Vera Bradley Inc (VRA) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Vera Bradley first quarter fiscal 2012 results conference call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Jean Fontana of ICR. Please go ahead.

Thank you. Good afternoon, and welcome. We would like to thank you for joining us this afternoon for Vera Bradley's fiscal 2012 first quarter results conference call. Before we begin, a reminder. Some of the statements made on the conference call 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. Those risks and uncertainties are described in today's press release and in the Company's Form 10-K filed with the SEC. Investors should not assume that the statements made during the call and 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'll make reference to certain non-GAAP financial measures including adjusted net income and adjusted diluted earnings per share. A reconciliation of these non-GAAP financial measures to the net income and earnings per diluted share is included in the press release issued this afternoon, a copy of which is available on our Investor Relations section of the Company's website at www.verabradley.com. I will now turn the call over to the Company's CEO, Mike Ray.

Thank you, Jean, and good afternoon, everyone. I would like to thank all of you for joining the Vera Bradley fiscal 2012 first quarter 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 2012 first quarter performance, and, second, an update on progress towards our growth plans.

Jeff will then review our fiscal 2012 first quarter financial results as well as update our fiscal 2012 outlook. Following my closing remarks we will take questions. During the first quarter, we continued to experience strong demand for our brand across all of our sales channels as reflected in our net revenue growth of 19%. The positive momentum is the result of new store openings, strong comparable store sales, and the strength of our Signature portfolio products. I will now review our results in more detail.

In our Indirect segment, net revenues increased 6% in the first quarter, incremental to sales growth of 14% in the first quarter of last year. The increase was driven by the strength of our Signature portfolio, a broader assortment in our special collections and the introduction of rolling luggage. We achieved these results in spite of challenging weather early in the quarter that we believe impacted many of our retail partners. In the Direct segment, we experienced 43% growth in net revenues during the first quarter reflecting the strength of our brand across our full price and outlet stores, as well as our e-commerce business.

In our stores, net revenues grew 96% in the first quarter driven by the opening of ten new full priced stores and four outlet stores during the past year, as well as an increase in comparable store sales of 22%. The comparable store sales growth was primarily driven by increased traffic. Our e-commerce net revenues grew 34% and represented 17% of total revenues for the first quarter.

This growth was the result of increased traffic to the website reflecting a refinement in our targeting of online consumers. In addition, the resulting sales had a higher margin profile versus the prior year, consistent with our planned evolution to a more full priced channel as our outlet store presence grows. In April, we held our annual outlet sale in Fort Wayne, Indiana. During the five-day sale, we greeted nearly 60,000 loyal Vera Bradley customers from all 50 states. Total net revenues for the sale were $11.1 million.

Operating income, which included $0.5 million of costs related to our secondary offering, increased 10% for the first quarter and net income increased 10% in the first quarter as adjusted to reflect a normalized 40% tax rate from the prior year. Overall, our performance reflects the strength and expanding appeal of our brand, the ongoing loyalty of our customers and the positive response to our product offerings. I would now like to briefly review our long-term vision for growth which is based on our Company's key attributes which include our iconic authentic American lifestyle brand, our dynamic multi-channel distribution model, our exceptionally loyal and diverse consumer following, our high quality portfolio of products that are distinctively Vera Bradley, and our proven track record of performance.

These assets support two primary strategies, expanding our product offerings and continuing to grow in under penetrated markets. As we execute these strategies, we're focused on several initiatives in fiscal 2012. We plan to execute our four Signature seasons throughout the course of the year each with four new patterns. We are currently selling our Summer Signature Collection which launched on March 24. This collection features the patterns Deco Daisy, Viva la Vera, Watercolor and English Meadow.

On July 7, we are scheduled to launch our Fall Signature Collection. This collection includes a back-to-campus theme featuring limited time items as part of our Signature assortment which has been very well received by retail partners as evidenced by the strong initial sell-in currently underway. We're also finalizing our Winter Signature Collection which features a broader lineup of holiday gifts and seasonal accessories building on last year's success.

In addition to expanding our product offerings, we plan to continue to grow in under penetrated markets. We believe there is significant opportunity to continue this growth by leveraging the strength and portability of our brand and our significant multi-channel distribution capabilities. Our long-term strategy includes entering the department store channel and we've consequently evaluated potential partners considering key criteria that are in line with our guiding principles. As a result of this evaluation, we've recently finalized plans to partner with Dillard's.

Their brand position within the department store channel, distribution footprint, their customer service focus, and the enthusiastic support for the partnership at the executive level were key drivers in this decision. In July, we will launch in 35 of their stores with a select assortment from our Fall Collection and in September we will launch in an additional 30 stores with a select assortment from our Winter Collection. This initial entry in 65 Dillard's stores will provide the opportunity to refine our initial launch strategy before expanding to additional store locations.

While we continue to explore new channels of distribution, we believe the primary growth driver of the Indirect segment will be productivity improvements within our current retail partners. We recently held one of our premier events in Charlotte, North Carolina with several hundred of our retail partners participating in educational sessions, viewing future collections and sharing ideas to drive growth. Feedback from the event was extremely positive and we believe the premier continues to be an effective mechanism for improving productivity.

In the Direct segment, we are on track to open 14 to 16 new stores during fiscal 2012 while continuing to drive strong comparable store sales. In the first quarter, we opened three full priced stores in Water Tower Place, in Westfield Old Orchard in Chicago, and Westfield Annapolis Mall in Maryland and one outlet store in Orlando Premium Outlets in Florida. During the fiscal year, we anticipate continued growth in our e-commerce business as we evolve our capabilities to reach more customers. We've recently launched the new mobile platform on verabradley.com that will enable our customers to shop with their smartphones in a more user-friendly way.

Marketing initiatives during the year will continue to focus on increasing brand awareness and enhancing our relationship with our most loyal customers. Under the umbrella of our, Be Colorful campaign, marketing activities will include national print media advertising, experiential marketing, direct mail, in-store collateral and online marketing. We believe this campaign has contributed to an increase in unaided brand awareness over the past year from 44% to 57%. In addition to our domestic marketing focus, we've recently introduced our brand in Japan through a combination of pop-up shots and major department stores, the launch of Japanese language website, and the development of relationships with key editorial leaders in Japan.

Between April 20 and May 8, we opened our first pop-up shop at Isetan Department Store in Shinjuku, Tokyo. The launch was very well received by customers new to the brand as well as avid brand loyalists. We've also recently launched verabradley.co.jp, our Japanese counterpart to verabradley.com. Due to the recent disaster in Japan, marketing efforts around building awareness for the e-commerce launch were delayed. As a result, our initial sales are lower than originally planned but over time as these strategic marketing efforts take place and we build brand awareness we believe e-commerce business will gain momentum.

For the balance of the year, our focus in Japan will be on building the brand. This will include executing an additional six to nine pop-up shops, primarily in major department stores. Our second pop-up shop opened last week at Atre Ebisu in Tokyo and has been very well received. We're also planning consumer and media events throughout the balance of the year including a consumer event at Roppongi Hills in Tokyo on June 10. This event was originally scheduled for early April but was postponed due to the natural disaster.

Overall, we're pleased with the initial reception we've received in Japan and believe there is an opportunity to build a meaningful business there in the years ahead. We believe the combination of expanding our product offerings and continuing to grow in under penetrated markets through all of our channels will support continued growth through fiscal 2012 and the years ahead. Accordingly, we will continue to build our team and the infrastructure necessary to fully realize these opportunities.

Finally, I would like to reiterate commentary from our fourth quarter conference call related to input cost increases. To offset some of the cost pressures, we are proceeding with a moderate retail price increase beginning with the introduction of our Fall Collection which launches on July 7. We have communicated the price increase to our Indirect sales team and our retail partners and the initial feedback suggests that there are no major concerns regarding potential consumer price resistance.

We are pleased with the way fiscal 2012 is unfolding given our strong results during the first quarter and progress we've made on key initiatives. With that, I will turn the call over to Jeff Blade, our Chief Financial and Administrative Officer, who will provide additional details regarding our first quarter financial results and updated guidance for fiscal 2012. Jeff?

Thanks, Mike. Good afternoon. I will begin my remarks with a review of our fiscal 2012 first quarter results and then discuss our outlook for the current fiscal year including second quarter and full year guidance. As Mike mentioned, we're pleased with our progress and our financial results for fiscal 2012 first quarter. Net revenues for the first quarter increased 19.3% to $101.4 million from $85 million in the prior year.

Indirect net revenues increased 5.7% to $57.3 million, incremental to the revenue growth of 14.4% in the prior year comparable quarter. The increase was due primarily to strong Signature collections, a broader assortment in our special collection and the introduction of rolling luggage. As Mike mentioned, we achieved this growth despite the impact of challenging weather at the beginning of the quarter. In the Direct segment, net revenues increased 43.2% to $44.1 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 $4.4 million, or 34.2%, increase in e-commerce net revenues which accounted for 17% of total revenues during the quarter. We ended the first quarter with 38 full price and five outlet stores. Note that the new business in Japan is being accounted for as part of our Direct segment. For the first quarter, the net investment to support our market entry into Japan was $0.03 per share, slightly more than the $0.02 communicated during our last conference call due primarily to the lower e-commerce net revenues.

Gross profit for the first quarter increased 15.6% to $56.4 million resulting in a gross margin of 55.7% versus 57.4% in the prior year. The gross margin decline was in line with our expectations and was due primarily to lower overhead absorption and higher input costs. SG&A expenses were $40 million for the first quarter compared to $33.9 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 these categories.

Selling expenses for the first quarter increased to $23.1 million from $17.5 million in the prior year. As a percentage of net revenue, selling expenses were 22.8% compared to 20.6% in the prior year. The dollar increase in selling expenses was due primarily to operational expenses for 14 new full priced and outlet stores and selling expenses associated with the market entry in Japan. Advertising, marketing and product development expenses decreased to $7 million from $7.4 million in the prior year. The decrease was due primarily to a decline in the number of catalogs and direct mailers distributed.

Administrative expenses for the first quarter increased to $9.9 million from $9 million in the comparable prior year period due primarily to higher corporate personnel and other costs necessary to support our growth, offset by a decline in professional fees as a result of our IPO readiness efforts in the prior year. Also included in administrative expenses in the first quarter were $500,000 related to the secondary offering. Other income, which includes advertising expense reimbursement from indirect retailers as well as revenue from outlet sale tickets, was $2.6 million for the first quarter compared to $2.4 million in the prior year.

The resulting operating income from the first quarter increased 10.2% to $19.1 million, or 18.8% of net revenues, compared to $17.3 million or 20.4% in the prior year. By segment, operating income in our Indirect business declined by 3.5% to $21.7 million compared to $22.5 million in the first quarter of last year, with operating margin of 38% in the first quarter of this year compared to 41.6% in last year's first quarter. Operating income in our Direct business rose by 27.1% to $12.4 million compared to $9.7 million in the same period last year and operating margin decreased to 28% from 31.5% in the first quarter of last year reflecting the investment for our market entry into Japan.

On a GAAP basis, net income for the first quarter was $11.2 million or $0.28 per diluted share compared to net income of $16.8 million or $0.47 per diluted share in the prior year. Net income for the first quarter of fiscal 2012 reflects a 40.1% effective tax rate. On an adjusted basis, assuming a normalized effective tax rate of 40% for the first quarter of last year and adjusting for increase in the number of shares outstanding, net income for the first quarter increased 10.1% or $11.2 million or $0.28 per diluted share compared to $10.2 million or $0.25 per diluted share in the prior year.

Key balance sheet highlights as of April 30, 2011, include cash and cash equivalents of $4.3 million compared to $14 million at January 29, 2011, reflecting continued paydown of our credit revolver balance. Inventory at the end of fiscal 2012 first quarter was $101.9 million, up from $96.7 million at January 29, 2011. This increase quarter-over-quarter reflects higher raw and semi-finished inventories, higher store level inventories in line with growth of new stores, and growth in retired inventories.

Subsequent to the outlet sales, we wrote down certain inventory by $1.4 million to recognize that some older, special collections inventory that was not liquidated during the outlet sale will likely sell below costs. Debt outstanding at quarter end was $62 million, a reduction of $5 million from $67 million at the end of fiscal 2011. Before I review our updated outlook for fiscal 2012, I would like to provide an update on input cost increases we are experiencing. Consistent with our comments on the fourth quarter conference call, we are proceeding with a retail price increase with our fall release 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% of the average unit retail.

The resulting retail price increase will enable us to offset a significant portion of the increases but not all of the cost escalation. On a full year basis for fiscal 2012, we continue to anticipate that gross margins will be impacted by approximately 50 basis points. We believe this is the right balance between preserving margins and continuing to provide value to our loyal customers.

Turning to our outlook for the second quarter of fiscal 2012, we expect net revenues to be in a range of $95 million to $98 million. This revenue guidance reflects a slight deceleration in sales growth during the month of May. The net revenues related to the Dillard's launch will not have a meaningful impact in the second quarter since the initial shipment is limited to the 35 stores launching in July. We expect a moderately smaller reduction in gross margin for the second quarter compared to the 170-basis-point decline we reported for the first quarter. Margin outlook for the second quarter reflects the previously discussed impact of the higher input costs.

Diluted earnings per share is expected to be approximately $0.27 to $0.29 for the second quarter including an investment of approximately $0.03 to support our market entry into Japan. 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 are raising our outlook for net revenues to a range of approximately $430 million to $435 million. This includes shipments to an additional 30 Dillard's stores that will begin in September. Our initial estimate of Dillard's net revenues for the fiscal year is approximately $1.4 million to $1.6 million, primarily in the third and fourth quarters.

Consistent with our fiscal 2012 first quarter guidance, gross margin will be impacted by approximately 50 basis points for the year due to input costs with the majority of pressure coming in the first half and easing in the second half of the year as we institute price increases beginning with our fall release which launches in July. Diluted earnings per share are expected to be approximately $1.27 to $1.30. This estimate includes a net investment for the full year earnings per share of approximately $0.08 versus the original guidance of $0.03 to support our market entry into Japan, 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 build-out of 14 to 16 new stores. With that, I will turn the call back over to Mike for some closing remarks.

Thanks, Jeff. As I stated previously, we're very pleased with our first quarter performance. Our brand and products are resonating with consumers and we remain focused on executing our growth strategies. In closing, I would like to thank all of our team members for their continued hard work and dedication to serving our loyal customers. We have a unique culture that attracts passionate and motivated people and this will enable us to continue our successful growth into the future. Operator, we're now ready for questions.

(Operator Instructions) And please hold for our first question. Erika Maschmeyer with Robert W. Baird. Please go ahead.

Thanks. Good afternoon.

Hi, Erika.

Hi.

Could you talk a little bit about what the shops will look like at Dillard's and if there is a geographic focus? Does this help your expansion last and a little bit about your decision making go with Dillard's? I know you mentioned a little bit on the call, but anything else that you might want to add, and then when you might think about expanding beyond the initial 65 stores what you're looking for? Sorry, I know that's a lot built into one.

We'll try to cover all of that. I will start and then I think Roddy can join in. I guess, starting with the decision to enter the department store channel in the first place, we realize that many consumers who are shopping for handbags and accessories shop exclusively in department stores. So we knew that was an opportunity to continue to expand in under penetrated markets.

Understanding that, and making that decision, we looked at the universe of potential partners, kind of considering where we saw our brand in that channel, and considering kind of that limited number of potential partners, we did a deeper dive in terms of kind of their footprint and geographically speaking the other brands that they carry, the level of customer service they provide. And really what was as important to us is, as other factors, was kind of the receptivity at the executive level of the potential partner, and we found all of those kind of key criteria lined up when we looked at Dillard's.

Dillard's is based in Little Rock, Arkansas and primarily, their footprint primarily lays across the Southeast and South. They do extend into the West and that will give us opportunities to expand into some of those significantly under penetrated markets West. Those were the factors that led us to that particular partnership. Roddy, do you have any comments on that?

Yes, just sort of following up on the other part as far as how we might grow, one of the things that was important, and having that executive level sponsorship was key, was to making sure we're both focused on long-term success. So we're going to be very diligent on both of our parts as to how we might grow, to have roughly 300 stores, can't say whether we'll even get to 300 stores. We want to be very diligent in how we grow. We're going to look at success at the end of this year, evaluate that, and then consider how we might expand next year.

If we expand next year, all of those stores will fall into the back half and, again, it would probably be moderate growth as we think about it. On the visual merchandising side, we will -- the merchandising display will be in line with some of the other displays in their stores, particularly in the stores that they recently remodeled. At the same time, we'll try to feature the brand in the best way possible and something that showcases the brand. One of the things we'll be doing during this period is also thinking about whether a broader merchandising solution closer to a shop within a shop makes sense and will actually drive sales, and that will be part of the decision factor as we look going forward how we can expand and what the merchandising solution looks for the long term.

Great. So then you will start out without the categories merchandise together and not on Vera Bradley fixtures but evaluate the potential to do more of a shop-in-shop with Vera fixtures and all the category merchandise together?

No. Just to correct, it will be a -- handbags and accessories, which is the assortment we're going with, will be merchandised together but it won't be the shop within a shop that you might see, sort of how Ralph Lauren presents it. It is important to us, and we have learned early on with department stores, that the brand needs to be merchandised together. So it will be featured together, but it will be featured together as some of the other primary brands that you see in their store are done.

Great. About how much square footage will you have in each store?

It is going to vary depending on the location itself. I think, Mike, do you remember what -- yes, I think probably, it is hard to say.

We don't have the exact answer for you in terms of square footage, but the brand will be well represented.

Yes. It won't be small, but it won't be large, too.

Perfect.

Not trying to dodge your question, but that's one of the items we're working on right now.

I think the other important thing to note, Dillard's will be flexible in terms of allowing us to employ certain branding elements within our space so that we'll be able to distinguish ourselves against other brands within the handbag and accessories area within the store. They have shown some significant flexibility in terms of working with us relative to the visual aspects.

Will there be a gross margin impact ultimately? I know you have got, have a nice margin profile with your indirect retailers?

Yes. So, Erika, this is Jeff. The way to think about it is consistent with the department store channel gross margins tend to be a little lower because of mark downs and advertising and some other components. But supporting that business is also a lot less expensive than our indirect business. So expect our gross margins to be a little bit lower on that business, but our operating margins to be very consistent with our independent channel, and I think part of the reason we like the Dillard's model, I think they have been extremely flexible in the initial discussion.

There is high level support within the organization, and some of their elements, such as advertising, is something that we can opt into so it is not a forced participation. So I think overall we feel good about the financial picture as well.

Great. And then are you still evaluating other national chain and department store partnerships?

Yes. There is no exclusivity expectation at Dillard's and we are looking at other potential national partners.

Great. And then on the numbers front, your new store productivity looked a little bit lower than it had been running in our model. Is there anything around that?

No, nothing material.

Okay. Probably just timing issue.

Yes.

Perfect. And then could you give us, through your initial thought, around sales for Japan this year?

You know, we haven't guided to specific sales, and part of the reason that we have not is first of all what we said was that this is really introduction of the brand to Japan and it's really a brand building year, so sales are not the key driver. The pop-up stores have relatively modest revenue because they run for short period of time, they are temporary by design. The bigger piece of revenue was anticipated to come from the launch of our e-commerce business and with the natural disaster in Japan, the timing of that, obviously, has been altered.

For instance, we had a major consumer event that we had planned in April that had to be postponed because it just wasn't appropriate given what the country was going through and so that has been replanned for June. And some of the other events that were planned to drive traffic to the website and build awareness for it, that timing has been altered as well. So we haven't given specific guidance and I think we need to see how some of these events play out and the timing of them before we can update anything concrete on guidance.

Perfect. And have you done a study of your unaided brand awareness in Japan?

We have not, no. You can think of it as very low.

Yes. That makes sense. Thanks so much.

Let's go to Neely Tamminga with Piper Jaffray.

Great. Good afternoon. Can you guys hear me?

Yes.

Okay, okay. All right, good. Phone issues here in London. So question for you on the guidance for Q2. Can you repeat again what you said about the trends in May? Was that acceleration or deceleration that you have been seeing in trend?

Yes, so what our guidance was that we saw a deceleration and the reason that we wanted to point it out was that, I think, post-Mother's Day what we saw was that traffic in our retail stores was a bit lighter than what we have been experiencing. So we're still very confident in the overall quarter. We're confident in the guidance we were able to give and the fact that we did raise no guidance for Q2, but we just wanted to point out that, I think, consistent with some of the headwinds facing the consumer right now that we did see some lighter traffic in the second half of May.

Okay. And then I guess related to that, then, I don't think you mentioned it or what's the underlying comp driver and kind of how should we think about the composition of the revenues?

Yes, so our underlying comp driver in from a comp store standpoint over time has been traffic and so you should continue to think that it will be traffic as well. You will get a little bit of AUR with the price increases going into effect, although those are relatively minor, so it will continue to be traffic.

I was thinking more specifically what is embedded in your plan for Q2, Jeff?

In terms of the comp store --

Comp store sales, as well as the Indirect program.

We don't guide specific to comp store growth percentages.

Okay. And then just wondering if you guys can maybe characterize qualitatively for us how you're feeling about the portfolio of brands, or portfolio of patterns, and how maybe they're performing this year versus last year at this time? Are you seeing like a wider dispersion of good performing patterns this year as you head into the back half on the reorders, but some sort of qualitative commentary behind how you are feeling about the patterns would be helpful.

Yes, I will start and then Roddy and Jeff can chime in. Generally speaking, we feel very good about the pattern assortment that we have. We spoke a lot about kind of the growth over time of that portfolio and the fact that by doing so we have a lot of ways to win within that portfolio. But recent launches of the Signature patterns have been in line with expectation, and given the response that we're seeing from our independent retail partners to the fall season, we have great expectations for that as well. Roddy, any color?

Yes. I think one of the key things is we have tried to approach the seasons from, increasingly with a common theme, and we're really putting that into effect for the most part for this fall and that's really resonating, the back-to-campus theme, the marketing materials behind it, the overall look and feel of the collections and the products and the assortment are really resonating well with the retailers. So qualitatively speaking there has been a good response to fall.

Yes, and we're about, just add to that, we're about halfway or more through our early order period for our independent retailers and based on what we have seen of orders booked to date, we feel really good about how that collection is being received.

Okay. That's really helpful, Jeff. Just one more question on inventory. I don't think this was really addressed. How are you feeling about your inventory levels, the currency of the inventory? There's, obviously, a lot of moving parts but it is a relatively big increase relative to sales. So, again, could you just kind of frame up for us how we should be thinking about inventory flows relative to sales maybe through the balance of this year or the currency of the inventory?

Sure. Let me go a little historic perspective first. Inventory is something that, obviously, in this business has to be continuously and aggressively managed and we have talked a lot about the fact that inventory over the last several years, sort of normal inventory levels and normal supply chain was greatly interrupted with the economic downturn, and so a couple of just macro statistics. So traditionally we have had inventory turns in the 1.5 to 2 range. We're currently at 1.6 at the end of Q1.

Inventory as a percent of sales, again, has been -- is relatively in line approximate if you look back over a number of years. And just to give you some perspective, so in, if you look back at quarters in the past, in 2009, calendar 2009, we had inventories of about $50 million on sales for the quarter of $71 million, and that represented one of the points at which we had lean supply chain significantly.

If you look at calendar year 2010, so last year, we were at $73 million of inventory on a quarter with $85 million of sales, and I would say that at the end of Q1 last year we were getting more towards a normalized supply chain, not fully there but getting there. And then, obviously, this quarter ended with $101 million of inventory and $101 million of sales. So I think our inventories are definitely at what I would call a sort of normalized and full supply chain, and I think the ongoing task for us is to continue to make sure that inventories do not get out of whack.

I think what we do feel good about right now is that we have inventories to fully service our business. There is some inventory growth that's related to the fact that we're building stores. We're also building -- we're also able to convert some of our older fabric that traditionally would have been discarded. We're able to convert some level of that for our outlet channel, our growing outlet channel, and about 60% to 70% of our e-commerce sales do move with some level of discount as one of the primary vehicles for outletting retired inventory.

So I think overall right now we're continuing to aggressively manage inventories, and I think from a retired inventory standpoint to the extent that there are any issues, we're addressing them. So as I mentioned on the call, we did take an inventory write-down of $1.4 million specifically for some older special collections that we weren't able to move at the outlet sale.

Okay. Great. Thank you, guys, and good luck.

Thanks.

Thanks.

Let's go to Jennifer Davis at Lazard Capital Markets.

Hey, guys. I have a couple of clarifications first. On the inventory write-down, I guess, did you take that to your outlet stores at all and how come you don't feel comfortable that it will sell there? I guess, what is the merchandise specifically? Then I have some more. I will let you answer that one first.

Let's start with that. Our normal cadence when we break prices as we've talked about, is when we break price on retired inventory we typically, the first mark down is 25% and then over time depending on the merchandise can be up to 40% off. What we typically do is we typically start with limited mark downs in our retail stores and on the Web and then move inventory into our outlet stores.

Then we have a long tradition of the annual outlet sale. So the outlet sale this year was a little over $11 million in sales, and that's a combination of things that have been retired to varying degrees. So the inventory specifically that we took the write-down on was older inventory that was primarily special collections, and some of it is inventory that we have -- that has been through our outlet stores or on the Web and then has been through our outlet sale, and in some instances it was there for more than -- has been there more than one year. And so we made the determination that some of that is going to need to move below cost.

Traditionally this has been a business that has had very little issue with selling retired merchandise at cost or above and we still believe that is primarily the case. With regard -- one other aspect, with regard to our outlet stores and our outlet stores specifically today, the currents mix is approximately 80% Signature product in terms of assortment and as you can imagine, it tends to merchandise better, it tends to be easier to, for the customer to shop.

So some of our special collections, stationery, eyewear, doesn't necessarily lend itself to being merchandised as well in our outlet stores. But this is some older stuff from awhile ago that we thought it was prudent that you clean it up and move it on. So, for instance, just one representative item that is in there, when we brought the licensing for paper in-house, we had some old inventory from our former license partner and we bought that inventory because we wanted to be able to control the channel of how it was disposed, and some of that inventory is now aged to a point where we think that it will move but it will move below cost.

All right. Got it. Thanks. And then quickly on Japan, I think, did you say that your full year estimate includes an $0.08 negative impact and your previous guidance had included $0.03?

That's right.

So there is an additional $0.05 in there?

That's right. Yes. That $0.05 really represents our best forecast at this point of the difference in revenue. So we think that because of the natural disaster and the delay in the launch of some of the consumer events to drive awareness to the Web, we think that that will affect the timing and the build of e-commerce revenues. That's the reason for the change.

Long term we believe that this is going to be a nice business and I think we just want to reiterate that the two pop-up store experiences so far, the one at Isetan and the one that's underway right now at Atre are both being very well received by consumers. We've have had good traffic, the pop-up stores themselves while they don't generate a lot of revenue have exceeded our expectations to date. And so, again, I think it is a mixed picture because of the timing and being able to reach consumers, but the consumers we have reached, the reaction has been very favorable.

Yes, I will say that I have seen some blogs and stuff and that it looks like it has been a very favorable response. Going on with that, your revenue guidance, it looks like you increased it $2 million to $3 million. Japan e-commerce is going to be lower than you originally anticipated. I think you said Dillard's would be about what, $1.4 million, $1.6 million, so I guess where is that differential coming from?

Yes, so the differential is, think about it in terms of the rest of the business, so I think our outlook for the balance of the year is that we expect both Indirect and Direct to perform well and we just mentioned the fact that our sell-in in Q3, which is our sort of our earliest window into what the fall collection looks like is being where well received.

Okay. And then one last one and I am sorry, I don't mean to hog it. Can you break out inventory a little bit in terms of units and costs because, I mean, prices because I am assuming some of the cost increase has something to do with the inventory increase? And then on your price increases, the 5% you are taking on the Signature items, I know you're taking it on the new collections but are you taking it on old patterns as well? Thanks.

I will start with the second piece first. We're not -- we're taking the price increase only on our -- we're launching it with, in July, with the release of our fall pat patterns. Any styles that are in the lineup already will be retagged, so we're basically line pricing. So if you go into a store after the launch, all of the items in the Signature Collection, and if you recall, we have 90-plus styles where pricing is slightly over half of those. Those that we are pricing we're pricing with that introduction, but we will also retag any styles in the older patterns so that from a retail consumer perspective everything will be line priced.

Great.

And then in terms of the cost increase in inventory, so some level of higher cost is flowing into the inventory, but it is not material in terms of the overall change because if you recall our sort of cost increase on a full-year basis is about 5% which is roughly the amount of the price increase.

Okay. Thanks. Good luck.

Thanks.

Thanks.

At KeyBanc, let's go to Edward Yruma.

Hi. Thanks very much for taking my question. How about the inventory write-down? Can you talk about, then, your comfort level with the inventory that you didn't write down and do you have other inventory that's kind of approaching that age level or is this really just a cleanup?

Yes. So, again, just based on the way our business model works, by definition you continuously have retired product, so our ability to sell retired product, we feel good about and we have a long history of doing so, especially on our Signature inventory, so our traditional cotton quilted products.

So we believe that continues to be the case, and, again, given the model we have, we have obviously 3,300 independent retailers selling primarily full priced current patterns. We have our own retail stores. We have the Web, and then as collections retire, we have the ability to do limited mark downs across those traditional full price channels, also utilizing the large Web business we have, our growing outlet stores and our annual outlet sale in Fort Wayne. So in terms of the business model itself and our ability to outlet inventory in a brand-right way we think we've built the channels to do so.

With that said, we're constantly vigilant about where inventory is going to go and how it is going to get liquidated. And in this case, again, just to reiterate, this was a relatively small write-down on some non-Signature special collections, some of which were aged and had attempted to sell them through our traditional outset channels and realized that in order to liquidate them they will have to move below cost, but we feel comfortable.

Got you. I think one of your longer-term goals has really been to expand your reach in the West Coast. If I recall correctly, Dillard's doesn't have a strong presence in the West Coast, outside of maybe Arizona. Can you talk about things you're doing to improve your penetration out West?

Yes. That's right. They will give us an opportunity to extend into the West but not as much as we ultimately plan to do. We still plan on expanding in the West, and we're continually in the process of developing and refining our strategies for improving in the West and we're seeing improvement. It is just on top of a small number.

I will give you an example, that 14% increase which is especially a 30% increase in brand awareness over a year ago saw 50%-plus percent of that in the Western region itself. We're actually getting more awareness in the West. Our Western region from our on the independent retail partners continues to be the fastest growing part of the Indirect business and our western stores are also growing and comping well, they are just starting with a smaller base. There is a lot of ways we're continuing to focus on building the West. The department store channel is one element in that and as we look at other partners in the future they will continue to be a part of -- that will continue to be a consideration.

Got you. And two more housekeeping questions. I know you cited the addition of luggage as one of the key drivers in the Indirect sales growth number. Can you tell us how much of the Indirect sales growth it contributed and what the Indirect number would be ex- luggage?

You know, I don't have the exact number in front of me. But it is relatively small, so as we talked about before with rolling luggage, what we said on our previous calls was that we were reintroducing it and so, again, that was a category that was licensed.

We've brought that in-house and said that we would relaunch it in a brand-right way, but that it would not be a significant category initially in that we're testing the initial response to it and that over time in future years it would grow to a more meaningful category. It is a relatively small amount of that growth percentage.

It is a pretty small assortment as it is now and we want to make sure that we get everything right before we continue to grow that. And that includes not only just operationally on the product development side but also making sure we have the right channel partners for us and certainly our entry into the department store channel opens up some good distribution opportunities for us.

Great. And one final question. On your slowdown that you have observed in May, I know that you've cited some of the weakness in your own stores. Have you seen a resulting impact in the Indirect channel as well? Thank you.

Yes. I would say not really. Again, it is qualitative because this is anecdotal feedback. Quantitatively speaking, we mentioned before that we had, in the last call, that we had a softer than expected what we call EOP or initial sell-in of the summer season. Some of that was made back up in reorders and we're continuing to see that so there was a little bit of too much leaning of inventory in that channel and I think we're seeing some of that. I don't think we're seeing anything more or less than, have any data that it's any more or less than what we're seeing in our own retail stores.

Great. Thank you.

Let's go to Liz Dunn with FBR Capital Markets.

Hi. Thank you for taking my question. I just want to clarify a couple of things. So what you just said in response to Ed's question was inventories are two lean, or are a little bit lean in the Indirect channel? Is there any ability for them to sort of buy in season to get inventories a little higher and do you think that impacted your sales in that channel at all? And then I just want to kind of drill down a little bit on this May issue.

It sounds like you are really pleased with the reaction to recent product introductions, so I think the stores, I was in a couple of them this weekend, are on sale right now so you have seen a slow down when you went on sale. Does that suggest your customer likes newness more or can you just help me understand that? Do you typically see a slow down after Mother's Day? I guess I'll start there.

Let me start with the first part and then Roddy and Mike can jump in as well. Let me just clarify with regard to our Indirect channel, it is less about the fact they're lean right now. We think that they are probably appropriately stocked/lean and I think their overall bias especially if you are an independent retailer and you made it through the last two years your bias is to be lean on inventory.

And I think what we saw in the early part of the year was we felt like they were coming out of the holiday season in a good inventory position, so I think for a majority of them they had a good holiday season, we had a good lineup in terms of our special collections for holiday and I think they came out of the holiday well. We had a good sell-in of our spring early order period. And then we had a lot of bad weather in February and March sort of throughout the country. What we saw was the independent retailers sort of responding accordingly from an inventory standpoint.

So I think that they have a general bias towards being a bit lean just given the economy and some of what they have seen. They absolutely have the ability to reorder, and I think if there was anything really concerning to them from a macro standpoint I don't think we would be seeing the kind of response to the early order periods for fall that we are seeing right now.

Okay.

And then --

Oh, just the second part of the question?

Just on the sale period and, I guess, as it relates to May in general, one, our two primary periods for sale are in June and then after Christmas. And I say two primary periods, that's where there is a fair amount of traffic specifically related to all-price merchandise, and this is both in, at all stores in our retail partners' stores. If you have performance and channel checked and seen some products on sale, that's just a common -- they have some retired product on their own in their own stores and may be on sale and they're trying to clear that out so they can open up some, more open to buy for the new collection and the new seasons coming in.

I don't think there is any trend towards wanting any more or less newness. We definitely know that our consumer likes new patterns, they are excited about the releases of the patterns, but that's been consistent over time. There has not been a shift in that.

Okay. In terms of Dillard's, do you -- I apologize if I missed this. I am juggling a couple of calls this evening, but will you go into malls with your own stores that Dillard's is in or will that sort of take care of you in those particular locations? And is there anything in the Dillard's agreement that precludes you from partnering with another department store retailer?

I will start. There is no exclusivity agreement with Dillard's. They're clear in terms of our strategy to continue to expand and that may include another department store customer. So that is not an issue. In terms of their locations relative to ours, we fully expect to kind of coexist within certain malls within their footprint and we have seen in cases where we have independent retailers within malls, where we have our own stores, both locations continue to grow and build market share. We don't see any challenge there necessarily in terms of us both being in the same center.

Yes. Out of that 65 there is a handful that there will be some overlap, and when we look going forward, looking at new stores, as we look at a center, we look at all of our retail partners, whether it is Dillard's or a future partner or one our independent retail partners and understand the overall impact and that is just one of the factors in this decision.

Okay. And then just one more, if I may, and I will hand it over to the rest -- okay.

Liz, just as a postscript on Dillard's, we actually will, when we do the initial launch at 65 stores, there will actually be a number of malls where we actually have a Vera Bradley retail store today.

Okay. All right. Great. And then just, finally, to clarify on guidance, so you raised by $0.02. You beat by a penny. You raised by $0.02, but you're saying there is $0.05 embedded that you didn't anticipate from Japan, so really it is a $0.07 raise if you ex- out the Japan impact. What were the positive factors influencing your guidance revision for the year? Was it primarily sales or were there some other positive factors?

So it is primarily sales driven, so you can see we took up sales guidance, we feel very good about that. We feel like the cost profile for the year is stable, so we feel like we have a good handle on input costs for the balance of the year and we have the price increase taking place. And then some of the encouragement early in this quarter for the fall themed back-to-campus Signature release, and as we mentioned in the prepared comments, feel good about how the winter/holiday collection is coming together as well. It was a combination of all of those factors.

Great. Thanks so much.

Thank you.

Evren Kopelman at Wells Fargo, please go ahead.

Great. Thanks. Good afternoon. I had a question on the Dillard's. Can you talk about how broad of an assortment you are starting with, maybe a number of styles or SKUs? The reason I ask is I am curious if we take kind of your guidance for that $1.4 million, $1.6 million divided by the 65 stores, I get $20,000, $25,000 for a few months. And when I annualize it, somewhat comparable to your, kind of your average Indirect door. So I am just curious if that size is comparable in terms of the representation of product and kind of in the future is there going to be a lot of opportunity to grow that in a Dillard's store?

I will start and then I will let Roddy contribute here. Remember that this is our initial entry, for all intents and purposes, into the department store channel. And so starting out we're going to start with an abbreviated assortment, primarily handbags and accessories and it will be limited to the new colors initially. And so that is a pretty small subset of the overall Signature assortment.

As we get a better sense for that channel, and how we may grow, we fully expect the assortment to grow over time. But this is, I think, kind of the appropriate, kind of deliberate way to enter the channel in terms of product assortment and we'll look to grow that over time including potential new categories that makes sense in a department store setting.

We wanted everyone -- we wanted to be able to provide some level of initial guidance but the reality is until we're there, until we really understand how the consumer responds and how things go, it is difficult to do anything more than that. We want to provide some guidance and be conservative but we feel really good about the potential at Dillard's.

Okay. That's very helpful. And then can you talk about the gift shop customer's reaction to you entering a department store?

We are announcing to the Indirect channel this evening kind in conjunction with this call. We anticipate there to be some question around opening more points of distribution, but we traditionally have that when we open one of our own stores. When we open another independent specialty retailer in a market those retailers who had the brand at times can express some disappointment in terms of opening more points of distribution. But what we have demonstrated over the period of time that adding points of distribution builds awareness for the brand, increases our market share, and points of distribution kind of grow in concert.

So while there may be some level of anxiety expressed, we fully expect as we have in the past to demonstrate that it is going to build the brand and build growth.

And, Evren, I will add that we, a few days ago, communicated to the Indirect sales team to make sure that they were fully prepped and had a chance to ask any questions and I've had some follow-up conference calls and the question -- they don't feel, there is not a great amount of concern out there. Not that there won't be a concern, but I think they believe our retail partners will take it in stride with our other growth efforts.

Great. And lastly, you mentioned the refinement in targeting online consumers. Can you give a little bit more color on that and how that drove, I think you said a higher average ticket online? Thank you.

Yes. So specifically we mentioned before the marketing database that we brought online towards the end of last year and really started using and I believe we mention that had we were actually planning to implement it on the email side for Mother's Day as part of that campaign, and we saw a lift in sales, looking, verabradley.com this Mother's Day compared to last Mother's Day, a lift in sales, a lift in AUR, while at the same time because we have just because of the promotional nature much like we had at the holiday period we had an increase in the amount of discounting that went on so the number of the percentage is roughly two-thirds.

It was, prior to that it was about a half, Mother's Day went back up to two-thirds of our products are discounted but the actual level of mark down was less. Even though we sold through some additional retired product, we actually had higher AUR overall and we attribute most of that to just smarter email marketing, sending the right emails to the right customer who is actually interested in the particular product we're selling.

Our next question will come from Dana Telsey with the Telsey Advisory Group.

Good afternoon, everyone.

Good afternoon.

Hi. As you think about the inventory write-down, in the past is it typical to have inventory write-downs at the end of a season and should we expect this given that your new [public Company] is something that we should just expect in the ongoing course of business? And then as you think about the Direct business, new store productivity, how is that ramping up relative to stores you have had in the past? What are you seeing and do you foresee a need for more price increases in the future? Thank you.

Sure. Yes. Okay. Let me start first with inventory. So inventory is something that, again, as I mentioned before, you have to proactively manage every day on an ongoing basis. So traditionally to the extent that there are any inventory write-downs they traditionally came on the raw material side. So it was typically on fabric for retired patterns that was not going to be fully consumed and so you would at the time that they were retired you would fully reserve for the remaining fabric.

That has actually changed a bit in the sense that because we now have an outlet channel with outlet stores specifically, we're able to convert some level of that product into finished goods that we sell in that channel. So what -- if we would have been public for several years, what you would have seen is that our traditional sort of level and cadence of reserving raw materials has actually decreased because we're able to convert some level of that fabric. On finished goods, traditionally this business over most of it's history was only Signature items and our ability to liquidate Signature cotton quilted items has always been very strong, and so traditionally we have not reserved for much if any of Signature items which we believe remains true today.

The things that is relatively new in the last two plus years we've entered a number of new categories, stationery, eyewear, and others where we're still learning. We've also increased the cadence of our special collections over the last several years, and so I think we're continuing to learn about those collections. We're continuing to learn about sell-through and how those products once retired get liquidated. And so we're not, obviously, can't give you any forward guidance here, but that is sort of the dynamics of what's changed.

And, again, specifically to just reiterate the $1.4 million write-down that we took was on some older special collections that had very specific, that we literally went by collection, by SKU and determined which items we thought there might be some issues in liquidating at full cost. But we have a long history of for the majority of our inventory at liquidating at full cost. Your question on new store productivity.

I think we feel good about the new stores that are opening, so the new class of stores this year that are coming online, I think feel good about them in relation to our target first year economics, so believe that those will come along nicely and should not be an issue. Then repeat your third question if you would.

Do you see the need for further price increases down the road?

I think from a price increase standpoint, whenever we introduce new styles, we always look at pricing relative to those products compared to adjacent products, so there is always the opportunity to correctly price and/or price at higher margin where appropriate anything that's new to the lineup, and it also gives you an opportunity to rebalance some of the pricing of the current lineup.

This was, because of the sort of unprecedented rise in cotton and input costs this was the first time that we broadly priced up across the portfolio at least in recent years. And so specific to input costs, obviously, again, we haven't given guidance but I think we feel comfortable that pricing action we're taking for this year puts us in good shape through the balance of the fiscal year and we think we have a good handle on input costs for the balance of the year. The nice thing in the future is if there is a need to price, we believe that because of the relatively low average unit retail around $30 and the fact that we have been conservative on pricing, we think there is room to do so with the brand.

I think it is important to point out that apart from our costs driving those decisions, there is opportunities for us to take a more strategic look at the product line and take price where it makes sense in terms of what the consumer will bear, so some of the that work will be ongoing.

And just to follow up on that first, just on the new stores, the new store economics, it is driven by the top line which is in turn driven by traffic and excitement to the consumer and we're continuing to see that. Most recently Prudential in Boston, a great start there, Stonebriar in the Dallas area. We can no longer call that a new market but it certainly continues to be under penetrated if you look at the excitement that comes in the actual sales and traffic that are coming into those stores, so we're very excited about the stores we have launched so far this year.

Thank you.

Thank you.

We have time for one final question. Let's go to Morningstar, Peter Wahlstrom.

Good afternoon.

Thanks. Hello, Peter.

Can you talk a little bit about the real estate and maybe provide an update there? Are you seeing, in terms of rental trends coming in line with expectations and as you maybe look beyond fiscal 2012 do you have a level of comfort in finding what you are looking for in terms of availability at mall?

Yes. On the first one you say rental trends. Are you speaking specifically to economics?

Yes, correct.

We have seen a little bit of that just, in the centers where we have been looking primarily the A, the major regional malls, and key lifestyle centers, they weren't greatly impacted by the recession. They still had great occupancy rates, so we didn't really see a decline in the rents in those centers. Consequently, we haven't really seen a strong increase in them.

What we did see during the downturn was some much better tenant allowances and we are continuing to see those, and at the same time we're continuing to see great opportunities and great locations within the mall themselves. Most recently we were at ICSC and we are -- there is a lot of developers continue to want to meet with us and provide us opportunities to grow with them. I don't know if, Mike was actually there, he can speak to it.

I accompanied the Direct team on that particular trip and I was -- I have been around long enough to remember the days when we started the Direct channel and it was great to see after a few years of not being there the response that we got from the developer community. The day I was there I think we did 18 half-hour sessions with a number of different developers and the locations within the centers are where we were seeing kind of the most improvement over the course of time.

We have got a significant amount of leverage in the discussion in terms of where we land in the mall, given the economics of our stores kind of given the newness and the freshness that they bring to the center. And so we're having some kind of very productive discussions with a number of developers as a result of ICSC and other portfolio sessions that we have had.

Very good. Thanks. And, finally, circling back to some of the weather trends that you experienced in April and how they proceeded into May, have you quantified how much of an impact the unfavorable weather had either on sales or traffic and help me think about whether those sales may have been lost? Are they shifted into second quarter? Is the consumer really event driven and will wait until the next holiday or event, or is that something where they would instead go online and some of those sales actually ship to a different channel?

Let me start and then, Roddy, jump in. Just to clarify the weather impact, we really saw it in our independent channel at the beginning of the quarter, so we really saw it in February into sort of mid-March, so until the weather started to get better. And the phenomenon we saw was, if you saw in the quarter results, Indirect was not as strong because of weather but our Direct stores and our e-commerce business were pretty strong. So I think there was certainly some level of trade-off of folks less inclined to make it to their local specialty retailer that shopped elsewhere to the extent they wanted, and to some extent I think with weather there probably are some lost sales if you don't get back.

Yes, but we did see -- I mean, the initial sell-in of the season for what was summer, that launched in March, was lower than our expectations but some of that was made up in Q2 during the reordering process.

Okay. Very good. Thank you.

Thanks, Peter. Take care.

And, again, we now conclude our question-and-answer session. I will turn the conference back over to the Company for any closing remarks.

Yes. I just want to thank everyone for joining us this afternoon and say that we're very optimistic about the business going forward as reflected in our Q2 and full year guidance. Thanks, all, for joining us and we appreciate your time.

Once again, we conclude today's conference call. Thank you very much for your participation. Have a great day.