Vera Bradley Inc (VRA) 2021 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Vera Bradley Third Quarter Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the call over to Mark Dely, Vera Bradley's Chief Administrative Officer.

Good morning, and welcome, everyone. I'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 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 the call.

I will now turn it over to Vera Bradley's CEO, Rob Wallstrom. Rob?

Thank you, Mark. Good morning, everyone, and thank you for joining us on today's call. John Enwright, our CFO, also joins me today.

Our quarterly results once again significantly exceeded last year's earnings performance as well as our expectations. We expanded our gross margin rate primarily through sales of cotton masks and controlled promotional activity and we diligently managed our expenses, achieving meaningful expense leverage. Our multi-brand strategy is proving to be powerful.

Customers are changing the way they shop and we have responded. Our digital competencies are becoming increasingly important, especially in this quickly evolving environment. Somewhat fortuitously, last year, we acquired digitally-native Pura Vida and began working on critical Vera Bradley technology, infrastructure and e-commerce site improvements necessary to position the company for future success. Those enhancements went live several months ago.

Our consolidated e-commerce business was very strong in the third quarter, reflecting growth from both Vera Bradley and Pura Vida. Even as our stores were reopened during the third quarter, our Vera Bradley digital business grew nearly 50% year-over-year, and Pura Vida's e-commerce sales grew over 17% for the quarter despite disruptions in the supply chain. E-commerce sales comprised over 1/3 of total sales for the quarter.

By staying laser-focused on the customer and by controlling what we can control, we have proven we can drive strong results and position ourselves to emerge a stronger and more resilient company despite facing ongoing headwinds. Our results were achieved through the innovation, teamwork and determination of our entire organization. Even while working remotely, our teams have demonstrated flexibility and decision-making, created new products and marketing initiatives and added efficiency to the organization. And our focus on cash management has driven us to think of creative ways to drive sales, expand margins and reduce expenses.

Let me turn the call over to John to review the financial results. John?

Thanks, Rob, and good morning. Let me go over a few highlights for the third quarter. As a reminder, financial results have been consolidated to include the July 2019 Pure Vida acquisition. This is the first quarter since the acquisition of the year-over-year quarters are comparable. The numbers I will discuss today are all non-GAAP. For a complete reconciliation of GAAP to non-GAAP numbers, please reference the schedules attached to today's press release.

The current year non-GAAP third quarter income statement numbers exclude intangible asset amortization. The non-GAAP income statement numbers for the prior year third quarter exclude the Pura Vida acquisition-related charges and technology re-platforming expenses.

Consolidated net revenues totaled $124.8 million for the current year third quarter compared to $127.5 million in the prior year third quarter. Excluding charges, Vera Bradley, Inc.'s non-GAAP consolidated net income was $10.2 million or $0.30 per diluted share for the third quarter compared to $6.9 million or $0.20 per diluted share last year.

Vera Bradley Direct segment revenues totaled $78.2 million compared to $78.4 million in the prior year third quarter. E-commerce sales growth of 48.8% offset the 19.1% decline in comparable store sales for the quarter. Store traffic continues to be negatively impacted by the pandemic. The company closed 10 full-line stores and opened 6 factory outlet stores in the last 12 months.

Vera Bradley Indirect segment revenues totaled $22.3 million compared to $24.1 million in the prior year third quarter, reflecting a reduction in orders primarily related to the pandemic and in the number of specialty and department store accounts.

Pura Vida segment revenues totaled $24.3 million compared to $25 million in the prior year third quarter. A 17.2% growth in e-commerce sales nearly offset the sales to wholesale accounts, which were negatively affected by the pandemic.

Third quarter consolidated gross profit totaled $73.8 million or 59.1% of net revenues compared to $74.1 million or 58.1% of net revenues in the prior year on a non-GAAP basis. The company expanded its gross margin in the quarter, primarily through sales of cotton masks and controlled promotional activity.

On a non-GAAP basis, consolidated third quarter SG&A expense totaled $59.4 million or 47.6% of net revenues compared to $64 million or 50.2% of net revenues. Current year SG&A expenses were lower than the prior year due to both temporary and permanent expense reductions related to the pandemic.

On a non-GAAP basis, current year third quarter consolidated operating income totaled $14.4 million or 11.6% compared to $10.1 million or 7.9% of net revenues last year.

The uncertainties continuing related to COVID-19 make fourth quarter financial performance extremely difficult to predict. As a result, we are not providing forward-looking guidance. For the fourth quarter, we believe our inventories are well positioned and marketing initiatives will drive traffic and sales. However, third quarter performance should not be considered to predict our future performance.

We are facing certain headwinds in the fourth quarter, including the continued impact of COVID-19 on store traffic and capacity limitations in stores. Mask sales may not be as strong for the fourth quarter and freight is a fairly significant headwind for all retailers as the consumer over indexes to e-commerce. Shippers are applying surcharge to each package during peak season, and we have elected to absorb that cost and not pass along to the consumer.

Now let me turn to the balance sheet. Net capital spending for the third quarter and 9 months totaled $900,000 and $5.2 million, respectively. Capital expenditures are expected to total between $6 million to $7 million for the year, primarily related to technology and logistics enhancements as well as new factory stores.

Cash, cash equivalents and investments as of October 31, 2020, totaled $77.3 million compared to $48.8 million at the end of last year's third quarter. We have $30 million borrowings outstanding on our $75 million credit facility at the end of the quarter.

Quarter-end inventory was $141.6 million compared to $134 million at the end of the third quarter last year. Current year inventory was higher than the prior year, primarily due to receipts accelerated into the third quarter from the fourth quarter. We expect year-over-year inventory to be relatively flat at fiscal year-end. Rob?

Thanks, John. Now let's shift to an update on our 2 brands. We believe the way that customers live and work has radically and permanently changed. Both Vera Bradley and Pura Vida are particularly well suited with our purpose-driven, casual, comfortable and fund positioning that dovetails perfectly into this consumer shift.

We remain focused on propelling both brands forward through innovation in product and marketing, supported by state-of-art technology. Our new cloud-based technology platform is allowing us to respond to the rapidly changing environment and to harness customer data and feedback earlier and more instantaneously to drive this innovation.

First, let me update you on Vera Bradley. Let's start with product. I'm very proud of the fabric and product innovation being driven by our talented design, creative and product development teams. We have a robust fabric innovation pipeline in place to continually update our cotton collection to develop new fabric offerings and to build on our platform of sustainable fabrics. This pipeline is important to our existing customers and helps us attract new customers to the brand.

Our full-line offerings of Performance Twill and our recycled Re-Active collection continue to gain traction and are highly rated by our customers. And the recent introduction of our ultralight fabrication has been a popular addition to our factory stores. Stay tuned for more fabric innovation over the next 12 to 24 months.

We also continue to introduce differentiated styles and silhouettes, providing our customers beautiful solutions in all facets of their life. One key focus is our hands-free products like our slings, backpacks and crossbodies, as they have become increasingly important to our customers, particularly during the pandemic.

Our long-term focus continues to be on building on our dominance in our 3 core franchise areas of youth campus every day in travel. Our Travel segment has held up relatively well during this period. Our product focus on soft travel items like our duffle and weekender collection for car trips or weekend getaways is proving to be more resilient than the hard luggage market in general.

We continue to innovate in travel. For example, we are launching our Re-Active Lay Flat travel backpack, which takes our award-winning Lay Flat functionality into our core backpack category. A great example of innovation has been our cotton mask, which once again drove meaningful revenue and gross margin dollars for us during the quarter. We have continued to improve our offerings with new features, styles, sizes, patterns and solids, and we are happy to provide our customers and the communities we serve with much needed personal protective equipment and provide a bit of Vera Bradley signature color and fun in the process.

Mask sales softened as we progressed through the third quarter, but still comprised approximately 10% of Vera Bradley's total sales. While we expect the sales of mask will continue to soften in the fourth quarter and beyond, we are beginning to experience recovery in the core business, which has offset the mask volume decline in third quarter. Our trend-right colors and patterns continue to be important to our customers. Paisley remains our #1 print. But our customers are also drawn to our emotional novelty prints and smaller, soon-to-sell-out capsule collections. These always add excitement to our assortments and a sense of urgency for our customers to shop. Our Best in Show dog print launched in the third quarter and was a fan favorite and even topped last year's wildly popular Cat's Meow pattern.

This holiday season comes with a focus on gifting and cozy in a combination of festive and whimsical patterns like Merry Mischief in coordinating classics and neutral textures, like our Teddy Fleece and Cozy Plaid. We are offering an expanded assortment of customer favorites like blanket, slippers and cold weather accessories, and we expanded Cozy into more apparel like loungewear, robes, puffer jackets and fleece. These items have sold out quickly.

Our collaborations and strategic partnerships continue to engage existing and new customers, expand our reach, increase brand awareness, generate media attention and provide opportunities for us to strategically test and ultimately enter new product categories. We are continually approached by well-known brands with collaboration and partnership opportunities, which speak to the strength and wide appeal of the Vera Bradley brand.

In August, we launched our newest Disney collection on verabradley.com and our second annual collaboration with Crocs. In October, we introduced our signature mask in 1982 backpacks in Target stores and on target.com. And earlier this month, we were able to replenish and add to our extraordinarily popular, Vera Bradley + Harry Potter collaboration that originally launched in July and sold that quickly. And look for more exciting collaborations in 2021.

Let me switch to marketing and customer engagement. Our talented digital and marketing teams have completely transformed the way we communicate and engage with our customers and touch the communities we serve. As we focus on reinforcing our position as an ESG organization, we continue to strengthen our community support and charitable efforts under the umbrella of VB Cares, particularly through organizations that could profoundly improve the lives of women and children.

Even though we were unable to hold any large fundraising events this year, through the generosity of our associates, customers and other supporters, we were able to raise $1.4 million to support life-saving research at the Vera Bradley Foundation Center for Breast Cancer Research at the Indiana University School of Medicine, bringing the total rate to date in support of breast cancer research to $36 million. Additionally, we are continuing our year-long support of other impactful organizations like New Hope Girls and Blessings in a Backpack.

Another aspect of ESG and our VB Cares' focus is caring for our associates. We are so thankful for all of our associates and are especially grateful to those that have served on the front lines making sure our customers have safe and exceptional experiences day in and day out, especially during the pandemic.

We were once again thrilled to award a quarterly bonus of up to $500 based on hours worked to each distribution center, store and customer service associates for their continued contribution and devotion to Vera Bradley during this extraordinary time. Over the last 2 quarters, we have paid over $800,000 in well-deserved bonuses to our front-line associates.

In the third quarter, we successfully launched our new verabradley.com site, which allowed us to improve our customers' online buying experience and offer enhanced content to guide purchasing. We added a number of key site capabilities and have experienced a triple-digit improvement in revenue attributed to our search engine optimization. Our digital and marketing teams have been successful in accelerating digital and customer growth. Our well-timed investments in customer data science, business analytics and AI positioned us well as we have navigated through the pandemic, allowing us to collect and analyze data and respond to customer changes and adjust marketing spend in an agile way.

Using our data-centric programmic buying, we have significantly increased our paid media efficiency and revenue attributable to paid media during the quarter. We continue to see strong performance from our digital media optimization. Our return on ad spend in the quarter improved double digits, led by campaigns like washable handbag and totes, which have resonated with customers as they are managing through the pandemic.

Earned media remained strong during the third quarter with over 3.3 billion impressions. We had exceptional media coverage of our mass effort supporting communities and health care workers, breast cancer awareness month and our foundation efforts, and our brand collaborations and partnerships. We rolled out customer journey-centered activations with high response rates, including a welcome journey for new Harry Potter customers and for mass purchasers new to our brand.

Vera Bradley has always been a brand about connecting with people, and we continue to see best in the industry engagement rates on Facebook and Instagram. Our second launch with Crocs, continued partnership with Disney in collaboration with Warner Bros for Harry Potter, gave our customers plenty to talk about in the quarter. This has helped our customers have a community to connect with in these difficult times in a way to find some fun and bright moments. This engagement has increased both followers and sales with third quarter revenue attributable to social media up triple digits year-over-year.

Our store and wholesale teams continue to drive results through innovation and creativity. Although our digital business is becoming a larger portion of our revenues, both factory and full-line stores continue to be an important part of our omnichannel strategy. We continue to focus on enhancing and reinventing the customer experience in both our full line and factory stores. While the pandemic and mandated capacity limits have challenged store traffic, we are using customer data to strengthen relationships by offering appointment shopping, particularly for our top customers, face time and social selling, buy online, pick up in-store and curbside pickup where possible. Appointment selling was very successful, generating nearly 10% of our full-line revenues in the quarter.

Our loyal customer retention at the end of third quarter is actually better than it was at the same time last year. This is a testament to our new digital and data analytics programs, our customers' love for the brand and our associates' devotion to our customers.

We have created more excitement in 6 Vera Bradley full-line stores by adding Pura Vida shop-in-shops after a successful test in Birmingham, Alabama. We will continue to leverage opportunities for both brands, and we'll be rolling out a Vera Bradley plus Pura Vida Charity Bracelet program at Vera Bradley next year.

In the factory stores, we are testing line-busting technology in several high-traffic locations, offering customers the opportunity to scan a QR code and receive a text message when it is their time to return to the store. They may also scan a QR code to review our electronic lookbook and decide what they would like to buy while waiting in line.

In the aggregate, our factory stores continue to outperform our full-line stores compared to last year, as customers feel more comfortable shopping in outdoor centers than in closed malls. Our customer satisfaction scores are consistently industry-leading despite pandemic-related disruptions. We are striving to create a seamless shopping experience no matter where she chooses to shop. Our omnichannel customers are our most valuable, on average, spending 3x more than the single channel shoppers.

We have opened 6 new factory stores and expanded and renovated 1 factory store this year. We continue to focus on improving the productivity of our full-line stores. We have permanently closed 7 full-line stores so far this year and expect to close 5 more by year-end. This will bring our total full-line closings to 38 since the beginning of fiscal 2018, and we expect to close approximately 10 additional locations next year.

On the wholesale side of the business, Amazon is our highest volume and fastest-growing account. As Amazon continues to grow, we have put resources against this business to optimize our inventory assortments, assure pricing integrity and drive volume.

Now let's talk about Pura Vida. We remain excited about the potential of our Pura Vida brand. Pure Vida's year-over-year third quarter e-commerce revenues grew over 17% despite significant supply chain disruptions that impacted sales early in the quarter. As inventory normalized, e-commerce growth substantially accelerated in the back half of the quarter.

Using Vera Bradley's global sourcing expertise, we have quickly strengthened Pura Vida's supply chain, diversifying raw material sourcing and adding 3 additional production facilities in countries outside of El Salvador. Of course, total revenues were also affected by sales to the wholesale channel, which are beginning to recover, especially stores reopen and start to reorder. During the third quarter, we were able to divert some wholesale inventory into our e-commerce channel.

At Pura Vida, innovation and product is first and foremost. We continually introduce new styles of the Pura Vida signature core bracelets and style packs, and we have continued to add to our popular metal, mood and semiprecious collections, which are at a higher price point than our traditional string bracelets. This category expansion and product diversification is working. In fact, nearly 50% of Pura Vida's e-commerce business in the third quarter was comprised of jewelry categories other than the traditional spring bracelets, underscoring the brand's lifestyle appeal.

Pura Vida's fall launches were a success. Our Celestial collection was a big winner, once again proving that beyond the beach styles resonate with our customers. Earrings and necklaces continued in popularity as we further expanded our above-the-keyboard offerings for those not only living but working from home.

Personalization is a continuing popular trend. Customers can personalize their signature core bracelets by choosing the color combination or charm special to them. Our engravable collection launched earlier this year has taken off with customers loving the customization of bar necklaces, rings or coin bracelets. We have expanded the styles of engravable blanks, including those embellished with birth stones or zodiac signs. And we have added a spinner necklace, where both sides can be customized with engraving.

Pura Vida's signature charity bracelets will always be an integral part of the Pura Vida lifestyle and continue to be a growing category as they are so special to our loyal cost-minded customers. We are continually adding to our popular charity charm bracelets that we introduced earlier this year and to our charity style packs that support many amazing causes that are cherished by our customers.

We developed 2 styles for Suicide Prevention Month in September and partnered with Boarding for Breast Cancer selling 4 styles of Breast Cancer Awareness Month in October. The expansion of the charms and style packs to our charity assortment is not only enabling us to increase our price points but to increase total donations to these great causes. To date, Pura Vida has donated over $2.8 million to more than 200 charities.

For holiday, we have an expanded offering of gift sets and fun advent calendars packed with 12 days of surprises, a super sparkly style packed from one of our most well-known influencers, Aspyn Ovard, our bigger collection of engravable jewelry and even more charms, including Zodiac and Wildlife Charity styles.

Pura Vida is continuing to expand on the distribution front. Earlier this year, we launched our Canada Shopify fulfillment capabilities and begin wholesale distribution of our products in Europe to complement our existing e-commerce business and third-party fulfillment there. We already have many Pura Vida fans around the world, and this global expansion is not only allowing us to serve those customers, but extend our reach to others. Although we are early in our international expansion, we believe there are more opportunities ahead.

Our first Pura Vida retail store that was scheduled to open this year was delayed due to the pandemic. We expect to open this exciting retail concept in San Diego next year. Pura Vida is truly expert in gauging customers, building loyalty and introducing new devotes into the Pura Vida lifestyle. Our monthly bracelet and jewelry clubs and shore club program are all creative ways to connect our customers with our products and lifestyle and cultivate loyalty.

During the quarter, earned media was strong with healthy returns on spend and Pura Vida doubled its SMS list from last year to 1.2 million active subscribers, which drove meaningful revenue. On the marketing front, Pura Vida's social media engagement is strong. Pura Vida remains one of the most highly engaged brands in the accessory space on social media with over 2 million Instagram followers. Pura Vida is consistently listed as one of the most, if not the most, engaged jewelry brands on Instagram.

A lot of Pura Vida's marketing strategy and overall success is driven by its devoted group of brand ambassadors and close to 150,000 active micro influencers. These passionate advocates help us spread the Pura Vida movement, showing their devotion to the brand while scoring perks along the way. These ambassadors and influencers create compelling and exciting content to create buzz about our product and share that excitement with their followers and fans. Like our holiday collaboration with Aspyn Ovard, we have several more exciting influencer product launches lined up in the months ahead.

TikTok has taken off with 115,000 Pura Vida followers. TikTok clips feature influencers unveiling boxes, showing sneak peeks of new items, promoting giveaways and giving tutorials. TikTok generates interest in followers with creative and engaging content and drive sales by linking the Pura Vida online store and occasionally offering special promotional codes.

Speaking of TikTok, we have moved the much anticipated launch of the Pura Vida bracelet influencer style pack with the reigning queen of TikTok, Charli D'Amelio to spring 2021 due to production delays. We want to make sure we have enough product to execute, and then we are sure we will be an incredibly successful launch.

Charli's TikTok followers have grown by 20 million fans in just over 3 months to an outstanding 100 million, and she has over 34 million Instagram followers. Her target demographic fits perfectly with the Pura Vida brand, and we are thrilled with the upcoming partnership. We believe the strength of the Pura Vida business underscores the opportunity for discovering other small, high-growth potential brands like Pura Vida with unique product and marketing position that could become part of the Vera Bradley family of brands.

Now more than ever, I am confident that we are in the right space with our purpose-driven, casual, comfortable and fun lifestyle brands at both Vera Bradley and Pura Vida. Both brands have unique growth opportunities, particularly as our focus is on customers who live beyond the major city centers, and this customer base is growing as they migrate from big cities to smaller communities. We are positioned well for the future.

Operator, we will now open up the call to questions.

(Operator Instructions) And we'll now take our first question. It comes from Oliver Chen of Cowen.

So the margins were really strong, but the Direct was a little lighter than what we had modeled. What are you seeing in terms of the comp store sales and traffic trends? And/or I'm sure there's a fair bit of volatility. And how has inventory trended in that channel relative to your expectations?

Thanks, Oliver. From a traffic perspective, in the third quarter, we saw improvement, obviously, from the second quarter in both the factory and full-line channels. Full -- factory was better than the full-line channel. So we saw better traffic getting to our stores as we opened up our stores, right, in Earnest in the back half of third quarter.

But from an inventory perspective, I think we're well positioned from an inventory perspective for both brands. We have -- outside of the beginning of this third quarter, Pura Vida got back into inventory late in the quarter and ultimately, I think, accelerated their sales growth, but the first part of the quarter was a little bit challenging from an inventory position perspective. In regards to stores at the Vera Bradley brand, we were well positioned in inventory for the full quarter.

Okay. And as we think about the comp and model of the comp, what are some dynamics that you saw in conversion versus check size in the quarter that we just had and any thoughts going forward? Will traffic continue to get better? Hopefully, there's added visibility on reopening.

Yes. So from a conversion perspective, conversion was definitely up in all channels, whether that is e-commerce, whether that is impact from the full-line because of individuals who came out, came out to shopping, really came out to buy. So we saw conversion increase. We also saw kind of ADS. We saw the actual check go up. People were buying a little bit more, but we actually also saw the AUR go down a little bit based on the fact that our masks were a portion of that purchase. And at an $8 price point, that's going to bring AUR down.

As we look into the fourth quarter, I think it's really -- it's going to be -- some challenges in the stores is going to be associated with capacity as all retailers kind of deal with the capacity constraints of certain states or certain cities in regards to what they're doing in regards to COVID-19. But the hope as we move into next year would be that the vaccine rollout kind of the stores and malls open up to get traffic back to where we thought it would be as we entered into this year.

But as you can imagine, factory stores from a traffic perspective, people still feel a little bit more comfortable going to kind of outside malls versus inside malls.

And then Pura Vida, all the details and strategy are helpful. I know you called out supply chain and wholesale as being factors. Could you elaborate on when those might have better visibility in terms of timing and improvement on those features of Pura Vida?

Yes. So from a supply chain perspective, we've corrected some of the challenges that we had. Rob mentioned in his prepared remarks that we are now working with additional vendors to help kind of from a supply chain that we're not only going to be fully reliant on the wholesale (inaudible). From a wholesale perspective, we -- as stores open up and as we look into the spring, we think that's when we'll see a correction from a wholesale perspective for the period.

Okay. And Rob, on product for fourth quarter and then next year, which products would you prioritize as most impactful to an outlook in terms of the...

In terms of, I guess, whether it's -- are you specifically regarding Pura Vida or Vera Bradley or both?

Vera Bradley brand.

Yes. Yes, I think with Vera Bradley, I think there's a lot of innovation coming. So in fourth quarter, I think what becomes really important is everything that we do around fleece and home and cozy, obviously, is really important in this time of the year kind of all of our holiday patterns. But we're seeing now with hands-free being really important, as we move through the fourth quarter, we think that will continue into next year. And then as we look at next year, continuing with our collaborations in (inaudible), which is important and then continuing with our fabric innovation. Those are 2 things that become really important kind of across categories.

The thing that's been interesting is if we've watched our youth, travel and everyday business, we were expecting to see a lot more suppression in the travel business, and it's basically trended more similar to the rest of our business. So that's been encouraging to see because we're more in that soft travel, car travel category, which has held up better than kind of that hard luggage air travel. So that's been encouraging to see.

Back-to-school was difficult back in August, but we saw some strength coming in September. And obviously, we're hopeful as we move through next year and get to back-to-school, that it will be in full return, hopefully, by the time we get to next fall.

Our next question comes from Mark Altschwager of Baird.

Just following up on the fourth quarter for a moment. You mentioned that I think sales might not be as strong in the fourth quarter versus the third quarter. Understanding that the environment is tough to predict here, but I was hoping you could expand upon that a bit. And is that primarily conservatism related to store capacity? I guess, with consumers' focus shifting to gifting, maybe most of a headwind related to back-to-school, I would think that continued sequential improvement might be possible. So maybe just talk a little bit more about the puts and takes there and how you're thinking about holiday?

Yes. I think the holiday season, right, this holiday is definitely not like any other, right? I think what we've seen in retail in general, and we've seen in our numbers is consumers move forward some of their spending. We had a very, very strong start to November. We were feeling very good. Obviously, Black Friday, you can tell from all of the market reports, there was suppression in store traffic over Black Friday. And so we'll just watch and see how it plays out over December.

I think a couple of things in the fourth quarter that are out there is that as COVID started pulling back on capacity issues that caused a little bit of pressure in some of our stores. I mean some of those capacity pullbacks have been pretty large. And so that has been a pressure that we've seen in the fourth quarter that we did not see as much in the third quarter.

And then the second question is just going to become with e-commerce as we move through the earlier shipping, right? And in all of retail, much of the business has moved on e-com, and how that impacts that last week before Christmas when people get back out in the stores, there's just still a little bit of uncertainty out of there. And so we'll watch how that works through.

And then the other thing, just from an earnings standpoint, right, the shipping surcharge is an additional pressure in fourth quarter that we haven't had the rest of the year. So those are kind of the 3 key points, right? The reduction in capacity in stores; once the e-commerce shipping deadline chip off, what happens with the customer; and then third, the surcharges. So those are the things we're watching in the fourth quarter that are unique.

But it's not that we think that there's an underlying weakness with the consumer or what we're seeing going on. We think the consumer is continuing to respond to now fully in innovation and so we see it just as kind of navigating through this COVID holiday and then moving into next year and hopefully, next year, momentum will continue to pick up.

Okay. That's really helpful. And then on the marketing front, can you talk about how you're engaging with some of the new customers you've acquired with the mask sales over the last couple of quarters? Are they coming back to purchase other categories? And I guess what does that behavior look like in terms of repeat business as the last couple of months have progressed?

Yes. No, it's been very encouraging. Both the new customers that we brought in through our mask business as well as customers that we brought in through Harry Potter, we have very specific marketing journeys against both of those customers to really engage them with the brand more deeply and widely, and we've seen really good response from those customers in terms of coming back. So we're encouraged that we really be able to keep a lot of those customers we've gained.

Got it. Got it. And then I guess last 1 for me, just bigger picture. Rob, you discussed this permanent shift in consumer behavior and you've been on a multiyear journey in terms of evolving what the store base looks like. But any changes to your thinking about that in the medium-term just in terms of stores versus digital? And for the outlet business specifically, is your approach evolving for online outlet relative to store outlet business, any high-level thoughts there would be great?

Yes. In terms of overall, right, the journey we've kind of been on, we've been -- we had talked about reducing our full-line store fleet. As you see, we're projecting to continue to do that next year. We're watching the mall development very closely to see what happens in enclosed malls going forward.

On the outlet front, though, we still feel that there's opportunity in the outlet channel. We're very happy with overall how the outlet channel has been performing. Customers are coming back faster to the outlets, and they're coming back to the enclosed malls. So we see that as an opportunity. We still are very cautious about moving the online outlet onto a digital platform just because of making that off-price product more highly accessible. So we still primarily see our factory business as a brick-and-mortar strategy.

(Operator Instructions) Our next question comes from Steve Marotta of CL King & Associates.

As far as the recent COVID hotspots and you mentioned, of course, it's negatively affecting capacity in the stores, is it having any effect on the e-commerce activity in those areas? In other words, do you find that if people can't get into the stores, e-commerce is going up or because of the restrictions and people not feeling very good about anything that sales are going down in those areas as well?

I think that overall, it's definitely not as quick as you slow down the stores and it all pop on to e-commerce. I think e-commerce helps offset some of that, which I think we've seen in the industry, and we've seen in our channels over this year. But as you -- as areas start to spike, we do see just consumers starting to pull back, particularly for the first few weeks that things change, right? Everybody, I think, begins to rebalance their life and we see a short-term impact. And then usually with time those things begin to mitigate.

And the only thing I would add to that, to Mark's question a minute ago is from a factory perspective, when capacity goes down from a factory perspective, we don't have an outlet further on an e-commerce perspective for those consumers to buy.

Okay. I understand. And Rob, maybe you can provide a little bit of your outlook for fiscal '21, not obviously from a guidance standpoint, but just from what you see as the trajectory of the consumer over the course of the year as vaccine opens the economy back up again and social distancing guidelines are reduced. Obviously, it's going to be good for your business in some respect. Do you think there will be different styles that will be utilized? How do you best prepare and capitalize on the reopening and the timing of the reopening?

Yes. I think the first half to the year, right, it's definitely going to be continuing to navigate a pretty dynamic environment. I think we're all hopeful that as we get summer, there's some normalcy starting to come back. And I think both brands are well positioned. If you think about what we expect to bounce back disproportionately would be things like summer travel. So that whole travel piece of the business, whether it's in our travel categories or Pura Vida with other beach lifestyle and people getting back to beaches and getting out and doing all of that.

I think the second big one that we expect to really pop back strongly is back-to-school. And I think there's a lot of impacts from that. There's -- Vera Bradley business in terms of the back-to-school business, obviously, was soft this year. I think there's a lot of pent-up demand. So we're hopeful there. And second of all, with Pura Vida, they do a lot of product around fundraisers and schools and teams and people kind of use their customizer pack to do fundraisers. And obviously, this year, since a lot of that did not happen, that business was softer. We think that, that's a real opportunity to bounce back next year.

So there could be a lot of positive momentum in the back half of next year as travel and school kind of pop back and return.

Our next question is a follow-up question from Oliver Chen of Cowen.

A few more just on the shipping and what you're seeing with the shipping deadlines. Has that been a limiter to some of the revenue growth? And/or as you look at elasticity issues, although you're taking the surcharge, I mean, has there been any consumer differences with cancellations and/or timing? And would also just -- this is very hard to forecast. But as you look forward with mask, how are you thinking about planning inventories with that situation and that being a big part of the business currently?

Yes. I think from the shipping deadlines, I think we've been managing through shipping deadlines capacity well. I'm sure you've seen some of the headlines out there that we were able to secure our capacity needs with UPS and been managing through that. So we don't have any disproportionate delays here. We've actually been encouraged by how shipping and logistics piece has been working from just an on-time performance, that's not really the issue. There is a surcharge issue, which there is expense associated with that.

I think the bigger question is when the shipping cutoffs happen and so much of the business has moved to e-commerce is what does the consumer do from that kind of shipping cutoff of approximately 12/15 through 12/25, right, that 10-day window, does she go back out to store like she has traditionally or not? I think that's a big question mark as we move through holiday.

And in regards to masks, all of the estimate masks, we do think masks are going to continue to abate, right, as a percentage of total sales. We do -- we think they're going to be an important part of the business for the fourth quarter and we think into the first quarter. But how it plays out after that, we're unsure.

Okay. And Rob, on Amazon, which you called out in the prepared remarks and pricing integrity. What are some of the key guardrails that you have there? And what are the main benefits and opportunities that offset some of the risk factors of partnering and deepening the relationship with Amazon?

Yes. I think, one, really building kind of a strategic partnership with Amazon was really important. We really dedicated resources, people who really understood the channel. And we worked on making sure that we were pulling back on either counterfeit product that was available digitally out in the world and pulling that back to a lot of activities we've been doing there, which helps with price stability, making sure that we're working with our other wholesale partners to make sure that they're maintaining price integrity. And doing all of those things has really helped us manage the price integrity on Amazon. And I think it's just in this new world, really be on top of data and management making quick decisions day in and day out has made that partnership effective.

The other thing that we've really used Amazon for is key category penetration, right? There's so many people shopping on Amazon. When people are looking for things like backpacks or masks or kind of category type of conversations, we want to be part of that search, part of that conversation, and we can really pick up new customers that way, which is the reason why we've really leaned into it, and we've been very happy with that partnership to date.

And finally, on the promotional environment, as you've been seeing it, how have you been seeing it? And how have your merchandise margins been relative to your expectations? And what you're seeing in terms of being competitive relative to competitors as well?

So in regards to merchandise margins, they're meeting really kind of our expectations. We haven't -- from a Vera Bradley perspective, we haven't been significantly more promotional. In the third quarter, we were controlling the promotionality. As we look into the fourth quarter, we're just being -- we're looking at kind of what others are doing, and we're trying to ensure that we play in the appropriate space. But as we've introduced kind of Vision 2020, we want to continue to drive full price selling versus kind of just revert back to kind of (inaudible). So we're being thoughtful in kind of how we are promotional throughout the season, but we want to make sure that we don't leave any opportunity uncovered.

And just finally, you've been a pioneer with using a lot of the data and AI for personalization and algorithms internally. What's the latest there in terms of like results that you've seen from implementing that technology in the organization?

Yes. I think that what we've seen: one, is we've seen a real acceleration of our consumer growth in kind of that 25 to 40-year-old category, and a lot of that has been through very specific targeted marketing. We also think as we lean forward, as we're continuing to diversify our customer base, really using a lot of very specific algorithms to really target consumers is really going to help us really talk to each one individually. You can imagine that with our very diverse product portfolio from a color and style standpoint, there's a lot of regionality. There's a lot of specificity in terms of ages. And as we've been doing that, we've been seeing much higher returns on our ad spend, and we think that with time, we're going to continue to get smarter and continue to get more and more targeted in our -- not only our product development, but also in our marketing of what is available.

Yes. As we brought in new customers from masks revenue or kind of Harry potter, we've been able to get their repeat purchases better-than-average based on kind of specific journey. So that's been helpful.

Our next question comes from Dana Telsey of Telsey Advisory Group.

Just wanted to get a little bit more color on Pura Vida, how you're thinking about the operating margins go-forward in that business? And also how you're thinking about planning it for 2021? And then just a follow-up on the expenses. When you think about your fixed cost structure now versus pre-COVID, how much of the leverage do you see as impacting margins as the core business recover from COVID?

Yes. From Pura Vida, we're still very excited about what the growth opportunity is in front of us with Pura Vida, a lot of initiatives ahead of us. We think that from an operating margin, we believe that Pura Vida can continue to kind of be in that high teens -- mid- to high teens operating margin. So we still feel very good about that business.

From the expense standpoint, I'll let John put some color on that one.

Yes. So from an expense perspective, we have a lot of fixed costs there. We saw some savings associated with certain items in the second and third quarter. We likely won't see kind of in the fourth quarter and some of those savings you can think of as personnel savings as we took some reductions in salaries or other furlough positions that we took. If you think about kind of core savings that we think we can see kind of into next year, you can think of that as a discretionary savings and is likely in the low single-digit as a percentage of total expense base that we think will be permanent savings on a go-forward basis.

Got it. And then when you think about the partnerships like with Disney, what's coming up that we should be marking our calendars for?

We haven't put the other launch days out there, but what I can tell you is that we have a very robust pipeline next year that is both with character releases, a lot of exciting news that's going to be coming. So we'll continue to build on our partnerships with Disney, continue to build on our partnerships with Harry Potter. And you'll also be seen with Pura Vida then taking advantage of a lot of licensing opportunities next year.

So those are some of the things we're doing on kind of that character licensing side. And additionally, we're continuing to do collaboration work like we've done this year, and we have some exciting things in mind next year. So stay tuned.

Got it. And just lastly, any more learnings on the Project Novus side?

Yes. I think our big learnings there is just continuing to become more responsive and technology and data driven. I mean everything that we did around that project was so that we can move more rapidly, we can make changes more rapidly. We've seen -- in our prepared remarks, you heard the comments we were making about the improvements in SEO. And how we just really are able to move quicker, right?

With our new infrastructure platform, we're able to make changes in how we execute and what we learn in probably a matter of days versus what might have been months before. And that will just, over time, we will get smarter and better and better. I think that's one of the big things in this new world with technology and data. It's not a destination, so to speak, it's kind of a journey, right? You keep getting better and better, the more you know, the more you learn. And you really build up a competitive advantage, and that's what we're working on.

(Operator Instructions) Our next question comes from Eric Beder of SCC Research.

So in Q4, you've been a lot more aggressive in terms of apparel, not the store in the Vera Bradley stores, but with outerwear, pajamas, robes. And I think the response has been pretty positive. Is that kind of a one-off holiday thing? Or should we be thinking about that as a potential category for some level of expansion going forward?

Thanks for the question, Eric. Yes. During fourth quarter, we definitely have expanded some of our apparel offerings, really focusing on kind of key item areas, and we've been very, very happy with the response from the consumer, and we do think that's an area that you will see continued development.

One thing that we've always believed in both of these brands is that both brands are truly lifestyle brands. They're not just a product. They actually are a lifestyle. So we think that there is opportunity to have category expansion in both brands.

Okay. And speaking of that category, when you -- for the Pura Vida store-in-store at a Vera Bradley store, could you give us a little more what kind of -- how big is this in terms of the physical store? And what are they selling in there beyond, I guess, the core? Are they selling entire Pura Vida line? How does that work right now?

Yes. We're still -- we're working on over the final design. We have identified a location. So it is about an 800 square foot space. So it's kind of on the smaller store footprint, which we think is a great opportunity for Pura Vida. With being a jewelry story, you don't need as much space, therefore, can get a much higher sales per square foot to make it more profitable in the long run.

In terms of assortment, it really is going to be focusing on kind of a fairly broad assortment. As you've seen, the metal jewelry business continues to be exceptionally strong, so that would be a big part of the assortment, supported by the string bracelet business. But also some of these other exciting initiatives they have planned for next year that we'll be talking more about on the next call, some of those new initiatives we'll be launching in the store too.

Eric, to your question also in regards to the store in the store for -- in the Vera Bradley stores? Or is it specific to the Pura Vida new location?

I think what you described is the Pura Vida new location, how big is it inside of Vera Bradley shop-in-shop, I guess?

I think with the shop-in-shops in Vera Bradley, we're testing a few different things. So we tested in Birmingham. We gave a couple of hundred square feet to Pura Vida and that was kind of a focused assortment on kind of their best-selling metal and string bracelets to kind of get a test up. We're rolling it out to additional stores, and some of those presentations might be tighter. One thing that's really great about Pura Vida is with the way their wall units work and how much product you can get in a very small square footage. You don't necessarily need a lot of space. So we're going to test a few different sizes. Some of them might be 100 square feet, some of them might just be 12 linear feet of wall space. But it will be exciting to watch how that responds.

And then the charity bracelet program that will be in all of our stores will even be a tighter assortment, but we think there's a real opportunity. What's been exciting is, we've seen a good response from our consumers, not only in our full-line stores, but also in our factory stores buying full price product, whether it's been with Pura Vida or whether it's been in some of our collaborations that we've tested by Harry Potter that we put in some of our factory stores. So we think there's a real opportunity to take advantage of some of this without the traffic that's going through our factory stores.

Okay. And finally, on Re-Active. You have had open, it's almost a year, next month will be a year approximately. So what are the -- I know it's been caught up, unfortunately, in the whole flow of everything else. But what kind of -- is it attracting the consumer you expected? Are you expecting to be as aggressive with all the patterns on the pieces that you've bid in 2020? What do you expect to see Re-Active kind of the next, I guess, somewhat normalized year next year?

Yes. We've been very happy with the Re-Active performance, right? There were really 2 key elements of Re-Active. One was really our first foray moving into sustainability. And the consumers really responded to that messaging. We've seen younger customer really be attracted to that messaging. You're going to see us. We've made a world commitment to move in our full-line assortments to a sustainable fabric platform as we move forward. So more exciting announcements next year. We think that's critically important. We've been very happy with the response.

The second piece of Re-Active was just the more active lifestyle. And obviously, we've seen the consumer this year continue to get more casual, get more active. And I think we'll continue to be leaning in that and how do we use Re-Active to even have a stronger foothold in the active space.

It appears we have no further questions at this time. I would now like to turn the conference back to Rob Wallstrom for any additional or closing remarks.

Yes. Thank you so much for joining us on today's call. I'm excited to have the opportunity to lead such a great team of talented, agile and innovative associates who are passionate about our brand and our customers.

Vera Bradley, Inc. is an authentic iconic lifestyle company with 2 powerful brands and devoted customers. We are committed to continual innovation in product and customer engagement. We have a strong balance sheet and ample liquidity, and we are fully committed to advancing our ESG and stakeholder focus and to create long-term shareholder value. Once again, we have proven that by working together, we can thrive even when facing unrelenting headwinds. We are poised to emerge a stronger company with an exciting future.

Thank you for your time and interest in Vera Bradley, Inc. We hope you can join us for our fiscal year-end call on March 10, 2021.

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