands, right? Vera Bradley has a long history of more traditional, and they've been building out a really strong digital platform, and we can use some of those lessons that Vera Bradley has learned to share with Pura Vida and really strengthen them.

Okay. And on the traffic front, physical store traffic, what are you seeing by channel outlet relative to full price? And how do you think these levels will manifest versus '19 levels?

Yes. So from a traffic perspective in the third quarter, we saw traffic was stronger in the factory outlet channel than it was in the full-line channel, which is fairly consistent with how it had been performing all year, that is slightly better from a traffic perspective in the factory channel. I think over the longer term, we still anticipate the factory channel continue to strengthen into next year, and ultimately, traffic to come back there at a greater extent than in the full line channel.

But I do think what's important to know, Oliver, is we've tracked the performance of both our full line and factory quarter after quarter, both of them have continued to get stronger quarter after quarter. The traffic continues to increase, which has been great to see. So there's just been a slight improvement as we've looked at traffic factory versus full line. So I think both of them are really on a very similar trajectory pattern, and we expect going forward probably similar performance from a traffic standpoint out of both. The real key continues to be increased conversion though across both channels. So even though traffic is down a little bit over the pre-pandemic levels, conversion has really strengthened, which I think is encouraging to see.

(Operator Instructions) We'll go next to Eric Beder at SCC Research.

Could you talk a little bit about collaborations and kind of how -- a, how they fit in, which is -- what is the better kind of -- which one works better as opposed to which one doesn't? You've done that for 2 to 3 years, some of them are multiple levels. How should we be thinking about what is a good versus what is a bad collaboration? Or what is a not-as-good collaboration?

Eric, I think maybe the best way to answer that is a couple of things. It's one, when you do your first collaboration, there's always an opportunity for kind of outsized growth more pent-up demand. So some of our largest results have been first-time collaboration. The second piece that becomes very important across both brands is how well that licensing partner collaborates with you. So for example, Hello Kitty was very successful at Pura Vida and we had support from Sanrio to push out to their customer base, what we were doing. So we got some outsized performance in that in Pura Vida. So it's just we do a lot of research in both brands. We ask customers what are their favorite licensing characters. And so we're continuing to look for things that are fresh.

So what you'll see is we'll have some franchises like Disney and Harry Potter that are massive franchises. But then we're going to go ahead and drop in a lot of freshness. You're going to see a lot of newness in those licensing partners. So it's a combination of those 2 things becomes important. And again, really looking at it as a way to expand the customer portfolio. It's been very exciting to see even like with Harry Potter, how many new customers came into Vera Bradley and moved over to Vera Bradley customers as we've managed that. So -- and again, don't only think about the licensing partners, but think about other brands that we collaborate with to, right, whether it's Crocs and Vera Bradley or some other brands that we've done things with, with Pura Vida.

The only thing I would add to that, I think also what we've learned is we need to be authentic to the brand. So if you think about the Pura Vida brand, we released some packs with Charli D'Amelio, and we released some packs Madison Bailey. Madison Bailey really has a little bit more of the ethos of the Pura Vida brand and that performed better than the Charli D'Amelio pack did for us in regards to sales. So I think we have to think about that, and we are thinking about that when we think about who we also collaborate with as an influencer.

On the Canadian expansion, how should we be thinking about that? I'm assuming you must already have had some customers in Canada. And does that eventually [either sell] maybe the stores or something franchise down the way?

I think right now, what I would say, Eric, is that we're continuing to test in growth. We do -- Canada, as you would imagine, is our #1 international country for the Vera Bradley brand. So we thought it was really important to begin to learn in Canada, begin to control the experience for our customer in Canada directly so we're getting learnings. And as we build on that learnings, we'll decide how big that market can be. But we're going to watch that, and we're going to continue to test not only at Vera Bradley, but at Pura Vida. Pura Vida, we do have international presence in Europe, and we're continuing to look for international opportunities. So we think it will be an important part of the brand expansion, and we'll just see how those grow over time.

But I think the other place we look at for international expansion to kind of begin to plant the seeds is through travel expansion. I think what you see happening in LAX with Vera Bradley. I think there's a unique opportunity. We've been able to work with, as we've come out of the pandemic, with more minority-owned businesses in terms of whether it's female-owned businesses or local businesses. And we think that, that really provides a new way to reach out and not only connect with our current customer, but get a lot of new eyeballs on the brand and a lot of international travelers coming through some place like LAX that we haven't had before. So we do think that the travel expansion opportunity is a unique customer acquisition opportunity.

We'll go next to Steve Marotta of CL King & Associates.

Rob and John, I want to go back to the recent price increases as well as ones are expected for next year. Can you talk a little bit specifically about magnitude on average across the product line? And also if you expect these price increases to fully offset the costing headwinds that you are either experiencing or expecting or it's a best guess at the moment to offset them all. If you can talk about how you feel about the size of the price increases and what they are expected to offset?

Yes. So the price increase, obviously vary depending on the style and category. But I would say the price increases in total, you could think about that in low single-digit overall. Increases, low to mid-single digits kind of overall increases as you think about each brand. That's what we're anticipating pushing through over time. Now whether or not that all gets pushed through, through the full year, we're working through all those details.

And as we think about being able to offset, the intent is to try to offset as much as possible, but we're still working through the plan for next year. And ultimately, we're seeing continued pressure on rates associated with shipping. We're out to contract in bids for some rates. So we're -- it's really a very fluid process right now to be transparent. So we're working through it right now, what is the best estimate for price increases and does that fully offset? I can't say with a 100% certainty yet.

Yes. I do think, the only thing I would add to what John was saying is that when you look at total portfolio price increases, right, so if we've targeted increases and you look at the entire portfolio, John is right, that's in the kind of the low single-digit numbers. When you look at an individual items, in some cases, we are seeing price increases in items that could be 10% to 15%. But when you blend in between where we're increasing prices, where we're not increasing prices, you end up more in the single digit, right?

We'll go next to Dana Telsey at Telsey Advisory Group.

Can you talk a little bit about with price increases, have you taken price increases in the past and what is the magnitude in the past? And then on the indirect accounts, what's happening with those accounts? Is it more concentration in fewer accounts? And then I just have a quick follow-up.

So I think overall, from a pricing increase, Dana, I'd answer it a couple of ways. If you think about this year, generally, our price increase started kind of in the fourth quarter. And we have taken double-digit type of increases on individual items is how I would look at the magnitude. If you look at it historically going back a few years across both brands, we did have a period a few years ago where we made price increases across Vera Bradley as we were dealing with all of the China tariff issues, and that was kind of in the single digit, low single-digit type of range. So not as aggressive as what we're seeing this year. Pura Vida did have, back a few years ago, they did have a significant increase, kind of double-digit increase in their core product. And they just took another double-digit increase in their core product in November. So we have had fairly large magnitude increases at Pura Vida over time, and we think there's opportunity there.

The only thing I would add to that the Pure Vida was prior to (inaudible) that has happened over the last couple of years.

We're talking about...

So from an indirect perspective, if you think about both brands, in the Pure Vida brand, it's really expanding ultimately, there's an expansion of doors that are happening in that brand. It continues to accelerate -- it has accelerated this year as compared to last year. If you think about the Vera Bradley brand, we're really diversifying our partners there, while we're diversifying kind of product offerings there. So that's the thought and kind of the plan associated with the Vera Bradley brand.

And I think as you -- as we mentioned, right, the partners like Chewy.com, how do we find again? So much of what we're doing at Vera Bradley now is playing target, right? So how do we take our pet line, put it in Chewy.com, which obviously has a significant amount of eyeballs and really use our wholesale opportunities to grab new customer eyeballs as much as just volume.

And then on SKU count, how do you think of the SKUs for each of the brand? Any expansion reduction or a percent of sales that comes from the most dominant SKUs? How do you think of SKU counts and where you are now?

So a few different things, right? The top items are always a key focus for us. They always have been at Vera Bradley. You can think about the iconic items there between our large duffel campus backpack, lanyards, all of those are -- the throw blanket, the tote, very much needle movers. We continue to focus on those. We also do believe that Vera Bradley, there's an opportunity in the core product, right, the bag business to continue to tighten that assortment, really focused on the best SKUs, make sure that we're really driving key items in the core assortment and then expand in categories on the edge. So adding more into the apparel area or the home area, giving the customer another reason to buy as opposed to just trading from one bag to the other, really focus that buying but really add another reason to buy. That's one of the key strategies at Vera Bradley.

If you think about Pura Vida, the focus there has really been how do we maintain that great core string bracelet business, expand out into jewelry, which has been successful, continue to monitor that SKU count. But in something like jewelry newness has become very important in terms of new SKUs and driving new growth. But bringing something new, sell out, bring in something new. And then we're just testing into apparel. We want to make sure we don't go too broad, but try to have kind of a tight SKU assortment. And we think that will be a great strategy for us as we move forward.

And that will conclude today's question-and-answer session. With no other questions holding, I'll turn the conference back to Mr. Rob Wallstrom for any additional or closing comments.

Thank you. We have an extraordinary culture, a dedicated team, loyal customers and a clear vision to be a purpose-driven multi lifestyle brand, high-growth company. Our strong cash position, debt-free balance sheet and capacity to generate free cash flow will allow us to continue to invest in our 2 unique brands and seek out other acquisitions at comfortable, affordable, purpose-driven brands over time.

Although there are near-term headwinds with rising digital expenses, supply chain disruptions and elevated costs and the delay in the GSP renewal, we have demonstrated an ability to manage through short-term challenges while delivering on our long-term strategy. We have an exciting future ahead and the opportunity to create long-term value for all of our stakeholders by pursuing growth within our current brands and continuing to seek nonorganic growth through new brand innovation and acquisitions over time.

Thank you for your time and interest in Vera Bradley, Inc., and we hope you can join us for our year-end earnings call on March 9.

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time, and have a great day.