Vera Bradley Inc (VRA) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to today's Vera Bradley's fourth-quarter fiscal 2011 results conference call. At this time all participants are in a listen only mode. Following the presentation we will contact conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions.

As a reminder, today's conference is being recorded. Now I would like to turn the conference over to Jean Fontana of ICR.

Thank you. Good afternoon and welcome. We would like to thank you for joining us this afternoon for Vera Bradley's fiscal 2011 fourth-quarter and full-year results conference call.

Before we begin we would like to remind you some of the statements made on the conference call during our prepared remarks and in response to your questions may constitute forward-looking statements, and are 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. Those risks and uncertainties are described in today's press release and Vera Bradley's prospectus filed with the SEC and in the Company's forthcoming 10-K.

Investors should not assume that the statements made during this call will remain operative at a later time. The Company undertakes no obligation to update any information discussed on the call.

In addition, during this call we will make reference to certain non-GAAP financial measures, including adjusted operating income, adjusted net income and adjusted diluted earnings per share. A reconciliation of these non-GAAP financial measures to reported operating income, net income and earnings per diluted share is included in the press release issued this afternoon.

I will now turn the call over to the Company's CEO, Mike Ray.

Thanks, Jean, and good afternoon everyone. I would like to thank all of you for joining the Vera Bradley fiscal 2011 fourth-quarter and full-year results conference call. Joining me today are Jeff Blade, our Chief Financial and Administrative Officer; and Roddy Mann, our Executive Vice President of Strategy and Business Development.

Today I would like to focus on two main topics. First, the highlights of our fiscal 2011 fourth-quarter and full-year performance. And second, an outline of our growth plans as we enter fiscal 2012. Jeff will then review our fiscal 2011 fourth-quarter and full-year financial results, as well as our fiscal 2012 outlook. Following my closing remarks we will take questions.

During the fourth-quarter we continued to experience and strong demand for our brand across all of our sales channels, as reflected in the 29% net revenue growth achieved in the fourth-quarter and 27% growth for the full year.

The positive momentum during the fourth-quarter and full year is a result of strong product offerings throughout the year, as well as outstanding execution across all of our sales channels.

At this time I would like to review our results in a little more detail. The record sales of $366 million for fiscal 2011 were driven by a product assortment that featured the vibrant colors and patterns and the distinctive styles that our customers have come to expect from Vera Bradley.

During the year we delivered four Signature releases, with more patterns than ever before. We did this while releasing a greater number of other collections, and continuing to widen the assortment of our Paper collection. We also focused on key holiday promotion periods, with special emphasis on the Christmas holiday season and the execution of a special collection during that period.

In our Indirect segment net revenues increased 6% during the fourth-quarter, incremental to the sales growth of 22% in the fourth-quarter of last year. The increase was the result of a highly favorable response to our holiday assortment. This benefited our Indirect retailers, as consumers began their holiday gift shopping. In addition, we experienced strong demand for our spring Signature collection that launched in January.

For the full year Indirect net revenues grew by 11%. These strong results are attributable to the popularity of our Signature releases throughout the year and our Christmas holiday execution. A comparable year-over-year growth came from existing as well as new Indirect retailers.

On behalf of everyone at Vera Bradley, I would like to thank our 88 sales consultants for another outstanding year of collaborating with our Indirect retailers to grow the presence of our brand.

I would also like to thank our 3,300 retailers for their passion and dedication as they continue to partner with Vera Bradley. They are a core attribute of this great brand and will continue to play an important role in our future growth.

In the Direct segment we experienced growth in net revenues during the fourth-quarter of 61% across our full-price and outlet stores, as well as our e-commerce business. Net revenue growth in our full-price stores in the fourth-quarter was driven by the opening of nine stores during the year, as well as an increase in comparable store sales of 22%.

This comparable-store growth was driven by increased traffic as our customers continue to visit us with greater frequency, and as new customers discover the brand for the first time. In addition, our strong store-level execution resulted in higher conversion rates during the period.

Net revenue growth in our outlet channel was driven primarily by the addition of three new stores, as well as increased customer traffic. The increased traffic was complemented by strong store-level execution as we continue to incorporate improvements as we enter our second full year of operating in the outlet channel.

Our e-commerce net revenues grew 43% during the fourth-quarter and represented 30% of total revenues for the period. This significant growth was a result of increased traffic to the website, reflecting strong targeting of online consumers, as well as the retirement of Java Blue and other popular patterns.

In addition, the resulting sales had a higher-margin profile versus the prior year, which is consistent with the planned evolution over time to a more full-price channel as our outlet store presence grows.

In addition to our topline growth, we are pleased with our operating results for the fourth-quarter and the full year. Operating income increased 48% for the fourth-quarter, and excluding the one-time charges discussed in the press release, increased 65% for the full year.

Adjusted to reflect a normalized 40% tax rate, net income increased 48% for the fourth-quarter and 67% for the full year.

Overall, our performance reflects the strength and expanding appeal of our brand, the ongoing loyalty of our customers, and the strong response to our product offerings.

Before I share our plans for fiscal 2012, I would like to briefly review our long-term vision for growth, which will frame our efforts for the coming year. As we have shared in the past, our prospects for future growth are based on the vision established by our founders, Barbara Baekgaard and Patricia Miller, and the solid foundation we have built over our 29-year history.

This foundation for future growth is comprised of several core elements, including our iconic authentic American lifestyle brand, our dynamic multichannel distribution model, our re exceptionally loyal and diverse consumer following, our high-quality portfolio of products that are distinctively Vera Bradley, and our proven track record of performance.

With this foundation in place, we are focused on two primary strategies, expanding our product offerings and continuing to grow in under-penetrated markets. And we will execute these strategies through our Indirect and Direct channels of distribution.

Executing against this long-term growth plan in fiscal 2012, we will focus on several initiatives. We will continue to expand our product offerings, recognizing that our core competence is designing to accessorize a woman's life. The customer loyalty we have with our existing product portfolio gives us confidence in our ability to enter into new product categories and other brand extensions.

During fiscal 2012 this will include executing four Signature seasons, each with at least four new patterns. We are currently selling our spring Signature collection, which launched on January 13. This collection features four patterns, Boysenberry, Folkloric, Blue Lagoon and Lemon Parfait. To date the collection has been very well-received by our customers.

On March 24 we will launch four new patterns as part of our summer collection. In addition to the Signature launches, we will introduce more than 20 other collections throughout the year, including Paper and Gift, Vera Vera Microfiber, Canvas and holiday gifts.

We are also relaunching rolling luggage, which we brought in-house from the previous license relationship. This collection has been well-received by our Indirect retailers, as evidenced by the strong initial sell-in. And although modest in terms of net revenues for fiscal 2012, we believe it has the potential to grow over time into a meaningful category.

We are also in the early stages of identifying new collections and categories that will drive growth in future years. Our product development cycle is focused 18 to 24 months ahead to ensure a steady pipeline of new product that will enable the Company to realize the full potential of the Vera Bradley lifestyle brand.

In addition to expanding our product offerings, we will continue to grow in under-penetrated markets. Over the past several years we have successfully expanded our Indirect and Direct channels in key developing markets throughout the country. We believe there is significant opportunity to continue this growth by leveraging the strengths and portability of our brand and our significant multichannel distribution capabilities.

In the Direct segment we will continue to work closely with our existing retailers to improve productivity. And we will partner with new retailers in under-penetrated markets throughout the country.

In the Direct segment we plan to open 14 to 16 new stores during fiscal 2012, while continuing to drive strong comparable store sales.

The first two of our new full-price stores for the fiscal year opened last week at Water Tower Place in Chicago, and at Westfield Annapolis Mall in Annapolis, Maryland.

During the fiscal year we anticipate continued growth in our e-commerce business as we utilize new direct marketing database capabilities to target customers, and as we further leverage our social media initiatives.

Marketing initiatives during the year will continue to focus on increasing brand awareness. Continuing under the umbrella of our Be Colorful campaign, these will include national print media, experiential marketing, direct mail, in-store and online marketing. We believe the campaign contributed to our rise in brand awareness over the past year, and will continue to have a positive impact going forward.

We believe the combination of expanding our product offerings and continuing to grow in under-penetrated markets through all of our channels will lead to meaningful growth opportunities in fiscal 2012 and in the years ahead. Accordingly, we will continue to build our team and the infrastructure necessary to fully realize these opportunities.

As we shared in our press release in late January, we have embarked on a brand building strategy in Japan. However, the severe earthquake and subsequent events there are impacting our near-term plans. I would first like to say that we are thankful that no harm has come to Vera Bradley employees or any of our business partners assisting in our brand building efforts there.

We continue to believe an opportunity exists based on our prior selling experience through a limited number of independent accounts in Japan, and more recently through our full-price retail store in Ala Moana, Hawaii.

Our fiscal 2012 strategy to this point has been focused on building the same level of brand enthusiasm in Japan as we enjoy in the US. That strategy was based on media features and events, temporary pop-up shops to ignite brand awareness, and the launch of VeraBradley.co.jp. Over the next few weeks and months we will continue to evaluate the situation and make changes as necessary to our marketing plans.

Finally, I would like to comment on the input cost increases we are experiencing, primarily due to the rising cost of cotton and labor costs in China. To the extent possible, we will offset these higher costs through a combination of price increases and continued cost savings initiatives throughout our supply chain.

To offset some of the cost pressures we will implement a retail price increase beginning with the introduction of our fall Signature collection. We will do so thoughtfully, recognizing that Vera Bradley has always stood for outstanding value within the reach of our loyal customers.

As we navigate through this challenging cost environment, we will not compromise on any aspect of the product quality that customers have come to expect from the brand.

We look forward to the year ahead, and are pleased with our strong results during the fourth-quarter and throughout fiscal 2011. With that, I will turn the call over to Jeff Blade, our Chief Financial and Administrative Officer, who will provide additional details regarding our fourth-quarter and our full-year results and guidance for fiscal 2012.

Thanks, Mike, and good afternoon. I will begin my remarks with a review of our fiscal 2011 fourth-quarter and full-year results, and then discuss our outlook for the current fiscal year, including first-quarter and full-year guidance.

As Mike mentioned, we are pleased with our progress and our financial results for fiscal 2011 fourth-quarter and full-year. Net revenues for the fourth-quarter increased 28.5% to $109.4 million from $85.1 million in the prior year.

By segment, Indirect net revenues increased 6.2% to $53.7 million, incremental to the revenue growth of 22% in the prior-year comparable quarter. The increase was due primarily to start execution of the holiday gift collection as well as the strong acceptance of the spring Signature release.

In the Direct segment net revenues increased 61.1% to $55.7 million due to increased customer traffic and strong store-level execution at our full-price and outlet stores.

Comparable store sales increased 22.1% during the quarter. We also experienced a $9.9 million or 43% increase in e-commerce net revenues, which accounted for 31.1% of total revenues during the quarter.

We ended fiscal 2011 with 35 full-price and four outlet stores. During the fiscal year we opened nine full-price and three outlet stores.

Gross profit for the fourth-quarter increased 31.5% to $61.8 million, resulting in a gross margin of 56.5% versus 55.3% in the prior year. Gross margin improvement was due primarily to lower discounting in the e-commerce channel during the holiday season, as well as ongoing improvements in raw material usage as we manufacture product for the outlet channel.

SG&A expenses were $37.2 million for the fourth-quarter compared to $31.4 million in the prior year. Our SG&A expenses are grouped in three categories, including selling expenses, advertising, marketing and product development expenses, and administrative expenses. I would like to take you through each of those categories in a little more detail.

Selling expenses for the quarter increased to $21.2 million from $16 million in the prior year. As a percentage of net revenues selling expenses were 19.4% compared to 18.8% in the prior year. The dollar increase in selling expenses was due primarily to increased store operational costs as a result of new store openings, as well as e-commerce and store marketing initiatives to drive increased customer traffic.

Advertising, marketing and product development expenses decreased to $6 million from $6.4 million in the prior year. The decrease was due to reduced expenses associated with our co-op marketing programs as a result of refining the marketing support for our Indirect retailers, offset in part by higher costs associated with our expanded product design capabilities.

Administrative expenses for the quarter increased to $10 million from $9.1 million in the comparable prior-year period, due primarily to higher corporate personnel and other costs necessary to support our growth.

Other income, which includes advertising expense reimbursement from Indirect retailers was $1.9 million for the quarter compared to $2.4 million in the prior year. The decrease in other income was due to the previously mentioned refinement of the marketing support for our Indirect retailers, which resulted in decreased reimbursement of our advertising expenses.

Operating income for the fourth-quarter increased 47.6% to $26.5 million or 24.3% of net revenues compared to $18 million or 21.2% in the prior year. By segment, operating income in our Indirect business rose by 5.8% to $23.8 million compared to $22.5 million in the fourth-quarter of last year, with operating margin of 44.4% in the fourth-quarter of this year compared to $44.6 million in last year's fourth-quarter.

Operating income in our Direct business rose by 100% to $18.4 million compared to $9.2 million in the same period last year. And operating margin increased to 33.1% from 26.6% in the fourth-quarter of last year, reflecting improved margins in e-commerce during the holiday period.

Net interest expense for the quarter totaled $400,000 compared to net interest expense of $300,000 in the prior year. The increase was due primarily to higher borrowings under the amended credit agreement used to fund the final S Corp distribution at the time of the Company's IPO.

On a GAAP basis, net income for the fourth-quarter was $14.2 million or $0.35 per diluted share compared to net income of $17.3 million or $0.49 per diluted share in the prior year.

Net income for the fourth-quarter of fiscal 2011 reflects a 45.6% effective tax rate. On an adjusted basis, assuming a normalized effective tax rate of 40% for both periods, net income for the fourth-quarter increased 48% to $15.7 million or $0.39 per diluted share compared to $10.6 million or $0.30 per diluted share in the prior year.

For fiscal 2011 net revenues increased 26.7% to $366.1 million from $288.9 million in the prior year. By segment, Indirect revenues increased 11.5% to $214.9 million. And Direct revenues increased 57.2% to $151 million, with comparable store sales increasing 25.8% for the year.

On a GAAP basis operating income for fiscal 2011 was $53.3 million, up $16.6 million -- up 16.6% from $45.7 million in the prior year. On an adjusted basis, excluding $15.8 million of stock-based compensation expense related to restricted stock awards that vested upon the completion of the Company's IPO in October, and $6.1 million of compensation expense for bonuses paid to recipients of the restricted stock awards to satisfy tax obligations, the net operating income increased 64.6% to $75.2 million.

Net income on a GAAP basis for fiscal 2011 increased 7% to $46.2 million from $43.2 million a year ago. Net income for fiscal 2011 included the previously mentioned restricted stock and bonus expenses totaling $21.9 million, as well as C Corp tax expense for only a portion of the fiscal year, as the Company converted from an S Corp to a C Corp for tax purposes in October 2010.

On an adjusted basis, excluding the restrictive stock and bonus expenses, and including an adjustment for income taxes, as if the Company had been a C Corp at the beginning of each period described, and assumed combined effective tax rate of 40%, net income for fiscal 2011 increased 67% to $44.2 million and $26.5 million in fiscal 2010.

Adjusted diluted earnings per share increased to $1.20 on 36.9 million weighted average shares outstanding in fiscal 2011, from $0.75 on 35.4 million weighted average shares outstanding in fiscal 2010.

Key balance sheet highlights as of the end of the fiscal year January 29, included cash and cash equivalents of $14 million compared to $6.5 million at January 30, 2010, reflecting continued strong cash flow generation.

Inventory at the end of fiscal 2011 was $96.7 million, up from $66.5 million at January 30, 2010. The increase reflects inventories at a more normalized level compared to the significantly lower inventory in the prior year as a result of our inventory management efforts during the economic downturn.

On a two-year basis, compared to fiscal 2009 year-end, net revenues are up approximately 53% and inventories up approximately 50%.

Debt outstanding at year-end was $67 million, a reduction of $10.1 million from $77.1 million at the end of the third quarter. We expect to rapidly pay down debt throughout fiscal 2012.

Before I review our outlook for fiscal 2012, I would like to provide an update on input cost increases we are experiencing. Since our comments during the third-quarter conference call cotton prices have increased and remained at historically high levels. In addition, we are experiencing an increase in manufacturing costs due primarily to labor costs in China.

As we reviewed in the past, our cost of goods sold is made up of three major cost components -- raw materials, which represent approximately 35%; labor and overhead, which represent approximately 50%; freight and duty, which represent the remaining 15%.

The cotton component of raw materials represents approximately 10% to 15% of total cost of goods sold. For the fiscal year we anticipate cotton costs will increase by approximately 30%.

In order to address these increases we are taking several actions. We will increase the retail price on a little over half of our 90 plus Signature styles, beginning with our fall Signature release, which launches on July 7. We believe the brand is well-positioned to support a retail price increase.

As a company, we have always been conservative in pursuing price increases, especially during the economic downturn of the past several years. As a result, our average unit retail price is slightly over $30, leaving room to increase retail prices, while continuing to deliver value to our loyal customers. On average the individual item price increase represents approximately 5%.

We are also pursuing several supply-chain initiatives to reduce our operating costs. Our well-developed operations organization enables us to continue to find ways to offset some of the cost input increases we are expecting. This includes leveraging our operating capability in Asia, as well as collaborating with our supply partners.

The resulting price increases and supply-chain initiatives will enable us to offset a significant portion of the increases, but not all of the cost escalations. On a full-year basis for fiscal 2012 we anticipate that gross margins will be impacted by approximately 50 basis points.

We are still early in the year, and we will continue our efforts to mitigate the impact, but given the volatile cost environment, we are working to find a balance between preserving margins and continuing to provide value to our loyal customers.

Turning to our outlook for fiscal 2012. First of all, I would like to start with the first quarter. In the first quarter of fiscal 2012 we expect net revenues to be in a range of $98 million to $101 million compared to $85 million in the first quarter of fiscal 2011.

In the first quarter the percentage growth of our Indirect segment net revenues are estimated to be in the mid-single-digit range, reflecting the impact of weather on the summer release sell-in and the strong comparable sales in the prior-year quarter.

Gross margins for the first quarter is estimated to be lower than prior year due to a slight shift in timing and the higher than anticipated margins at the fiscal 2010 annual outlet sale of approximately 120 basis points, as well as the impact of higher input costs of approximately 50 basis points as discussed above.

Diluted earnings per share is expected to be approximately $0.25 to $0.27 for the first quarter, including an investment of approximately $0.02 to support our market entry into Japan.

In the prior-year comparable quarter on a pro forma basis earnings per share was $0.25. Our earnings per share estimate assumes an effective tax rate of 40%, and fully diluted weighted average shares outstanding of 40.5 million.

For fiscal 2012 full year we expect net revenues to be in a range of approximately $428 million to $432 million. Gross margin is estimated to be impacted by approximately 50 basis points for the year due to input costs as discussed above, with the majority of pressure coming in the first half and easing in the second half of the year as we institute price increases.

Diluted earnings per share are expected to be approximately $1.25 to $1.28. This estimate includes a net investment for the full year of approximately $2 million or $0.03 per share to support our market entry into Japan. In addition, an effective tax rate of 40% and fully diluted weighted average shares outstanding of 40.6 million.

Capital expenditures for fiscal 2012 are expected to be approximately $15 million, including the buildout of 14 to 16 new store openings. With that, I will turn the call back over to Mike for some closing remarks.

Thanks, Jeff. As I stated previously, we are very pleased with our fourth-quarter and full-year 2011 performance. This was another outstanding year for Vera Bradley, and it sets the stage for continued growth.

Our brand and products are resonating with consumers, and we remain focused on executing our growth strategies in the years ahead.

In closing I would like to thank all of our team members for their hard work and dedication to Vera Bradley and to our customers. We have a unique culture that attracts passionate and motivated people, and this will enable us to continue our successful growth in the future.

And, operator, with that we will turn it over for questions.

(Operator Instructions). Erika Maschmeyer, Robert W. Baird.

Congratulations on a fantastic quarter. You had a really impressive SG&A leverage. Were there any areas in particular where you were able to get better than expected efficiencies? I know you had some pretty tough comparisons to cost controls last year.

I think it was -- this is Jeff -- I think overall it was essentially across our channels, but particularly in the Direct segment with the strong showing in both our full-price and outlet stores, as well is the very strong e-commerce business during the holiday season.

Then just a follow-up on the price increases. You said 5%, was that averaged across the full line or just for the items where you were increasing prices?

That is for the items where we are increasing price.

Okay, perfect. So not an average, [your] increase across-the-board. Perfect. Then any early indications for your summer lineup from the testing that you do or early retailer feedback?

Rod, do you want to field that one?

Erika, this is Roddy. We just sold it in, and so far I guess anecdotally it has been received well. This is from our retail partners on the Indirect side. The sell-in was fairly in-line with our expectations, but the balance between sell-in and reorders changes on a seasonal basis. So just based on their feedback it was good. We were pleased with it.

Great. This summer in general is that a season where you tend to see more reorders than initial sell-in?

Not necessarily. We have evolved our early order period strategies, our sell-in strategies over time. Actually, our goal is to actually get more to flatten it out and get more reorders and less spikes as far as the EOP.

As you'll recall in last year's summer release, it was a particularly strong release last summer. We had the pattern Night and Day, which was extremely well-received by customers, and still continues to sell well as a full-price pattern.

I've got some Night and Day. And then Direct marketing, when do you think you will be able to kick off your tailored e-mails -- retail based on prior purchases?

Yes, the first -- the launch of that utilizing that market marketing database will be for the Mother's Day mailings, both on the printed mail and the e-mail side.

Fantastic. Thanks so much.

Neely Tamminga, Piper Jaffray.

Good afternoon and congratulations on a great quarter here. So I just wanted to follow up a little bit on -- thank you again for all the clarity on the puts and takes of the cost increases. It is all very difficult for all of us to navigate.

I guess, related to that go for the impact on the full year being about 50 basis points, is that including a broader improvement still in the e-com margin, or do you think that could be some potential future offset to that cost increase, given its significance of revenue?

No, I think you should think about it as including it. So our goal over time -- what we said is that over time we believe that the e-commerce channel will become more of a full-price channel, but that is going to happen over time.

So it is not that we are predicting a radical change during this year, but as we grow our presence at outlet stores and as we evolve that into more of a full-price channel, it will happen over time. But I wouldn't bake in any major expectations.

Okay, good to know. Then just conceptually for your business since we don't have the experience of prior calendar shifts, I am just wondering if you could relay for us for a later Easter, if that has any sort of impact on your business even by channel in terms of how your customer buys?

No, not significantly. I would say not significantly.

Nothing to specifically call out from guiding the quarters.

But then related to the outlet sale it has been moved in earlier. So there was a portion I think of the outlet sale that ran into Q2 last year, now it is fully in Q1. Maybe just remind us of how that worked out.

So the way it worked last year was three of the four days fell in our first quarter. And the last day of the sale fell into the second quarter. And this year all of it falls into the first quarter.

And I would think our going forward as staying in the first quarter. It is a good -- it at a good point now between the end of Easter and before we get into Mother's Day.

Great, thanks. Then just one product question. How are you guys feeling about the Canvas collection that is launched here very recently? I am just curious how that sizes up to other collections that you have done in the past.

We are pleased with it. The sell-in or the sell-through of spring is in-line with our expectations. We have the summer sell-in that we just conducted, and that was received well also by retailers.

Great, thanks, you guys, and good luck.

Edward Yruma, KeyBanc Capital Markets.

Thanks very much for taking my question. I had a quick question for you regarding your first-quarter gross margin guidance. I was under the presumption that you had locked in cotton costs and labor costs for items sold out through the first quarter, and was a little surprised that you're seeing gross margin compression. Can you help us understand how that progresses from first to second quarter?

So what we talked about on Q3 was that we thought at that time, given the visibility we had that the majority of the cotton cost increases would impact us in the second half. As you know, since that time a couple of things have happened. First of all, the markets have been in extreme turmoil, so significant increases in the cost of cotton. But we have seen some pressure earlier than what we anticipated.

Secondly, we had been -- what we said on the Q3 call was we were continuing to monitor other input costs, especially potential labor increases. And what we have seen is with the overall increase in raw material inputs it has also been an opportunity for some folks to lean forward on overall manufacturing costs as well.

So that was the piece that is relatively new. So think of it as the pressure in Q1 and 2 is more related to the manufacturing cost increases. Cotton will be primarily in the second half, and that is why we are taking the price increase. So the earliest we could affect price increases were for our fall collection, which launched in July.

Got you. I noticed in your call script too you discussed manufacturing product for the outlet channel. Can you give us an update on how much product is clearance and closeout that is being sold through outlet versus made for outlet?

So none of -- let me start and I will ask Roddy and Mike to jump in as well. None of our product is manufactured specifically for the outlet channel. So there are no unique products specifically for outlet. So everything in that channel is retired product.

What we are able to do is in the past, as you got to retired patterns, to the extent that you had fabric that had been unused in the past you typically discarded it. And what we're finding is that with the outlet channel and the strong sales we are experiencing we are able to convert some of the retired fabric into product.

I will also add that when we look at the store-level assortments in the outlet stores, we want to make sure that it is nicely rounded. And so at times that means we need to up production with some of this retired fabric in particular styles that we actually may be low on in inventories. (multiple speakers) as far as assortment and reducing the liability.

Great, and one final question. I notice that your payables ticked up significantly both year-over-year and also sequentially. Is the right number to think about going forward, and what was the key driver there? Thank you.

I think some of it was related to in transit inventories, so you have a little bit of timing as it relates to that, given where you are at relative to Chinese New Year. So nothing significant in terms of year-over-year changes.

[Jennifer Davis], Lazard Capital Markets.

Let me add my congratulations, good quarter. First, I have a quick clarification question. On your gross margin guidance for the first quarter, I wasn't clear, should we expect gross margins to be about 120 basis points lower or 170 basis points? I wasn't sure if that 50 was part of the 120 or we should add that in.

No, it is 170, so it is approximately 120 related to the shift to the outlet sale, and then 50 for cost inputs.

And speaking of cost inputs, could you talk a little bit more about the supply chain initiatives that you had mentioned? I know part of it is you can better use retired fabrics, but then you had also mentioned better -- you will be better able to leverage your capabilities in Asia. I guess, could you go into a little more detail about that?

So several things. One, we have talked to you in the past about the fact that five plus years ago we began to significantly evolve the supply-chain capabilities of the Company. So part of that was establishing a few years ago a sourcing office in Dongguan, China. So that gives us the ability to have a presence in China and work directly with our manufacturers.

So one, it gives us visibility into manufacturing and an ability to look at sourcing throughout Asia. Secondly, we have a lot of long time supplier relationships, so we are able to work closely with our supply partners, and given the unprecedented rise in cotton and rising labor costs, able to work with them to continue to find solutions. So there have been some efforts to move manufacturing more inland in China as labor rates have risen, etc.

So certainly sourcing capability. And then in addition we continue to look at freight shipping and ongoing productivity efforts throughout our supply chain to find ways to reduce costs.

Okay, great. Then one last one. You had said that 35% of cost of goods sold is raw materials and about 10% to 15% is cotton. So what is -- could you tell us what makes up the other 20% to 25% of the raw materials?

Yes, so there is a number of other items. So there is, obviously, the facing of the product is cotton, but there is backing, there is lining, there is various accessory and hardware items that are part of the product.

Okay, thank you.

Evren Kopelman, Wells Fargo.

I have a few questions. So, first, on managing SG&A next year, given the gross margin pressure, should we expect advertising expense to be down again in dollars, given you are changing your program with your retailers? And also how should we think about the administrative expense growth again -- how you're thinking about that given the gross margin pressure?

Let me kick it off and give you some thoughts on overall SG&A, and then I will let Roddy chime in on marketing. So what we have talked about from a long-term guidance standpoint is that the way to think about SG&A will be that SG&A will be flat as a percentage of net revenues, and over time declining. And so that is our long-term guidance. And as you look at fiscal '12, especially given the rapid growth of the business, our goal is to do two things.

One, to continue to make the strategic SG&A investments that are necessary to build the right team and the right infrastructure to support our future growth. But at the same time find opportunities to do it as efficiently as we can so that you begin to get leverage.

And also, especially in light of commodity cost increases. So I think our guidance for the first quarter and the full year reflects the fact that we are trying to find that balance.

Specifically on advertising and marketing, those costs, think of them as flat against last year, as well as other income is flat to percent of sales.

Flat as a percent of sales?

Correct.

Okay, as a percentage of sales. Then the other question is on e-commerce growth. Obviously, the kind of growth you're generating here, 43%, is very strong. How should we think about that going forward? Maybe if you can help specifically on Q1, what kind of growth you would expect, and then maybe for the full year as well?

So on e-commerce, again, let me kick it off and then others chime in. So in terms of guidance what we said on e-commerce from a long-term growth standpoint was to think about it as midteens growth. And, obviously, we had very strong growth during Q4, and that was a combination of several things.

One, just the overall industry growth in e-commerce sales during Christmas holiday, it just continues to grow year-over-year. So we certainly experienced some of that.

We also, as Mike mentioned in the prepared remarks, we did do a lot of work to target new customers and traffic to the website. Then we also benefited from the fact that during the holiday season Java Blue and several other popular patterns were retired.

So think in terms of the growth of the Web over time were in-line with our long-term guidance. Obviously, we experienced very strong growth during Q4, but would refer you back to our long-term guidance.

Again, consider that over time we will evolve that the channel to be more of a full-price channel, utilizing our outlet stores to move product that we previously had to leave through that channel. So we want to continue to expand our margins in e-commerce, and that will have an impact on the growth rate.

This is Roddy. I just wanted to follow up on one thing. When I said the percentage of sales, that is the advertising and marketing. The other income is flat, and flat to slightly up in dollars, not as a percent of sales.

Okay, that helps -- in dollars. The other one I wanted to ask you about, in terms of your comp growth, the 22% you reported. How are -- and I don't know there is -- I know there is not a huge history, but how are -- if you look at maybe '08 openings versus the '09 openings -- are you seeing a certain class of stores or maybe geographically a group of stores that are comping above that versus others below? I'm just curious if there is either maturation or some geographical difference that is driving comps as well.

Generally speaking -- this is Mike -- we are seeing strong comps across all of our regions, and really from all of the classes. Some of our most rapidly growing retail stores are from that early class of '07 and '08, and so we are really seeing strength across-the-board.

Lastly, if I can ask, on the price increases you mentioned the 5%. I am curious if your comp prices continue to increase, if you think there is more room in your average unit retail to increase it further? If you could share some thoughts on how you decided 5% is the right rate. Thank you.

Generally thinking speaking we think there is more opportunity. We have not raised prices significantly in recent years, obviously given the economic environment, and given the breadth of the increase that we're going to put in place with the fall season. We just want to make sure that we are thoughtful and deliberate in our approach. And we want to get a better understanding of the receptivity of that before we consider doing anything on a broader scale.

So we are going to step through this judiciously. But generally speaking we think there is opportunity for us to increase further. Any other comments from --?

No, I think that's right. Absolutely.

Erika Maschmeyer.

Could you give us the amount of IPO readiness cost that you had that fell into Q4?

It was pretty small. So I would say it is probably $100,000 to $200,000, in that range.

Perfect. Then could you elaborate a little bit more on the strategic investments you making where you're building the store team and infrastructure this year?

Roddy, you want to speak to that?

Specifically related to Direct or just strategically investments across-the-board?

Across-the-board would be great. And I guess is Direct where you're making the bulk of those or --?

No, you just said the store team, I just wanted (multiple speakers). So I will speak about the store team and Jeff can follow up the broader Company level.

The store team, we're continuing really making investments. Continue to -- on the corporate side we have increased to five regions now. I should say they are five districts on the store site as well as an outlet district to better manage that.

We are continuing to make investments on the inventory management side of things as well. As we get more stores, in many ways it is a step function to support them.

So that is in some ways a -- it is a little more tactical of an investment. The investments we made in the districts are somewhat strategic. But right now we are really operating as if for X number of stores we will add the right headcount.

Then, in addition, from a strategic investment standpoint as we think about fiscal 2012, we are continuing to make investments in our product design capabilities, and recognizing the core competence we have there, and the future of continuing to build out products and collections, investments in that arena.

Also, investments in both the team and infrastructure from an IT perspective to be able to support the platform for growth.

Good, thank you.

There are no further questions at this time. I will turn the conference back over to management for any additional or closing comments.

I have no additional comments. I would just like to thank everybody for joining us today. And have a great week and a great weekend. Thanks.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect.