Vera Bradley Inc (VRA) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. And welcome to today's Vera Bradley fourth quarter fiscal 2012 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. And now I'd like to turn the conference over to Paul Blair, Vera Bradley Investor Relations. Please go ahead, sir.

Good afternoon, and welcome. We'd like to thank you for joining us this afternoon for Vera Bradley's fiscal 2012 fourth quarter and full year results conference call.

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 10K for the fiscal year ended January 29, 2011 filed with the SEC for a discussion of known risks and uncertainties. Investors should not assume that the statements made during the call will remain operative at a later time. The Company undertakes no obligation to update any information discussed on the call.

References to information included on the Company's website or sponsored blogs are for informational purposes only, and the Company does not intend to incorporate any information on those websites or blogs into its public filings made pursuant to the applicable securities laws.

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.

We understand that this is a busy period for reporting, so we will do our best to keep today's call to an hour in length. Therefore, during our question and answer session, we ask that participants pose one question with one follow-up to allow as many callers as possible the opportunity to take part in today's call.

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

Thank you, Paul. Good afternoon, everyone, and thank you for joining us today. With me are Jeff Blade, our Chief Financial and Administrative Officer, and Roddy Mann, our Executive Vice President of Strategy and Business Development.

Today we'd like to focus on three main topics -- the highlights of our fiscal 2012 full year and fourth quarter performance, an update on the Company's long-term growth plans as we enter our new fiscal year, and our outlook for fiscal 2013 first quarter and full year. I'd like to start by discussing some highlights from our outstanding year.

Fiscal 2012 was a very successful year in which revenue increased across all of our sales channels as a result of leveraging our brand equity, product portfolio, and multichannel capabilities. We also continued to make key strategic investments to support our current and future growth.

Among our accomplishments for the year, we delivered earnings per share of $1.43, exceeding our initial guidance of $1.25 to $1.28, grew consolidated new revenues by 26%, achieved 49% revenue growth in our direct segment, successfully opened 17 new full price and outlet stores in both current and new markets, grew e-commerce net revenues by 35%, achieved net revenue growth of 10% in our indirect segment through our specialty retail partners and the addition of 65 Dillard's locations, successfully entered the Japanese market, launching 7 pop-up shops and an e-commerce site, made several key investments in our product development capabilities to support our long-term growth strategies, and continued to improve our planning and inventory management processes, which brought inventory and revenue growth into alignment.

We ended the year with an outstanding fourth quarter, in which net revenues grew by 23%. This revenue growth was driven by our direct segment, which experienced strong holiday sales in our full price and outlet stores, as well as our e-commerce business. In the direct segment, net revenues increased 46% during the quarter, and 49% for the full year, reflecting significant growth across all channels.

In our stores, net revenues grew 69% in the quarter and 75% for the full year, driven by the opening of 13 full price and 4 outlet stores during the year. Comparable store sales increased 9.3% during the quarter, and 10.9% for the full year. We benefited from improved conversion rates, which were driven by a strong product assortment and more productive staff scheduling.

E-commerce net revenues grew 28% in the quarter and 35% for the full year, due primarily to increased traffic and higher conversion rates. During the year, we continued to invest in the acquisition of new customers and enhancing the shopping experience, focused on new and full price merchandise.

During 2012, Vera Bradley consistently ranked second among six of our most closely related peer companies with regard to website visits, hosting more than 43 million visits during the year.

In the indirect segment, we worked with our specialty retail partners during the third quarter to ensure that they had appropriate inventory levels as they entered the important holiday season. We believe this resulted in a pull forward of approximately $3 million of revenue into the third quarter. In addition, most of the retail traffic after Black Friday came during the last two weekends prior to Christmas, resulting in lower than planned holiday reorders. As a result, the indirect segment fourth quarter revenue was slightly below the prior year, at negative 0.7%.

With the third and fourth quarters combined, indirect segment revenue increased by 7.9% compared to prior year. For the full year, indirect net revenue growth was 10%.

As further evidence of our ongoing partnership with our speciality retail partners, GIFTBEAT, a monthly trade publication that tracks trends in the gift industry, selected Vera Bradley as vendor of the year for the third consecutive year. The award is based on specialty retailers' assessment of their most profitable vendor. This award is a testament to the outstanding support we offer to our specialty retail partners.

Our significant revenue growth and leverage of SG&A expenses resulted in consolidated operating and net income growth of 23% and 41% respectively during the fourth quarter. For the full year, consolidated operating and net income increased over the adjusted prior year by 28% and 31% respectively.

Turning to our view of future opportunities, we believe that our iconic lifestyle brand, distinctive designs and exceptional customer loyalty support our long-term growth strategies of expanding our product offerings and continuing to grow in underpenetrated markets. As we execute these strategies, we will focus on several key initiatives during fiscal 2013.

We will continue to build on our 30 year tradition of bringing products to market that resonate with our loyal and diverse consumer following. These efforts are centered on a collaborative product development process and providing compelling assortments that thematically tie to important occasions throughout the year.

During the past year, we established a dedicated merchant function, and elevated the role of marketing to work more collaboratively with the design team to continue improving our process of bringing product to market. We believe these enhancements are resulting in a clear understanding of what the Vera Bradley DNA is from the customer's perspective, and assuring that as a part of every new collection. A greater emphasis on styles is part of the assortment, in addition to our tradition of great pattern design, further leveraging our best selling categories in which we already have a strong presence but still have compelling growth opportunities. A focused effort to ensure that each assortment is supported by a compelling story.

We believe that these initiatives will enhance our capabilities to consistently bring product to market that resonates with the consumer.

In addition to expanding our product offerings, we will continue to pursue the significant growth opportunities in underpenetrated markets by leveraging our multichannel capabilities. The focus this year will be on continuing to open successful new stores, further enhancing our e-commerce business, evolving the indirect segment to improve productivity of specialty retail partners in the expansion of our relationship with Dillard's, and building on our successful entry into Japan.

During fiscal 2013, we plan to open 16 to 18 new full price and outlet stores, continuing to build out existing markets, while also opening in a number of new markets. Developers continue to offer us outstanding locations within targeted centers, and are pleased that the fiscal 2013 slate is essentially complete.

We continue to invest in our specialty retail partners to help them grow their Vera Bradley business. This channel remains an important part of our multichannel strategy. We remain focused on improving the productivity of our existing retail partners, and the addition of highly productive new retail partners.

Since approximately 35% of all handbag purchases are made within department stores, we believe there is a significant opportunity for Vera Bradley in this channel. During fiscal 2012, we began our relationship with Dillard's, opening in 65 of their locations. We are pleased with the performance of our brand within these locations, and are working closely with the Dillard's management team to refine the product assortment, enhance the visual presentation, and continue to improve productivity.

As a result of the success of our relationship so far, we plan to open an additional 60 Dillard's locations during the year. In addition, we are continuing to work with the Dillard's management team to identify opportunities for additional locations and expanded product offerings. We will also continue to explore other growth opportunities within this channel, in a way that complements our current channels.

Our entry into the Japanese market continues to gain momentum. During fiscal 2012, we focused on building brand awareness among Japanese consumers, and demonstrated significant sales potential to major department store operators. Through highly productive pop-up shops and targeted media placements, we launched the Vera Bradley brand in an exclusive manner, and as a result, have connected with a wide range of Japanese consumers.

During fiscal 2013, we will continue our brand building efforts, and plan to open a series of permanent shop and shop locations within major Japanese department stores, including Marui, Takashimaya, Odakyu, and Mitsukoshi. The first store, Marui Yokohama, located just outside of Tokyo, had a very successful opening last week. We have posted some photographs on the Yokohama store on our blog at Insidestitch.com, and encourage you to take a virtual tour of our first permanent location in Japan. While fiscal 2013 will continue to be a year of investment, we believe we are establishing the foundation for a profitable long-term business in Japan.

Overall, we're pleased with our performance during the fourth quarter and full year. Our focused execution enabled us to deliver excellent results despite a difficult operating environment. Most importantly, it reflects the strength of the Vera Bradley brand, and our opportunity for future long-term growth.

Turning to the current quarter, although our spring patterns are selling well, the overall assortment is not performing to our expectations. Despite the positive response to the spring and earlier season patterns, there are fewer breakout patterns and styles in the overall assortment. We feel that this issue is addressed throughout the remainder of the year, as you will see reflected in our guidance.

First, we recently completed a successful sell-in of our summer 2012 season, and are optimistic about its sell-through prospects, based on strong consumer testing. In particular, consumers are having a positive reaction to Lime's Up, and we feel it has the potential to be a breakout pattern.

In addition, we believe we have a more compelling overall assortment, supported by marketing that is tied to common themes throughout the season.

I will now turn the call over to Jeff Blade, our Chief Financial and Administrative Officer, who will provide additional details regarding our fourth quarter and full year financial results, as well as guidance for our fiscal 2013 first quarter and full year.

Thanks, Mike, and good afternoon. I will begin my remarks with a review of our fiscal 2012 fourth quarter and full year results, and then provide you with our outlook for fiscal 2013 first quarter and full year.

As Mike mentioned, we are very pleased with our outstanding financing performance and operational accomplishments during fiscal 2012. Throughout the year, we consistently delivered strong top line growth while managing for a difficult cost environment, yet continuing to make key infrastructure investments to support our current and future growth.

This effort resulted in fiscal 2012 net revenue growth of 25.9%, that translated into adjusted net income growth of 31.1%. We are pleased with the consistency and quality of the financial metrics that was delivered during the year.

Net revenues for the fourth quarter increased 23% to $134.5 million, from $109.4 million in the prior year.

In the direct segment, net revenues increased 46% to $81.2 million, driven by increases across our full price and outlet stores, as well as continued growth in e-commerce. The direct segment accounted for 60% of total net revenues in the fourth quarter versus 51% in the prior year.

The revenue increase resulted from the opening of 17 new stores since the fourth quarter of last year, and comparable store sales increase of 9.3% during the quarter. Comparable store sales growth is incremental for an increase of 22% in the fourth quarter of last year, and 25.8% for the full year in fiscal 2011. We ended the fiscal year with 48 full price and 8 outlet stores.

E-commerce net revenues increased $8.9 million, or 27.6%, and represented 31.1% of total net revenues during the fourth quarter. The increase was due primarily to a compelling product assortment, continued growth in website traffic, strong conversion rates, and enhanced customer targeting.

In addition, we experienced favorable gross margins due to a reduced level of discounting, as we continue to evolve to a more full price channel.

As Mike previously mentioned, the approximately $3 million impact of the early sell-in, combined with the late holiday sell-through, resulted in a fourth quarter growth rate for the indirect segment of negative 0.7%. The growth rate for the third and fourth quarters of this year, when taken together, was 7.9%.

As we have previously discussed, net revenue growth among our specialty retail partners can vary significantly from quarter to quarter, given the diverse nature of our 3,300 retailers. For that reason, we believe it is appropriate to look at net revenue growth rates in the indirect segment in terms of full year growth. As we enter the new fiscal year, we remain confident in our long-term guidance of mid to high single digit annual net revenue growth for the indirect segment.

Gross profit for the fourth quarter increased 22.7% to $75.9 million, resulting in a gross margin of 56.4%, essentially in line with the prior year gross margin of 56.5%. The fourth quarter margin reflects higher patent and labor costs in the prior year, and favorable channel mix driven by growth in full price stores and e-commerce.

Total SG&A expense was $45 million for the fourth quarter, compared to $37.2 million in the prior year. SG&A as a percent of net revenues was favorable by 62 basis points, reflecting revenue driven leverage in the direct segment.

The resulting operating income for the fourth quarter increased 23% to $32.7 million, or 24.3% of net revenues, compared to $26.5 million or 24.3% of net revenues in the prior year.

Operating margin at our indirect segment was 38.6% in the fourth quarter of this year, compared to 44.4% in the prior year, reflecting a lower fourth quarter net revenues, and the relatively fixed nature of our SG&A cost structure for the channel.

Operating margin in our direct segment was 35.9%, compared to 33.1% in the fourth quarter of last year. Excluding Japan, operating margin in the direct segment increased 383 basis points to 36.9%, due to improved gross margins, as well as the leverage of fixed SG&A expenses resulting from the growth of both e-commerce and full price stores.

Net income for the fourth quarter was $20.1 million, or $0.50 per diluted share compared to net income of $14.2 million, or $0.35 per diluted share in the prior year. Fourth quarter results included earnings per share investment of $0.01 for our Japan market entry.

For fiscal 2012, full year net revenues increased 25.9% to $460.8 million, from $366.1 million in the prior year. By segment, indirect net revenues increased 9.6%, $235.6 million, and direct net revenues increased 49.1% to $225.3 million, with comparable store sales increasing 10.9%. Comparable store sales growth, on top of an increase of 25.8% in the prior year.

Operating income for fiscal 2012 was $96.2 million, compared to $53.3 million in the prior year. Operating income of $96.2 million increased 27.8% from adjusted operating income of $75.2 million in fiscal 2011, which excludes $21.9 million of IPO related compensation expense.

Net income for fiscal 2012 increased $57.9 million from $46.2 million in the prior year. Net income of $57.9 million increased 31.1% from adjusted net income of $44.2 million in the prior year, which excludes the previously mentioned IPO related compensation expense, and assumes a 40% tax rate.

Diluted earnings per share increased to $1.43 in fiscal 2012 from $1.25 on a GAAP basis in fiscal 2011. Diluted earnings per share increased 19.2% from adjusted diluted earnings per share of $1.20 in the prior year.

Turning to some key balance sheet highlights as of January 28, 2012, includes cash and cash equivalents of $4.9 million, accounts receivable of $38.1 million compared to $34.3 million in the prior year, with days sales outstanding in line with the prior year. Debt outstanding of $25.1 million, a reduction of $41.8 million during the fiscal year. This paydown of debt reflects the strong cash flow generation and capital efficiency of our business model.

Inventory at the end of the fourth quarter of $107 million, compared to $96.7 million in the prior year, resulting in year over year inventory growth of 10.6%, compared to growth in net revenues of 25.9%. This reflects our ongoing efforts to significantly evolve our core supply chain and inventory management processes. The improvements to inventory management will enable us to grow inventory in line with revenue growth on a more consistent basis in the future.

I would now like to review our outlook for fiscal 2013 first quarter and full year. In the first quarter of fiscal 2013, we expect net revenues to be in a range of $115 million to $117 million, compared to $101 million in the first quarter of fiscal 2012. We expect comparable stores sales growth in the mid single digits, and indirect net revenue growth is anticipated to be in the low single digit range.

Gross margin for the first quarter is expected to be in line with the prior year at approximately 56%. Price, higher input costs for cotton.

SG&A, as a percent of net revenues in the first half of the year, will be slightly higher than prior year, due to an annualized fiscal 2012 infrastructure investment. Diluted earnings per share expected to be approximately $0.27 to $0.29. Our earnings per share estimate assumes an effective tax rate of 39.5% and fully diluted weighted average shares outstanding of 40.5 million.

For full year fiscal 2013, we expect net revenues to be in a range of $540 million to $545 million. We expect comparable store sales growth to be in line with our long-term guidance of mid to high single digits, and indirect net revenue growth to be in line with our long-term guidance of mid to high single digits for the full year. The indirect revenue guidance includes approximately $5 million for the existing 65 Dillard's stores, as well as approximately 60 additional stores.

Gross margin expansion for the year is expected to be approximately [50] basis points due to lower cotton costs in the back half of the year, and channel mix due to continued growth of the direct segment. In the first half of the year, we are selling products sourced with higher cost cotton. We expect to see cotton cost moderation beginning with the fall release in July.

The previously mentioned investments in SG&A will not fully annualize in the first half of the year, impacting both SG&A and operating income as a percent of net revenue. For the full year, we expect SG&A and operating income as a percent of net revenues to be in line with long-term guidance.

Diluted earnings per share for fiscal 2013 are expected to be approximately $1.68 to $1.71, with net income growth stronger in the back half of the year. This estimate includes a net full year investment of approximately $0.06 per share to support our market entry into Japan. In addition, we expect an effective tax rate of 39.5%, and fully diluted weighted average shares outstanding of 40.5 million.

During the fiscal year, we expect to open 16 to 18 full price and outlet stores, representing a balance between current markets as well as expansion into new geographic areas including Mobile, Oklahoma City, and Phoenix.

Capital expenditures for fiscal 2013 are expected to be approximately $36 million, including our buildout of new stores, and approximately $19 million of spending related to the distribution center expansion that we announced in September of 2011, which is progressing as planned.

In fiscal 2013, we will have a 53rd business week. The additional week is late in the fourth quarter during a non-peak period for our business. Therefore, we expect the impact to be immaterial to the full year earnings per share.

Overall, we are entering the new fiscal year with optimism about our ability to continue delivering strong financial results as we execute our long-term growth strategy.

With that, I will turn the call back over to Mike for some closing remarks.

All right. Thank you, Jeff. Before I close, I'd like to briefly mention our announcement in early February of the promotion of Joan Maxwell to the position of Vice President of Merchandising, and the hiring of Lisa Mis, who joined us as the Vice President of Global Sourcing.

Joan's promotion, and the hiring of Lisa, reflects our commitment to enhance the management team and maximize our significant product development capabilities, and to ensure the continued execution of our long-term growth strategies.

In closing, I'd like to reiterate that we are very pleased with our record setting financial performance in fiscal 2012, which resulted from the significant contributions of the entire Vera Bradley team and our dedicated retail partners. As we begin a new fiscal year, our second full year as a public company, we remain optimistic about our prospects, and look forward to continued growth and success.

Operator, we're now ready for questions.

Thank you. (Operator instructions) We'll take our first question from Jennifer Davis with Lazard Capital Markets.

Hi, guys. First, let me say congratulations on a great year. And then second, Mike, I think Priscilla Pink is going to give Lime's Up a run for the money. So, we'll wait (multiple speakers).

(multiple speakers), very good. Yes, (inaudible), I will too.

Yes, yes. So my first question is actually a clarification. Can you just kind of give us the timing on the Dillard's openings, and also, I didn't catch how many permanent (inaudible) shops are you opening in Japan, and can you give us the timing of those? And then my question is, I was wondering if you could talk a little bit about your strategy for fall. We've heard from some stores that you're going to introduce six patterns and do two different launches. So I was wondering a little bit about that. And then, kind of combined with that, your strategy around the special collections such as (inaudible). Thanks.

Okay, I think I remembered about half of those questions, so we'll --

Yes, sorry.

I'll start with what I remember. In terms of the Dillard's rollout, we're planning right now 30 yet this month, in conjunction with the summer launch, and then 30 more in July with the launch of the fall season.

Okay.

Tick down through your questions. What --

Okay. Then Japan. How many stores -- how many permanent (inaudible) shops are you opening, and what about the timing of those? I'm assuming you don't know all of them yet for the year.

Yes, don't have all of them nailed down --

We're actively in negotiations with the list that Mike spelled out. We're planning one to three for certainly the front half of the year, and then some additional ones that we'll sort of figure out where and when for the back half.

Okay, great.

We are -- as we mentioned, we are already in Marui Yokohama, and we will be opening soon at Marui Shibuya.

Okay. And then -- those were just my clarifications. My question was, your -- kind of your strategy in terms of the six patterns and two launches for fall, and so your strategy on the signature launches, and also with your special collection. Thanks.

Okay, I'll start, and maybe, Roddy, you can add some color. So I think those of you who have been following us closely know that probably for the last two or three years, the cadence has been four signature -- three or four signature patterns, four times a year. We are changing the cadence somewhat this next year, primarily to really align the launches with when the consumer is out there shopping and expects to see the product.

So we -- as you know, launched four for the spring season. We're launching four next week for summer. We've actually split the fall season into two launches. We've got Fall I, and then we've got a fall fashion lineup, so six total for fall. Then we have a single pattern that we're going to launch in the October timeframe, and then we have two patterns that we're launching for winter.

Yes. I'll add that these -- you know, the shift in this is to get more on the cadence of our customer. So those three in fall -- what, you know, the first fall release essentially is tied to back to campus. Then there is more of a fall fashion a little bit later. That one in October is our breast cancer awareness pattern. And then, two that are tied to holiday.

Great, thanks. And then what about -- have I noticed -- it seems like you're not bringing as much of the special collections in.

Yes, that is the case. What we have learned over the course of time is that we need to bake into every assortment, every collection, the brand DNA. And the signature product across great styles that resonates with the consumers, our best foot forward.

And so, as you see us rolling forward, the assortment across -- you know, end to end, the assortment is going to be very cohesive, and you'll see less of the special collections as you've traditionally known them, and really, more emphasis on those significant categories that we do very well in, and building those out over the course of time.

All right, great. I think that's a good strategy, for what it's worth. Thanks a lot, and best of luck.

Thanks, Jen.

And we'll move next to Erika Maschmeyer with Robert W. Baird.

Thanks. Good afternoon, and nice year.

Thank you, Erika.

Could you give a little bit more -- this is kind of my follow up -- more of a little bit of the detail on your outlook? So, sort of what you said, you expect SG&A to deleverage in the first half from the investments you're making, but then leverage in the back half. And then, can you talk a little bit -- you know, a little bit more about the cadence of your Japan -- your spend in Japan? And then, just to clarify, the shifts that you saw between the indirect side -- that was between Q3 and Q4. Did you also see a shift between Q4 and Q1, as indirect reorders were fulfilled in Q1?

So, Erika, let me -- this is Jeff. Let me start with the question around SG&A. So, as we talked in the past, our long-term guidance is, we expect that SG&A growth will be in line with -- in line, as a percent of net revenues. And what we experienced last year was continuing to make a number of non-CapEx infrastructure investments, as we continued to build the team and put processes in place to be able to support our substantial growth.

So we did a number of things last year in terms of building out merchant function, continuing to invest in the direct team, both stores and e-commerce, made investments in our customer service capability, etc. So we have a number of investments that we made during the year that we won't fully annualize until we get to the back half.

So for the full year, you should see SG&A in line as a percent of net revenue growth, but you will see -- you won't see that leverage until the back half.

What was the next part of your question, Erika?

And then, the cadence of your spend in Japan, and then, did you see a shift between indirect sales as Q4 reorders came in and were fulfilled in Q1?

The cadence of the Japan investment, so the [six sets] for the year, think of it as a relatively even cadence across the year.

And then a --

We didn't see a shift between Q4 and Q1, in terms of demand activity.

Okay. And then, could you talk a little bit more about the patterns that you have that were top sellers in the quarter, and a little bit more around the spring line, and where that's pointing, and it seems like Island Blooms was doing pretty well. And then, I guess kind of compare that to what you're seeing in your early indications for the summer.

Yes. The spring patterns performed very well. Island Blooms, the one you called out, has done very well, as well. What we didn't have during the period was a handful of those breakout patterns that we traditionally do. And so, while the spring range sold well, we fell below our expectations relative to the older patterns.

All right, thanks so much. Best of luck.

Okay, thank you.

And we'll move next to Neely Tamminga with Piper Jaffray.

Great, thanks. Let me add my congratulations to a great year, you guys.

Thanks, Neely.

So, I want to ask a little bit more about that question on just the summer. So, some of the things you've seen already, can you just remind us, Mike, is it conversations with the indirects, or is it the actual order flow? What's the -- what's giving you confidence on the Lime's Up? Early indications?

Well, it's those two things, and it's also consumer research that we've done, market testing. And so, the results of the testing around the summer range overall were very, very good compared to previous seasons. And specifically, Lime's Up scored very, very high. And so, it was really across all of those sources of information, we saw a great response to the summer range.

Great, thanks. And then (inaudible), Mike, you've been at the Company a long time, you know, clearly, sometimes you have season where you don't have the breakout patterns, right?

Right.

Do you find that anecdotally, that when you have kind of a lull in patterns, that the customer comes back and there's some pent-up demand in that next batch, once you find the breakout pattern? Just wondering from your perspective.

Yes, I think it's -- yes, I think it's fair to say that. When you have a breakout pattern, and we've had a number of them over the course of time, Night and Day, Very Berry Paisley, Baroque, Java Blue -- there's been a number of them.

Suzani, and (multiple speakers) --

(multiple speakers), Suzani. And they tend to also kind of give a lift to the entire assortment.

And so, this -- we've seen this happen in the past, and the nice thing about where we stand today relative to where we were, say, just four, five years ago, is the breadth of the pattern assortment. We've had years -- I'll share a couple of examples. Villa Red, or Riviera Blue, those two patterns -- different seasons. But back when we launched those patterns, I think at the time, we were probably launching two or three patterns twice a year. So the impact of, say, an underperforming pattern relative to the overall assortment was significant. Today, given the breadth of the assortment, and the portfolio approach we take, those impacts are dampened.

So while we had a bit of a challenge around the assortment that was out there when we launched spring, we've seen this before, and we're very optimistic about what we have coming down the pike.

That's fantastic. Thanks for the color on that, historically. Hey, then -- this is for Jeff. Congratulations on your inventory numbers coming in really nice and lean. You guys are doing what you said you were going to do, and so, we thank you. But also, just wondering how we should think about that line item relative to sales as we kind of navigate the next couple quarters. Do you expect this -- the progress that you've achieved to kind of bounce back around, to be more in line with sales, or -- you know, just help us understand what we should be expecting in the quarters to come, the inventory to sales. Thanks.

Yes. So, you know, we don't guide to specific quarters as it relates to that metric, but what we've talked about in the past is, our goal going forward is to be able to consistently grow inventories in line with net revenues. And you may have some quarters that are slightly below or slightly above, but always to be in and around that.

And obviously, our opportunistic goal is, to the extent that we have the opportunity to grow inventory more slowly, we certainly would love to do that.

What we do feel really good about is all the work that's gone on during the last year to unify the planning group, to put the merchant function in place, to make significant progress on supply chain, and continuing to optimize some of our demand planning capabilities, I think are all -- have begun to demonstrate our ability to do that, and there's more to come. So I think we feel very comfortable in our ability to consistently grow it in line with sales.

Thanks so much. Good luck, you guys.

Thank you, Neely.

We'll move next to Oliver Chen with Citigroup.

Hi, guys. Congrats on a great quarter and a great finish to a strong year.

Thanks, Oliver.

We had a question related to the earlier commentary around fewer breakout patterns. What do you -- what does that mean or imply in terms of how that's impacting your sales or margins? It does look like the guidance is still very encouraging. But is there going to be some kind of expectation that that product may have to be cleared there in some fashion?

Yes, I think the term I used to answer one of Neely's question, you really have to think of the assortment as a portfolio that, you know, is updated and renewed and refreshed as we roll through a year. And so, patterns will roll out, we'll bring new patterns in, and so, when we think about what we see coming down the pike, certainly the summer season, which tested incredibly well, and as mentioned earlier, the fact that we are focused on making sure that every assortment that we bring to market, every collection, has the Vera Bradley DNA baked into it.

That, coupled with a focus on compelling styles, all those things working together to continue to build out that portfolio, gives us great confidence that we're going to be able to deliver on that guidance that we shared. Roddy, do you have anything to add?

No, I think you covered it. As far as, you had a question about margins, as far as that portfolio goes, we're not looking, thinking that these -- this mix of patterns will be retiring anytime soon, or sooner than we would normally anticipate. We're comfortable with where they are, and the inventory levels we have to support them.

Thank you.

Yes, I would just add, Oliver, that we are very comfortable with our ability to manage through the inventory in any given season, and I think parallel to my earlier remarks with Neely about some of the things we've done from a supply chain standpoint, we've also enhanced our ability to make adjustments within a season to inventory levels that we're bringing in. So I think the combination of all that, we're also really comfortable in our ability to move through retired inventory in the normal course. We don't see any issues related to any of the spring performance.

I think another point, while we're on this topic, you know, I think one thing to understand is that all of these patterns that we've launched over time, we own. And so, we have a significant portfolio of what we refer to as retired patterns, and we can reach into that range and use it to supplement the assortment.

So a good example of that is Baroque, and Very Berry Paisley. Those two patterns were scheduled to retire I think at the end of this year. And when we make a decision to retire patterns, when we bring new styles out toward the end of their life, we don't use those patterns in those new styles. So considering kind of where we are today, and the opportunity that we have, we're going to be pulling Baroque and Very Berry Paisley into styles that we hadn't previously planned to use them in, and then also, we're going to extend their life.

So that's another lever we can pull, a significant asset that we have. So we're going to use that this year.

Thank you very much. And as a follow up, can I ask you a refresher, kind of how we should think about your long-term strategy for both outlet and e-commerce and e-commerce as a platform that does offer -- you know, special kind of offers to customer, how you see those two channels evolving?

Our goal is to evolve the e-commerce channel to more of a full price, and we've made strides doing that. You can see it in the progress we've made just in Q4 margins year over year. That will come over time, and that will come as we build out more outlet stores. Our goal is to shift more of those, the special offers of the retired merchandise, increasingly to the outlet store channel.

Thank you very much. I'm a big believer of the patterning strategy, so good luck for the next year.

Thanks, Oliver.

Next, we'll move to Dana Telsey with Telsey Advisory Group.

Good afternoon, everyone. Given that the inventory levels are now in a cleanup position, how do you see inventory growth for 2012, and with the reaction to the most current pattern, how are you looking at pattern flows for 2012, and anything different in the process as you move forward? Introductions or type or solids or patterns? Thank you.

Let me start with your first question, the first part of the question. So just to reiterate, we don't specifically guide to that metric for the year. But what we've consistently said is that our goal is to grow inventory in line with the growth of sales. And we believe we've been able to demonstrate that over the last several quarters, and it's the result of a number of, again, structural process changes that we made that will enable us to do that. So we feel very comfortable with our ability to do that going forward, and that remains our goal.

And in terms of pattern development, there are solids in the line. And we'll continue to focus on staying true to color trends, with an emphasis on kind of newness and freshness. So you'll see things coming down the pike that you've not seen before, and so we're excited about where we're heading.

Thank you.

You're welcome.

Next, we'll move to Randy Konik with Jefferies & Company.

Hi, this is Amanda Sigouin, on for Randy.

Good morning.

I guess, first with Dillard's and the relationship there, I know you said you're still evaluating that strategy. But as far as the assortment in those stores, I believe originally, it was to have eight patterns, four from the current collection and four from prior. I guess, is that still the idea going forward? And then, just an update, if you could give us your thoughts on expanding with other department stores. Is this something we could expect announcements around any time in the next couple of quarters? Thank you.

Yes. I don't know if you used the current testing or how you frame that relative to Dillard's. We're committed to continue to grow out that relationship, but we're doing it kind of at a deliberate pace. And by doing that, we've been able to adjust as we've rolled along.

I think today, we have seven patterns across 36 styles in the assortment, and while that's probably comparable in terms of a number of SKUs to where we started, what we have done over the course of time is refined that range of colors that are in the stores, and the range of styles that are in the stores, so that we're getting more productivity out of that range.

The size of the space that we occupy in Dillard's is roughly the same as it was when we started. We are rolling out across the system kind of a uniform visual presentation approach where we can.

And so, I think we're getting it pretty dialed in, and we feel very good about our ability to add 60 more doors this year, that are kind of in line with how the others have evolved, and that will be very productive.

So we're committed to a long-term relationship with Dillard's. I would say, in many ways, it's exceeded our expectations. The Dillard's management team has been outstanding in terms of their willingness to work with us, to make sure that we present the brand in the right way. And I think there is great opportunities, not just for expanding the footprint, but over time, partnering with Dillard's to bring new categories to market.

So, that's the Dillard's relationship. A quarter ago, what I would have said around potential department store partners, I think at at point in time, I said we really weren't pursuing anything, because we wanted to make sure that we had the Dillard's relationship nailed down. We were operationally able to accommodate and manage.

What's different today is that we are engaged in some discussions. We haven't committed to anything. There's nothing imminent, but we are starting to have some discussions with other potentials. And so, that's how I'd frame that.

Great, thank you.

Welcome.

Next, we'll move to Evren Kopelman with Wells Fargo.

Hi, it's [Mary Casper], in for Evren. I'll add to all the congratulations on a great year.

Thank you, (multiple speakers).

I have two questions. The first is that you guys mentioned that the indirect operating margin declined due to deleverage on the fixed expenses. We're wondering what level of growth do you need in this business to get leverage and have a flat margin? And then I'll ask my second, is that, you know, building on some of the previous questions around the spring line, do you think that there's any risk in the indirect channel on managing in the inventory with the lack of breakout items? And do you think that they are at risk to have more promotions year over year going into Q1?

Mary, this is Jeff. So, first of all, with regard to leverage in the indirect channel. So, in the indirect channel, from an SG&A standpoint, the majority of the expenses really reflect our indirect salesforce, so our 90 plus territories across the US, and that's a largely fixed expense.

So in order to leverage that, our long-term growth targets for the indirect segment are mid to high single digits. So anything in that range sort of has operating margins in line. And any growth above that gives you the opportunity to leverage it. And you saw that in some of the quarters in fiscal 2012, when we go above the 9% range.

With regard to any concerns or risks around inventory related to the spring season, as I mentioned in some previous comments, we feel really comfortable with our ability to manage through it, for two reasons. One, we have, with the enhancements we've made to supply chain, our ability to manage inventory, we have the ability to make adjustments to the inventory levels for current seasons as we're going along. That was just a nice enhancement.

And then secondly, we have a long history of being able to sell retired product at great margins through our outlet channels and outlet stores, and on the Web.

And Mary, I'll add that as it relates to inventory in the channel, the -- our retail partners, and we saw this reflected in some of the reorder volume or the lack of opportunity to place some of that reorder volume in Q4, they came out of Q4. Our read on it through our sales team is, pretty lean on inventory. And because of the overall portfolio has performed a little bit lower than expectations, they've ordered wider. So we've seen that in reorder volumes. So we don't feel there's any kind of inventory challenge out in the channel itself.

Okay, great. That's really helpful. Thank you.

Yes.

Next, we'll take Elizabeth Howell with Raymond James.

Hi, good afternoon, and congratulations on a great year.

Thank you.

So, you mentioned that you're exploring other department store opportunities. Would those deals be sort of similar to what you're doing with Dillard's, and would you be able -- would you be willing to give us any additional information on what you're working on there, or is it too early?

Yes, it is too early. We are having some discussions, but we're not to the point where we can really share anything beyond that.

Okay, got you. And then, with the pull forward of revenue from the fourth quarter into the third quarter, can you talk a little bit about how you approach holiday this year differently than you have in the past, and maybe why you thought you needed to get the product into the stores earlier? And how should we expect this (inaudible) relationship in FY '12 or this upcoming year?

Yes, so I'll start, and maybe Roddy can add some color. We find that especially, kind of post recession, the independent channels, the specialty retailers, are somewhat risk-averse when it comes to building inventory. One challenge that we've had around holiday in the channel is that they're under-assorted as they go into the holiday season, and our ability to react and replenish, while we've got a pretty good short lead time, there were opportunities that were missed, sales opportunities missed, because the independent retailers didn't have an appropriate assortment going into holiday.

So this particular season, we said, let's kind of tackle that, and make sure that we give them the opportunity to have inventory there when the holiday season begins. So that was the impetus for the holiday build.

I'll add that we received consistent feedback from our retail partners who did participate in that holiday build, that they were very happy they did. They saw, they felt that if they hadn't have done it, they would have lost some sales. So just further validation that it was the right thing to do.

We're making some changes that Mike spoke to during the script about -- within the product development process, and we also mentioned the product, the release cadence. One is, as we continue to focus more on core categories that are meaningful to the business, and less so on things like what we've called special collections in the past, there will be a better buy-in by our retail partners going into the holiday season.

In addition, as we change that cadence, we actually have a release that's what I would say is more properly timed than we've had in the past, one that is essentially right at the beginning of November, as opposed to on -- much earlier in the season, with an expectation of more reorders to come. So we think that will actually help them get the product and the assortment in the store early to drive sales.

Okay, great. Thank you.

And we'll move next to Ike Boruchow with JPMorgan.

Hey, guys. Thanks for taking my question.

Hey, Ike.

How you doing? So, I guess, Mike, I don't know if you had given this or not, but is there any way you could give some cadence on the months for Q4 in terms of how the comp was trending at retail? And then, on your earlier comments on the call about the -- I guess, the cautious beginning to Q1, excluding the new seasonal launches. Could you just give us a little bit more color? Is that at retail, is that at wholesale, online? I mean, any more color would be helpful.

Yes, I mean, my commentary relative to the product assortment certainly would impact the system. So it would be in our direct and our indirect segment.

And I'm not sure I followed your first question.

I'm just wondering, is there any way to give cadence on the Q4? I mean, with the [9 comp]. Was that -- did that start off stronger and then weaker, did it start weaker and stronger, as you moved throughout the holidays?

Yes, it started off a little lower in November, so a little bit weaker in November, and then, we had a good, very good Black Friday initial holiday weekend, and then it was pretty positive in December and January.

Okay. And then, I guess, just one more question. On inventory, it looks like, Jeff, you've done a great job getting the inventory growth down. Is there any way you guys could quantify or give some color around the retired product? You know, what is retired product as a percent of inventory today versus last year versus historical? I mean, anything like that?

No, we don't really break down inventory in that regard, in terms of how we share the information or guide. But what I can tell you is that -- a couple of things. One, we definitely have reduced our exposure to retired inventory over the last year, and a couple of the events last year, in Q1 of last year, we had a lower cost to market adjustments for some of the very oldest inventory. And then in Q3, we had some opportunistic sales of final liquidation.

So, I think as we enter this year, we feel good about our level of retired inventory. We also have a long history of being able to sell retired inventory at great margins at our indoor outlet sale in Fort Wayne. That's where our outlet store is, as well as on the Web. And as we've talked in the past, we don't have the same level of either seasonal or fashion risk that you have in a lot of retail apparel businesses.

Okay, okay. And I guess, Jeff, I'm sorry, I might have missed this. But the SG&A, heavier in the first half versus the back half?

Yes.

Could you give an explanation as to what exactly is driving that?

Yes. During fiscal '12, we made a number of non-CapEx SG&A and infrastructure investments. So as we talked throughout the year, with the rapid growth we have in the Company, we're continuing to make critical investments. And so during -- so for '12, we made a lot of investments around our direct team and continuing to build out our merchant function. We enhanced our customer service capability, just a number of areas that are critical to our growth. And so, as a result, we won't fully annualize that, some of those investments until the back half.

Okay, okay. All right, great. Thanks a lot. Good luck, guys.

Thanks, Ike.

Next, we'll take Edward Yruma with KeyBanc Capital Markets.

Thanks very much for taking my question. Congrats on a good year.

Thanks, Ed.

Can you talk a little bit about your testing on spring? Did you see some of this lack of a breakout pattern early in your testing? I know you indicated last quarter that the sell-in was actually very good at the indirect channel for the spring patterns.

Yes, Ed. We -- the spring season is actually -- it's performing well, and it's performing in line with how it tested. Again, when we speak to lack of a breakout pattern, it's really the lack of the number of breakout patterns in the overall portfolio. We -- Island Blooms is performing well, and it could be, in hindsight, you sort of have to look at it after a few seasons, could be classified as a breakout pattern.

So we think there is -- it's a strong season in and of itself, and it tested well early on.

Got you. And just so I'm clear, you guys essentially have a breakout pattern generally more seasons than not? Is that a fair statement, or --

I'd say we would characterize it as having a number of breakout patterns in the overall assortment.

Got you. And I guess with -- you had indicated that you were going to kind of carry over some of the existing patterns as part of your flexible strategy. How many patterns, then, will you have in the store, and do you think that's the right number?

We'll still -- right now, we have 20 to 22 active at a time, and that will be our -- really, our goal is to keep it at 20 to 22. So holding on to some of the higher, better performing patterns, means that we'll just retire a lower performing pattern earlier than we might have anticipated.

Great. And one last question. On the indirect channel, I think you guided to low single digit growth for the first quarter. If I strip out Dillard's and the impact of Japan, what does that kind of core indirect growth look like? Thank you.

You know, Ed, we don't guide to the specific components within that. So what I would say is that within the indirect channel, we did guide to the low single digits, and obviously, you have some of the maturing of Dillard's in that. So for core indirect retailers, it would be closer to flat.

And Japan is accounted for in the --

In the direct segment.

Right.

Great. Thank you so much.

Thanks, Ed.

We'll take our final question from Peter Wahlstrom of Morningstar.

Good afternoon. Thanks for taking my question. As we -- as you've basically pushed through last summer's price increases, how much of that were you able to realize, and as you head into the back half of fiscal 2013 and some of the cost headwinds reverse, could you give us a sense on how you're thinking about pricing?

Yes, for -- so in fiscal 2012, we took a fairly significant price increase across approximately half of our portfolio in conjunction with our fall release in July. And that price increase was bigger than normal, and it was in response to the fact that we were seeing significant cost input pressure from China and cotton -- China labor and cotton.

For this year, from a pricing standpoint, what we do in any normal year is, we look at the lineup of the assortment, and as we introduce new styles, that's an opportunity to price them appropriately as they get introduced, and it gives you the opportunity to look at some of the adjacencies.

So, the pricing action that we'll take during this year is relatively immaterial, and it's more in line with sort of what we've done in past years, and not a repeat of what we did in '12 as a result of the cost pressures.

Okay, and then as a quick follow up, there's several puts and takes as it relates to gross margin. And I'm not necessarily thinking about fiscal 2013, but we're hearing a lot about -- and you seemed to mention, labor costs in China, and increases. Those certainly aren't going away. But is it too early, now that you've been in China since 2008, is it too early to look beyond manufacturing in China?

Yes, you know, we're continuing to look at manufacturing capability, and I point out, in Mike's closing remarks, we mentioned again the hiring of Lisa Mis to be head of Global Sourcing. So we're continuing to evolve our capabilities and capacity to think about where we source product. We have -- we've been in China for a number of years. We have a sourcing office there, so that we can work directly with suppliers, and we're continuing to evolve our thoughts within China.

At the same time, we are looking at the possibility of other countries. Part of what makes China somewhat unique is the capabilities for our particular category are much deeper than in a number of other countries. So while there's opportunity over time, China still remains one of the best places to produce our product globally.

Okay. Thank you very much.

Thank you. Okay. Everyone, thanks for joining us today, and for your continued interest in Vera Bradley. We look forward to speaking with you during our first quarter conference call, which will be held on May 31st at 4:30 pm.

And everyone, that does conclude our conference call for today. Thank you all for your participation.