使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to today's Vera Bradley second-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 your questions. One final note, today's call is being recorded.
And now I'd like to turn the conference over to Jean Fontana of ICR. Please go ahead.
- IR
Thank you. Good afternoon, everyone. Thank you for joining us this afternoon for Vera Bradley's fiscal 2012 second-quarter results conference call.
Hosting the call today are -- Mike Ray, Vera Bradley's Chief Executive Officer; Jeff Blade, Chief Financial and Administrative Officer; and Roddy Mann, Executive Vice President of Strategy and Business Development. On this call we will review our fiscal 2012 second-quarter performance, provide an update on progress against our long-term growth plans, review our outlook for the balance of fiscal 2012, and conclude with a question-and-answer session.
Before we begin, we would like to point out that this presentation contains forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations, estimates, forecasts, and projections about our industry and our Company. These statements are not guarantees of future performance, and involve risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from those in the forward-looking statements. Certain of these risks and uncertainties are described in the disclosure materials filed by Vera Bradley with the Securities and Exchange Commission. Vera Bradley disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
This presentation also contains certain non-GAAP financial measures. A reconciliation of this non-GAAP information to the most directly comparable GAAP financial measures, along with other financial and statistical information for the periods to be represented on this conference call, was included in the press release announcing our earnings, or is posted on your website, which may be accessed through the Vera Bradley website at www.verabradley.com under the section entitled investor relations.
In addition, we routinely post important information for investors on www.verabradley.com in the investor relations section. Through this website, we will share non-public information as a means of complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor the investor relations sections of our website in addition to following our press releases, SEC filings, public conference calls, presentations, and webcasts. A rebroadcast of this call will be available through September 13, 2011, and can also be accessed from the investor relations section of www.verabradley.com.
At this time, I would like to introduce Mike Ray, Chief Executive Officer of Vera Bradley.
- CEO
Thank you, Jean. Good afternoon, everyone, and thank you for joining the Vera Bradley fiscal 2012 second-quarter results conference call. Today we'd like to focus on 3 main topics, including the highlights of our fiscal 2012 second-quarter performance, an update on our progress against the Company's long-term growth plans, and our outlook for the balance of fiscal 2012.
During the second quarter, we continued to experience strong demand for the brand across all of our sales channels, as reflected in net revenue growth of 30%. This positive momentum is the result of a fresh portfolio of product portfolio that continues to resonate with consumers, a healthy and growing base of indirect retail partners, the opening of new Vera Bradley stores, an increase in comparable store sales, and the continued growth of our e-commerce business. These strong results are on top of an increase in net revenues of 34% in the same quarter last year.
One of the key drivers of success in the second quarter was the early July release of our fall assortment. This was enhanced by a range of new, back-to-campus theme merchandise, including popular items such as our laundry bag and shower caddy. This introduction was supported by an integrated marketing campaign that spanned all of our distribution channels, and leveraged focused experiential marketing events, targeted promotions, and social media, resulting in strong traffic and sales throughout the release.
In our Indirect segment, net revenues grew 18% during the second quarter, incremental to growth of 17% in the same quarter of last year. Importantly, we experienced solid growth across all of our Indirect sales regions, and from our key corporate accounts. This performance can be attributed to the success of the fall product assortment, the strong appeal of the back-to-campus marketing campaign, the continued strength of patterns from prior releases, and the ongoing commitment of our great retail partners.
In our Direct segment, net revenues increased 46%, reflecting strong growth across all of our channels, including full-priced stores, outlet stores, and our e-commerce business. In our stores, net revenues grew 77% in the second quarter, driven by the opening of 12 full-priced and 4 outlet stores during the past year, as well as an increase in comparable store sales of 10.5%. Comparable store sales growth in May was in the low single digits, reflecting the difficult consumer environment's impact on retail traffic, and the timing of Easter and Mother's Day that shifted sales into April. Comparable store sales growth rebounded in June and July to the mid-teens, driven by our semi-annual sale and the strong consumer response to the July launch of our fall product assortment, and our back-to-campus marketing campaign.
It's also important to note that the stores opened in the past year generated first year sales that were above our target new store economics. This strong first year performance reflects increasing consumer awareness for our brand, the evolution of our site selection capabilities, the ongoing development of our Direct team, and the improved marketing of our new stores.
Our e-commerce net revenues grew 29%, and represented 22% of total net revenues during the second quarter. The increase in e-commerce sales reflects a strong product assortment, with an appealing mix of full- and reduced-priced merchandise, as well as continued growth in traffic. We continue to build awareness through the improved use of search and affiliates, and connect with our customers in better ways through social media, e-mail capture, and the deployment of new marketing database. We currently have more than 600,000 Facebook fans, and e-mail addresses for over 2 million customers.
This strong growth across distribution channels resulted in consolidated operating and net income increases of 44% and 46%, respectively, during the second quarter. Overall, we are pleased with our performance during the period, as it reflects the continued strength of the Vera Bradley brand, and significant opportunity for future growth.
I would now like to briefly review our long-term vision for growth based on our Company's strengths, 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 our 2 primary long-term growth strategies -- expanding our product offerings and continuing to grow in under-penetrated markets. As we execute these strategies, we are focused on several key initiatives during fiscal 2012.
We continue our long tradition of bringing to market product lines that resonate with our loyal and diverse consumer following. Our merchandising, product design, marketing and sales efforts are increasingly integrated, yielding seasonal product offerings that both surprise and delight, elevating the consumer's experience with Vera Bradley. This is evident in the success of our fall product assortment.
Our winter assortment will launch on September 22, featuring the patterns -- Suzani, Rhythm & Blues, Floral Nightingale, and Tea Garden. In addition to the winter assortment, we are also selling in our holiday collection, which features an expanded range of gift items designed to drive traffic throughout the holiday season. The winter release early-order period for the Indirect channel is nearly complete, and overall, the reception has been very positive.
In addition to expanding our product offerings, we will continue to focus on growth in under-penetrated markets. We believe there is a significant opportunity to continue this growth by leveraging the strength and portability of our brand, and our significant multi-channel distribution capabilities. I would like to review a few of the initiatives currently underway.
Last quarter we announced a new partnership with Dillard's, our first in the department store channel. We believe this channel represents a long-term growth opportunity based on research that indicates approximately 35% of all handbag purchases in the United States occur in department stores. A select product assortment was introduced into 35 Dillard's locations in July. The launch has been well executed, and we're pleased with the initial results, which were in line with our expectations.
We continue to believe that Dillard's is well suited to represent Vera Bradley given their strong commitment to fashion brands, their customer-focused approach to retailing, and senior support for our brand within the Dillard's organization. In September, we will expand to an additional 30 Dillard's locations, bringing the total to 65. We will evaluate the potential for additional locations as we begin our planning for next fiscal year.
In the Direct segment, we plan to open 17 stores during fiscal 2012, exceeding our guidance of 14 to 16 stores for the year. In the second quarter, we opened 5 full-priced stores including 3 in Texas, and 1 each in Ohio and Massachusetts, as well as an outlet store in suburban Philadelphia. As we complete our new store openings for this year, we are well on our way to developing a strong line up of new locations for fiscal 2013, and continue to believe that the long-term opportunity of 300 full-priced stores plus an additional 30 to 45 outlet stores is achievable.
This focus on store unit growth is a core component of our long-term strategy of expanding in under-penetrated markets. A good example of the successful execution of this strategy is in Texas, where our penetration was limited as recently as 3 years ago. Since then, we've opened 8 stores including 2 in Houston during the second quarter. The Texas stores consistently rank among the top performing units within our store portfolio. The resulting increase in awareness for our brand is also driving strong growth of our e-commerce business, as well as the opening of 49 new Indirect retail partners in this important market during the past year.
Our efforts to enter the Japanese market continued to gain momentum during the second quarter, with the execution of 3 additional pop-up shops including 2 in Tokyo and 1 in Kyoto. Each of the temporary shops had a unique target audience, and all 3 performed very well, providing further confirmation that Vera Bradley brand resonates with a wide variety of Japanese consumers. In addition, we continue to build momentum for our e-commerce business. As previously discussed, our focus for fiscal 2012 is to build brand awareness with the Japanese consumer, and demonstrate our sales potential to major department store operators. Learnings from our initial introduction will shape the development of our long-term strategy in Japan.
Overall, we're pleased with the way fiscal 2012 is unfolding given our strong operating results through the first half of the year and the progress we've made at executing our long-term growth strategies.
I will now turn the call over to Jeff Blade, our Chief Financial and Administrative Officer, who will provide additional details regarding our second quarter financial results and updated guidance for fiscal 2012.
- CFO and Chief Administrative Officer
Thanks, Mike, and good afternoon, everyone. I will begin my remarks with a review of our fiscal 2012 second-quarter results, and then provide you with an update on our outlook for the third quarter and full year. As Mike mentioned, we are pleased with our progress during the second quarter, in which we delivered strong top and bottom line financial results.
Net revenues for the second quarter increased 30% to $104 million from $80 million in the prior year. This performance was on top of sales growth of 34% in the second quarter of last year. Indirect net revenues increased 18% to $56 million, incremental to the revenue growth of 17% in the prior year. The increase was driven by the success of the fall product assortment and strong sales of carry-over patterns from prior releases.
In the Direct segment, net revenues increased 46% to $48 million, driven by 16 new store openings since the second quarter of last year, and a comparable store sales increase of 10.5% during the quarter. We ended the second quarter with 43 full-priced and 6 outlet stores.
E-commerce net revenues increased by $5 million, or 29%, and accounted for 22% total revenues during the second quarter. The increase was due primarily to continued growth in website traffic, and a strong product assortment mix of full- and reduced-price merchandise.
Gross profit for the second quarter increased 27% to $60 million, resulting in a gross profit margin of 57.5% versus 58.5% in the prior year. The 100 basis point decline in gross margin was slightly better than our expectations, and consistent with our previous discussions regarding the increase in input costs expected during the year. Price increases were instituted on July 7, with the launch of our fall collection, and partially offset higher input costs in the quarter. We have not experienced any negative consumer reaction to the price increases.
Total SG&A expense was $39 million for the second quarter compared to $33 million in the prior year, adjusted for 1-time stock compensation expense. As a percent of sales, we are pleased that SG&A dropped by 290 basis points in the second quarter of this year compared to the second quarter of fiscal 2011. Expense management and disciplined SG&A expansion allowed us to keep SG&A growth to a lower rate than sales growth. Our SG&A expenses are grouped in 3 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 second quarter increased to $23.2 million, over $16.6 million in the prior year. As a percentage of net revenue, selling expenses were 22.3% compared to 20.7% in the prior year. A $1 increase in selling expenses was due primarily to higher store operational expenses, resulting from increased store count and costs associated with our market entry into Japan.
Advertising, marketing, and product development expenses decreased to $6.6 million from $7.1 million in the prior year. The decrease was due primarily to client and advertising costs associated with national advertising expense in the prior year. This was partially offset by an increase in Direct mail, but on behalf of our Indirect retail partners.
Administrative expenses for the second quarter increased to $9.3 million, over $8.8 million in the prior year, adjusted for a 1-time stock compensation expense due primarily to higher corporate personnel and other costs necessary to support growth, partially offset by a decline in professional fees as a result of our IPO readiness efforts in the prior year.
Other income, which includes advertising expense reimbursement from independent indirect retailers and revenue from outlet sale tickets was $2.4 million for the second quarter compared to $1.5 million for the same period last year. The increase in other income is due primarily to an increase in Direct mail, but on behalf of our Indirect retail partners. The resulting operating income for the second quarter increased 44% to $23 million, or 22% of net revenues, compared to $16 million, or 20% of net revenues in the prior year.
By segment, operating income in our Indirect business increased by 11% to $24 million, with operating margin of 43% in the second quarter this year compared to 45.8% in last year's second quarter. The lower margin reflects a better alignment of operational costs with the flow of goods, partially offset by sales-driven leverage of SG&A. Operating income in our Direct business, which includes our Japan retail business, rose by 40% to $13 million compared to $9.3 million in the same period last year, with operating margins of 28% compared to 29% in the second quarter of last year. Excluding Japan, operating margin in our Direct segment increased 130 basis points to 29.9%.
On a GAAP basis, net income for the second quarter was $13.6 million, or $0.34 per diluted share, compared to net income of $9.2 million, or $0.26 per diluted share in the prior year. On an adjusted basis, assuming a normalized effective tax rate of 40% for the second quarter of last year, excluding $6.1 million of compensation expense for bonuses paid to recipients of the restricted stock awards, and $100,000 of stock based compensation expense related to the restricted stock awards, and adjusting for an increase in the number of shares outstanding, net income for the second quarter increased 46% to $13.6 million, or $0.34 per diluted share, compared to $9.3 million, or $0.23 per diluted share in the prior year. Details of these adjustments are included in the reconciliation attached to our press release.
Key balance sheet highlights as of July 30, 2011, include cash and cash equivalents of $800,000, and accounts receivable of $44.7 million. The accounts receivable balance at the end of the second quarter was higher than comparable periods, reflecting the strength and timing of the fall product launch. Since the balance sheet date, we have collected significant receivables resulting in a current outstanding balance of approximately $26 million, and a current cash balance of approximately $6 million. Since the end of the quarter, we have paid down $10 million of debt, which currently stands at $61 million.
Inventory at the end of the second quarter was $118 million compared to $85 million in the prior year. Growth in inventory of 39% is moderately above our net revenue growth of 30% for the quarter. The higher inventory level is due primarily to a number of initiatives we have underway as we execute our long-term growth strategies and provide for an expanding base of business. This includes inventory for the next seasonal launch of rolling luggage, inventory to support new stores recently opened or opening in the near future, the Japan market entry, and the launch of Dillard's. As we complete the fiscal year, we expect inventory growth to come in line with sales growth.
Turning to our outlook for the third quarter of fiscal 2012, we expect net revenues to be in a range of $107 million to $110 million, or growth of 17% to 20%, respectively. We expect this strong growth across all of our businesses despite anniversarying a 33% comparable store growth rate in the prior year. Diluted earnings per share is expected to be approximately $0.26 to $0.28 for the third quarter. Our earnings per share estimate assumes an effective tax rate of 40%, and fully diluted weighted average shares outstanding of 40.5 million.
For full-year fiscal 2012, we now expect net revenues to be in a range of $438 million to $443 million, from our previous guidance of $430 million to $435 million, reflecting better than expected performance in the second quarter. This includes Dillard's net revenues for the fiscal year of approximately $1.4 million to $1.6 million, consistent with our prior quarter guidance. On a full year basis for fiscal 2012, we continue to anticipate that overall gross margins will be negatively impacted by approximately 50 basis points due to higher input costs, consistent with our discussion in prior quarters.
In addition, we are reaffirming our estimate of a net investment in Japan for the full year earnings per share of approximately $0.08. Diluted earnings per share for fiscal 2012 is expected to be approximately $1.32 to $1.35 compared to our previous guidance of $1.27 to $1.30 due to the better than expected performance in the second quarter. We continue to expect capital expenditures for fiscal 2012 to be approximately $15 million, which includes the build out of 17 new stores.
Overall, we remain optimistic about the back half of the fiscal year despite the current economic uncertainty. We will continue to monitor the consumer environment, and are confident in our team's ability to respond to whatever changing market conditions we may face.
With that I will turn the call back over to Mike for some closing remarks.
- CEO
Thank you, Jeff. As I mentioned before, we're very pleased with the progress we've made year to date, and look forward with optimism to the balance of this year. We remain excited about the long-term growth prospects for Vera Bradley. We have a 29-year history of success, a portfolio of distinctive products, a loyal customer following, a multi-channel distribution model, and a proven track record. In addition to these strong attributes, we are still an early stage growth Company with significant opportunity to expand our product offerings and grow in under-penetrated markets in the years to come.
In closing, I'd like to thank all of our team members and our Indirect retail partners for their hard work and dedication to Vera Bradley, and their commitment to serving our loyal customers. I believe that our current momentum and long-term prospects are the result of our unique culture that attracts passionate and motivated people, and provides an environment that cultivates creativity.
Operator, we're now ready for questions.
Operator
(Operator Instructions) Evren Kopelman with Wells Fargo.
- Analyst
Great, thank you, good afternoon. Hi, guys. One of the questions, the Indirect growth of 18% is very impressive, is there some sales maybe pull out of Q1 into Q2? Is there any shift in there? And then maybe in light of the strong number there, should we still expect more of the high single-digit type of growth for the year?
- CEO
Yes, I'll speak to the first question. No, there was no shift from quarter to quarter. That reflects really the performance for the second quarter. In terms of going forward--
- CFO and Chief Administrative Officer
Yes, and in terms of going forward, so obviously we've guided the Indirect channel to the high single-digit growth going forward.
- Analyst
Okay, and then the second question is on gross margin. 50 basis points for the year and now that we have the first half in that pretty much tells us that you expect more flattish growth margin in the back half. Maybe give us a little color on how you're offsetting cost pressure to be able to get to a flattish gross margin after the pressure in the first half? Thank you.
- CFO and Chief Administrative Officer
Sure. Yes, absolutely, so this is Jeff. This-- as we described before, in the first half of the year, we began to see input cost pressure, so related to higher cotton prices as well as increased labor costs in China. And because of the timeliness for sourcing, we were not able to offset with pricing until the launch of our fall collection on July 7. And so what we've explained in previous guidance was that we would see more impact in the first half because of the inability to price and then in the back half, you can see that improving as the pricing went into effect on July 7. So we continue to feel comfortable with our full-year guidance of the 50 basis points and so far from the price increase, we're not seeing any negative consumer reaction.
- IR
Is there anything further, Evren?
- Analyst
No, thank you.
- CEO
Thanks, Evren.
Operator
Neely Tamminga with Piper Jaffrey.
- Analyst
Good afternoon and good quarter you guys.
- CEO
Thanks, Neely.
- CFO and Chief Administrative Officer
Thanks, Neely.
- Analyst
So I have a question for you, Mike, on Dillard's and then Jeff, I have some modeling questions too. Mike, talk a little bit more about the Dillard's launch for us, the initial 4 into the 35 stores, you've got the other 30 around the corner, at what point does the decision point on probably more dedicated fixed stream, beyond just some of the signage, when would that start progressing? Is that as you exit out of the 65 store kind of test and into the next tranche? Give us a sense of what that launch may look like of the Dillard's?
- CEO
We've got some initial feedback from the initial 35 store launch. Still early though in terms of what that might look like longer term. We've got 30 stores teed up to go at the end of September and we expect as we go into the planning cycle this fall to have some good feedback in terms of how we're performing in the stores. Also based on our discussion, ongoing discussions with the merchant team at Dillard's, we'll have a much better sense for what the longer term visual presentation solution will look like there.
- Analyst
And I know that you guys originally launched just with the new patterns I do believe with fall, did you sense that there was demand for actually the spring patterns as well or some of the prior older patterns coming into the store, is that--?
- CEO
The assortment was primarily fall but we did have some patterns from previous seasons in the assortment as well. Roddy, maybe you can speak to the specifics.
- EVP- Strategy and Business Development
Yes, I believe we had a total of about 8 patterns, so 4 from fall and 4 from some of their earlier seasons and I think the response has been good. It's what we would expect from-- in our own stores as far as the demand for the other patterns.
- Analyst
Okay, great, thanks. And Jeff, I have some-- a couple modeling questions for you. First, the SG&A numbers for last year in Q3, there's a lot of interesting puts and takes going on from last year. Would you just remind us again how we should be kind of thinking the Q3 SG&A numbers this year, what was incremental last year and kind of getting more to an apples-to-apples sort of view? And then just on the cotton issue, could you-- two things, one look ahead to next year for us a little bit on the cotton side and kind of what you're seeing because obviously we're all watching the commodity charts coming in but weighing that versus the yarn pricing? And then maybe how much of that price increase did you really take for fall? Thanks.
- CFO and Chief Administrative Officer
Okay, all right. So let me start with the first in terms of the SG&A year over year. So in Q2 SG&A, the only adjustment was $6.2 million. And last year that was related to 2 things, some-- about $100,000 which was the very initial amortization of restricted stock awards that was made to the senior team prior to the IPO, and then a $6.1 million bonus expense for related to that equity grant to help the recipients pay taxes, so that was the Q2 effect. And in Q3 of last year, we had the amortization of the actual restricted stock award that was-- that vested at the time of the IPO, and that was approximately $15.7 million in Q3. So those are the 2 items. And then the only other adjustment obviously not in SG&A, but we also adjusted for tax rate prior to the IPO, we were an S-corp and so have to adjust for being a public Company 40% tax rate.
With regard to cotton for next year, so we are seeing cotton future prices come down and if that holds and the trends continue, which so far it looks good, as we enter next year we should begin to see cotton pricing moderate. We're currently-- we have largely produced the early order period requirements for our spring release which will ship at the end of January, so the earliest that we'll see any cost reductions would be some time next year. And again, we buy cotton in the value chain stage where it is essentially cloth ready to be printed.
- Analyst
Okay.
- CFO and Chief Administrative Officer
And then in terms of price, we took price on July 7 and we took the pricing that we had indicated we would in prior conversations, and the intent of that pricing was to offset for the year as much of the cost increase as we could and obviously, you have some timing in there since the earliest we could take price was mid-year. And then second, we wanted to take a level of pricing that we thought would not impact the consumers perception of the brand and approachability. And so the result of that was-- is the covering most of it but not all of it and the reason for the 50 basis points for the year, but we did end up taking the amount that we had anticipated.
- Analyst
That's great. Thanks, you guys, congratulations and good luck.
- CFO and Chief Administrative Officer
Thanks.
- CEO
Thanks, Neely.
Operator
Erika Maschmeyer with Robert W. Baird.
- Analyst
Hi, congratulations on a nice quarter.
- CEO
Thanks, Erika.
- CFO and Chief Administrative Officer
Thanks, Erika.
- Analyst
I just wanted to follow up on your Indirect sales growth, that was really nice. Could you parse that out a bit more for us? I know you said it was due to the successful fall assortment as well as carryover patterns, was the fall assortment and some of the marketing you did around that, was that would you say kind of a bigger driver than the prior releases?
- EVP- Strategy and Business Development
I'll answer that, Erika, this is Roddy. Yes, so yes it was. We have-- we continue to improve our marketing efforts. It's much more integrated than it has in the past. We actually launched our Be Colorful campaign last year and, in Q2 of last year, and based on the learnings of that, we took that and figured out even better ways to roll it out. The performance in Indirect was across all regions, so we're pleased that the campaign has done really well, sorry, across all regions and seeing a lot of successes of the efforts. You can actually look out on Facebook and see something that we've done specifically in the Dallas area to focus our efforts there and we'll again take that, our learnings from that, and then leverage that for future releases.
- CEO
Yes, I would also add that we also had strong sales of carryover patterns from previous seasons as well to help contribute to the strong quarter.
- EVP- Strategy and Business Development
Yes.
- Analyst
Okay, and on the marketing front, so you had the spirit squad in Texas seemed pretty interesting and you had the outlet sale on Facebook. Can you talk about some of the initiatives that you've had and the success there and your thoughts on rolling those out?
- EVP- Strategy and Business Development
Yes, so the-- back on the specifically the spirit squads. That was a very focused experiential marketing campaign, much like we had done to kick off the Be Colorful campaign where we did it in a few different cities. But the goal there was to pick an area where we have a good concentration of Indirect and Direct stores and leverage that, and actually because it was back to campus, we wanted to really find an area that had a good population of college students. So that was 1 aspect and that was really 1 thing that resonated with our Indirect retail partners, just demonstrating how we were going to support the fall release really of the back to campus piece of the fall release, naturally the fall release included a lot more items that weren't just focused on back to campus, so that's 1 aspect.
There's national advertising, we've had direct mail, other pieces of it that we will continue to build and be further integrated across all channels in the future. The online outlet store that you saw on Facebook was essentially a separate section of just testing new ways to outlet our merchandise, having focused on the off price merchandise rather than mixed in as much and much of that was a test. We didn't send out e-mails to support it and just let people know about it on Facebook.
- Analyst
Great. And then could you talk a little bit about your Q2 comp, the composition of that between traffic and ticket with your price increases there? And then could you also give a sense for what you might be expecting for your Q3 comp in your revenue guidance?
- CFO and Chief Administrative Officer
Sure. Yes so obviously, we gave the composition of our comp during the quarter, so a weak May and that was largely traffic driven as we had commented on our previous conference call sort of post Mother's Day, definitely saw the slowdown that I think a lot of retailers did and then rebounded nicely in June and July. So a lot of the comp during the quarter was still driven by traffic but we also saw some higher conversion rates as well, so it was a nice mix of the 2 during the quarter. In terms of comp guidance for Q3, the way to think about Q3 right now would be that our comp for Q3 would be in line with our long-term comp guidance but at the high end of it. So our long-term comp guidance is mid to high-single digits, so think of Q3 in terms of high-single digits.
- Analyst
Okay, great. And then any other thoughts on expanding your distribution of luggage?
- CEO
We are looking into it. Dillard's is 1 opportunity that we are considering as well as other department stores that we may partner with in the future. Naturally we have a few larger travel accounts in the mix and our own stores and look to continue to grow just further productivity from them.
- Analyst
Great.
- EVP- Strategy and Business Development
And what I'd also add to that is that we are just launching in August new season of rolling luggage, so Mocha Rouge is now out in addition to a few new styles.
- Analyst
That is fantastic. Thanks so much and good luck.
- CEO
Thank you.
Operator
Jennifer Davis with Lazard Capital Markets.
- Analyst
Hi guys. Let me add my congratulations on a great quarter.
- CEO
Thank you.
- Analyst
A couple of quick questions. Mike, you mentioned that you had seen a positive reception to winter. I guess could you maybe compare that to fall, is it kind of similar to that or if you--
- CEO
I'd characterize it as comparable. Our Indirect sales consultants had done a nice job of selling in the season. Retailers are responding favorably to the patterns and the styles, the holiday assortment that we've put together for the season as being well received. So I'd say across the assortment and across the channel, the response has been very strong.
- Analyst
All right, that's good to hear. And then also going back to the price increases, you guys said you took on average 5% on now I forget what was it, 50% of the signature styles. I guess can you talk a little bit about where you took those and what it did, if it impacts margins more on some items than others, maybe give a little more detail on that?
- CFO and Chief Administrative Officer
Yes, absolutely. So what we have said about the price increase was that-- so it launched on July 7 with the introduction of our fall collection. We took pricing only on our signature collection, our signature collection is a little over 90 styles and we priced a little over 50% of those styles. And what we've said in the past was that on average, on an item basis, the price increase was on average about 5%. And obviously if you went item by item that would differ, so some would have higher, some lower depending on their price point. The other thing that factors into it is that in terms of what items got priced and what it did to margins does differ by item. Obviously some have lower cotton content than others, and so the 5% can't be applied sort of across-the-board.
So in a pricing, our strategy was to do a couple of things. One, price in a manner that would not be obvious to the consumer or do anything to damage the approachability and image of the brand in terms of accessibility. Second, price in a way that made sense across the line up, so we went item by item. And then third, try to maximize the amount of margin recovery that we could get from the pricing.
- Analyst
Okay, great. And then one more if I can maybe this is for you, Mike. I've been getting a lot of questions recently on your thoughts of your expansion into Japan. What made you enter or decide to enter Japan now and not wait a little while since you still have a lot of growth opportunity left in the US? So if you could maybe talk kind of high level what your thoughts are there, thanks.
- CEO
Sure, and that's dialogue that we had as a team, understanding the opportunity to grow domestically. The question we posed to ourselves was does it makes sense to take the brand offshore. We certainly have the capacity to do it. Indications were positive from experiences we had in our [Almawana] store. Other data points said it's time to pursue that market and so certainly we had to make sure we had the capacity to pursue it at the same time and we do. And so we felt this was an appropriate time to move forward.
- Analyst
All right, great. So anecdotally I was at Roosevelt Fields and apparently some Japanese tourists who had seen one of your pop-up stores literally came right from the airport straight to Roosevelt Field to the Vera Bradley store, so thought that was interesting.
- CEO
Good, nice to hear.
- Analyst
All right, best of luck.
- CEO
Thank you.
- CFO and Chief Administrative Officer
Thank you.
Operator
Edward Yruma with Keybanc Capital Markets.
- Analyst
Congratulations on a good quarter and thanks for taking my question. In terms of the incremental giftable items you talked about particularly in the holiday season, are these primarily owned businesses or are you increasing the amount of licenses that you have?
- EVP- Strategy and Business Development
This is all our product. It's nothing licensed for the holiday season.
- CFO and Chief Administrative Officer
And what we did is we were very successful last year at holiday and based on that, decided to expand the assortment.
- Analyst
Got you. And should we expect this assortment to become a more permanent part of the overall offering or is this kind of more of a seasonal item?
- EVP- Strategy and Business Development
We'll evaluate the success of it when we go through, but we are definitely a giftable brand and it only makes sense to have some aspect of giving to support the holidays.
- CFO and Chief Administrative Officer
Yes, and that was really the-- part of the focus around the collection this year was really to increase the amount of gift focus around the assortment.
- Analyst
Got you. And giving your success and taking up price and having the customer accept it, what is the normal cadence by which you consider your pricing architecture, could we expect more price increases in the back half of this year?
- CFO and Chief Administrative Officer
Yes, so in terms of price increases for the back half of this year, we-- every season that we introduce, we typically have some styles that retire and some new styles that are added. So just naturally when you have a new season, there's always an opportunity to look at price to some extent. The price increase we just took on July 7 was the most comprehensive one we've taken in the last several years. So going forward, we wouldn't anticipate any major price increases in the back half, but as we introduce winter and spring, we will certainly look at new styles being added and any other adjustments that we think might need to be made.
- Analyst
Got you. And one final modeling question, in terms of gross margins for the back half, again having to kind of have flattish to hit your 50 basis point compression, is there really any change from quarter to quarter or will gross margins from here not be relatively stable? Thank you.
- CFO and Chief Administrative Officer
Sure, so again, we don't-- we haven't guided to the specifics for the quarter. You're right in terms of flattish for the balance of the year and if anything, I think it would-- should be somewhat even for 3 and 4 with potentially 4 being stronger.
- Analyst
Great. Thanks very much.
- CEO
Thanks, Ed.
Operator
Dana Telsey with Telsey Advisory Group.
- Analyst
Good afternoon, everyone.
- CEO
Hi, Dana.
- Analyst
Hi. Can you talk a little bit about the complexion of the gross margin and the drivers of SG&A go forward, where on the gross margin whether IMU, mark downs or how you see the cadence even going in third quarter and fourth quarter. And lastly just on inventory levels, how do you see the progress of that as you move through the year to being more in line with the sales growth rate? Thank you.
- CFO and Chief Administrative Officer
Sure. So complexion of gross margin through the balance of the year, I think that-- again I think that given where we're at in the year and the lead times and sourcing I think we have high level of comfort with product costs that we'll see in the balance of the year. So I think the guidance we've given on a full-year margin of down 50 basis points, again we feel comfortable with. And as we move into next year, obviously from a product cost component of gross margin, our hope is that we'll begin to see some opportunity as input costs, especially cotton, moderate.
In terms of mark downs or other things that would impact gross margin, again I think we view that as obviously we have a retired inventory component of our ongoing business model and we would expect that to look similar as we go throughout the back half of the year.
With regard to SG&A, what you saw in the second quarter in the Indirect business was nice leverage because of the growth, and any time you get growth above our long-term net revenue projections for Indirect you'll get leverage, because we have a largely fixed sales force. And in Direct, we're continuing to make investments in Direct but obviously continuing to see SG&A in line with net revenues from a percentage standpoint.
And then your second question was about inventory as we go throughout the back half of the year. So what we said in the prepared remarks was that as we go throughout the back half of the year and especially as we complete the year, you should see the growth in inventory come in line with the growth in sales. And obviously, we have a number of things going on from a structural standpoint as we continue to grow this business. And so as we go from Q2 to 3 and especially into 4, again we believe that by the end of the year, that should be in line with progress being made along the way.
- Analyst
Thank you.
Operator
JJK Research, Janet Kloppenburg.
- Analyst
Hi, everybody. Congratulations on a nice quarter. I got on a couple minutes late, I just wanted to make sure that I know you said comps ticked up and were very healthy in June and July. I was wondering if you could comment as if you saw a nice pick up in comps when the new line was introduced? And also as far as the new products, the shower caddy and the laundry bag, will there be any other new product introductions like that in the September line introduction, the holiday line? And lastly, Jeff, we had talked about change in strategy in the e-commerce channel in terms of maybe increasing full price business there, if you could comment on how that initiative is working? Thanks so much.
- CEO
Yes, so I'll speak to your first question about the comps. Definitely, the fall launch had a positive impact on sales in our stores as it did across the channels. As for the winter assortment, you can think about the holiday collection that we're launching in the winter as being kind of similar to the incremental product that we had for the fall season for the back to campus campaign so yes, there is an expanded assortment relative to the winter launch as well.
- Analyst
Okay, great.
- CEO
And then your last question, I can't remember what that was?
- CFO and Chief Administrative Officer
Yes, with regard to e-commerce--
- Analyst
The e-commerce channel, full price initiative, yes.
- CFO and Chief Administrative Officer
Yes, so what we've said in the past is that that will be evolutionary, so that'll be over time. And over time, we will migrate e-commerce to being more of a full priced channel. What we've done over the last several quarters and including Q2 was the mix of full priced to discounted merchandise was about the same, so that's remained relatively static but the level of discount has been lower. So resulting in better margins in e-commerce, so we're on that path and we'll continue that evolution over time.
- Analyst
Great. Congratulations. Good luck.
- CFO and Chief Administrative Officer
Thank you.
- CEO
Thanks, Janet.
Operator
Peter Wahlstrom with Morningstar.
- Analyst
Good afternoon. Thanks for taking my question.
- CEO
Sure.
- Analyst
As a quick reminder, could you provide some information as to the historical kind of churn level at the independent retail channel and maybe how this compared to second quarter of this year?
- EVP- Strategy and Business Development
Yes. The churn that we see has been pretty much consistent over time. We didn't really see say an uptick around the time of the recession. It's about I don't know, 5% to 10%. Some of that is Vera Bradley deciding to part ways rather than just natural churn from financial circumstances. As it relates specifically to the quarter there wasn't really an uptick in churn. I should point out most of the churn usually comes at the beginning of the fiscal year, most of the inactivation of accounts and it's just most retailers make it or don't make it through the holiday season and that's usually their decision. We haven't seen anything new or unprecedented and certainly in the past year or specifically in the quarter. And we are doing a great job as we mentioned pointed out for Texas of opening new accounts to net up beyond what exits.
- Analyst
Okay, and staying on the Indirect channel for a moment, with the understanding that handbags and accessory categories still represent the vast majority of sales, are there particular products which either tend to outperform or really remain under pressure as the general economic environment either strengthens or slows, or is this really not an important factor given the relatively low average price point for your merchandise?
- EVP- Strategy and Business Development
Yes, we don't really see it as a factor and it really is because of that average price is pretty achievable by most consumers.
- CFO and Chief Administrative Officer
Again, I think the broad array of demographic appeal we have, the age appeal we have, the size of our range of products, 90 styles ranging from $10 to $12 entry to the low $120-ish range sort of something for everyone and it's a very accessible brand.
- Analyst
Okay and lastly, you're opening-- you're planning to open 17 stores this year and you talk about a strong pipeline, is there anything that would lead you to revisit your longer term annual growth range for adding between 14 and 20 stores?
- CEO
Not at this time. We feel comfortable with the pace at which we're rolling out stores. We're still relatively young as a retailer and we just want to make sure that we can incorporate learnings as we go without getting too far in front of ourselves. So we feel comfortable with that long-term guidance at this point.
- CFO and Chief Administrative Officer
Yes, which remains at 14 to 20 stores per year.
- Analyst
Very good. Thank you very much.
Operator
And that does conclude our question-and-answer session. I'll turn the conference back over to Mr. Ray for any closing or additional comments.
- CEO
Okay, thank you for joining us today and for your continued interest in Vera Bradley. We look forward to speaking to you on our third-quarter conference call which will be held on December 6, 2011 at 4.30. Thanks, everyone.
Operator
Ladies and gentlemen, that does conclude today's conference. Thank you for joining.