Vera Bradley Inc (VRA) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Vera Bradley fiscal 2013 second quarter results conference. 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. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Paul Blair of Vera Bradley's Investor Relations department. Please go ahead, sir.

Good afternoon and welcome. We would like to thank you for joining us this afternoon for Vera Bradley's fiscal 2013 second quarter results conference call. Some of the statements made on the conference during our prepared remarks and response to your questions may constitute forward-looking statements made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect. Please refer to today's press release and the Company's Form 10-K for the fiscal year ended January 28, 2012 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 disclosed on the call.

We understand that this is a busy period for reporting and intend to keep today's call to and 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 will focus on three main topics. The highlights of our fiscal 2013 second quarter performance, a review of our initiatives and outlook for the remainder of fiscal 2013, and an update on the progress against our long-term growth strategy. Although there were many accomplishments during the quarter, our results fell short of our expectations. As we shared during our previous call, our most significant challenge has been a product portfolio that has under performed. While our spring and summer collections had a positive impact on the overall offering, they were not enough to overcome the weakness of prior seasons in the midst of a challenging consumer environment. As result, while we met our revenue expectations, we sacrificed gross margin in the quarter. We will provide more insight on this topic throughout the call.

After a challenging May and June, business improved significantly in July with the successful launch of our fall back to campus collection. As we begin the third quarter, we are encouraged by our current momentum, the strong selling of the winter collection to our specialty retail partners and strengthening comparable store sales. In the second quarter, consolidated net revenue was 19% over prior year to $123 million, in line with our guidance. Consolidated gross margin was 55.8% a decline of 170 basis points to prior-year, reflecting the impact of increased promotional activity to address lower than expected sales trends early in the quarter. As result, net income decreased $200,000 to $13.4 million, or $0.33 per share, versus $13.6 million, or $0.34 per share in the prior-year.

In the indirect segment revenue grew 2.6%, in line with our expectations. As a result of the challenges I mentioned earlier, we expensed lower than anticipated reorders from our specialty retail partners during May and June. As we shared on our last call, we've been working closely with them by a system and a variety of ways to support their in-store events and other marketing efforts to improve sell through. The sales team also provided support to ensure that our partners had the proper merchandise assortment and marketing plans in place to capitalize on the highly anticipated fall back to campus launch. As a result of these efforts, we believe that our specialty retail partners are now appropriate and merchandised and are experiencing strong sell through of our fall offerings as evidenced by the positive reorder activity we've experienced since mid-July. Also during the second quarter, we continued to expand our presence in the department store channel by opening an additional 70 Dillard's locations and embarking on a new relationship with Von Maur, opening in their 27 stores.

In our direct segment revenue grew 37%. During the quarter we opened eight new stores, achieved comparable store sales growth of 5.3% and grew our e-commerce business by 21%. In response to the challenges I mentioned previously, we were increasingly promotional as the quarter progressed primarily in outlet stores, as well as on our website. The weakness in May and June was partially offset by the successful launch of the back to campus collection, as well as the continued strength of our new store openings. During the quarter, we continue to develop existing markets such as Nashville and Pittsburgh, and established a presence in new markets such as Oklahoma City and Phoenix. As we have discussed before, one of our key strategic initiatives has been to enhance our product development capabilities to ensure improved product assortments each season. This has included the creation of formalized merchandising teams, as well as updates to a collaborative processes by which we plan each season. While back to campus was the first season in which we could affect a better assortment through these improvements. The launch began on June 28 with the release of our highly anticipated new bedding and dorm collection in three patterns, VaVa Bloom, Indigo Pop and Paisley Meets Plaid.

On July 10 we brought the remaining assortment to market that features several styles and updated categories, including expanded line of backpacks, soft body silhouettes and tech items. An integrative marketing campaign has included both in-store and digital activities supporting the release across all channels. Consumer response to these collections has been outstanding and currently in the period since the launch, the top two selling styles in our stores consist of five new products such as the campus backpack, as well as five classics such as the large duffel and the hipster.

For the remainder of the year we will continue focus on bringing compelling collections to market. Tomorrow we will launch our fall fashion collection which features three patterns including Provencal, Canyon and Portobello Road, as well as fresh assortment of new styles, including an expanded offering of baby bags. On September 20, we will launch Ribbons, a pattern supporting breast cancer awareness. Then on November 2 we will release our winter collection, which features two new patterns, Dogwood an English Rose and signature sales, as well as an assortment of holiday gifts. These two collections were well-received by our specialty retail partners as demonstrate by their commitment during the sell-in period.

It's important to note that we've historically launched winter in late September marking the last release of new patterns for the calendar year. We believe this year's November launch of two new patterns will create positive momentum going into the holiday period. In general, the updated timing of our seasonal releases allows for natural marketing names more in line with how and when our customers are shopping. For the remainder of the year, we are focused on executing our merchandising sales and marketing plans across all channels to fully leverage these themes.

Moving on to our efforts in Japan, our objective this year has been focused on establishing relationships with major department stores and then leveraging those to build connections with consumers. Through the end of the second quarter, we've opened a total of eight locations in department stores. Since our entry into the Japanese market last year we have learned that, as in the US, the more a customer expenses the brand the more it resonates with her. This was demonstrated once again earlier this month when we were featured on the stage at Isetan Shinjuku. The stage is a temporary event space on the first floor of this iconic department store dedicated to showcasing the finest brands in the world. Over the course of six days we greatly exceeded both our expectations and those of Isetan. Our experiences in Japan to-date, both in our premium shop-in-shops and through events at the stage have given us a foundation by which we can map a future long-term vision for the market. We're actively developing that vision, bearing in mind our successes and learnings to-date, as well as our shorter-term priorities here in the US.

As noted in our press release, we have lowered our guidance for the year. I would like to provide some color around this change. Second quarter benefited from the strength of our fall product introductions and we are pleased with the current momentum we are seeing in the business. That said, when guiding for the back half of the year, we have taken into consideration our new released cadence and the challenging consumer environment, which results in limited visibility into the holiday season. Therefore, we are revising our outlook to take those factors into consideration. Jeff will provide more detail in his discussion on our outlook.

In conclusion, we have a strong brand here edging a 30 year track record that enables us to enjoy tremendous brand loyalty and provide the foundation for our long-term growth strategies. Key of these strategies is our ability to consistently execute compelling seasonal assortments. While we need to continue to invest in routines and processes that support how we go to market, we believe we have made significant progress in enhancing these capabilities and are encouraged by what we're seeing in the success of the fall back to campus launch, the current momentum of the business and a great line up of product introductions for the remainder of the year.

I'll 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, as well as guidance for our fiscal 2013 third quarter and full-year.

Thanks, Mike and good afternoon. I will begin my remarks with a review of our fiscal 2013 second quarter and then provide you with our outlook for the third quarter and full-year. As Mike mentioned, the second quarter was challenging in May and June as we managed a product portfolio that under performed prior to the launch of the fall back to campus collection on June 28. We were able to overcome some of the sales challenges but our required increased promotional activity that impacted gross margin and earnings per share. Net revenues for the second quarter increased by 19% to $123 million, from $103.8 million in the prior year. This performance was on top of revenue growth of 30% in the second quarter of last year.

In the direct segment, net revenues increased 37.2% to $65.7 million, driven by increases across our full price and outlet stores, as well as continued growth in e-commerce. The direct segment accounted for 53% of total net revenues in the second quarter, versus 46% in the prior year. In our stores, net revenues grew 51% during the quarter driven by the opening of 17 full price and four outlet stores during the past year, as well as an increase in comparable store sales of 5.3%. In the second quarter, we opened seven full priced stores, one outlet store in both current and new markets. During the balance of the year we have six remaining stores to open for a total of 20, which is one more than originally planned. Overall, we are encouraged with the performance of our new stores. We ended the quarter with 60 full priced and 10 outlet stores.

E-commerce net revenues grew 21% and represented 22% of total net revenues during the second quarter. This was due primarily to increased traffic of marketing of the fall back to campus selection through social media and increased keyword search spending, as well as targeted promotions. Indirect net revenues increased 2.6% to $57.3 million, in line with our expectations for the quarter. We expect challenges with reorders in May and June for back to campus release was well-received and as a result, we have experienced steady reorder volume throughout July. We are also encouraged by the reorder volume we have experienced during August.

I also want to mention that we believe the inventory issues at some of our specialty retailers, discussed on our previous call, are largely resolved. In the department store channel we continue to build on our positive momentum at Dillard's, launching an additional 70 locations during the quarter. We are now represented at 176 Dillard's locations and expect to launch in approximately 100 additional stores, coinciding with our September and January launches. Our collaborative relationship with the Dillard's team has enabled us to continue optimizing the product assortment, evolving visual presentation and improving sales productivity.

Gross profit for the second quarter increased 15.1% to $68.6 million, resulting in gross margin of 55.8%, compared to a gross margin of 57.5% in the prior year. Second quarter decline in gross margin was due to promotional activity to drive sales, which was partly offset by channel the mix as the direct segment becomes a larger portion of our overall business, as well as operational savings. Total SG&A expense was $47.8 million for the second quarter, compared to $39.1 million the prior year. SG&A as a percentage of net revenues was unfavorable by 120 basis points compared to the prior-year, due primarily to annualizing fiscal 2012 infrastructure investments made in the second half of last year and higher occupancy cost driven by opening full priced stores earlier than originally planned. As a result, operating income for the second quarter decreased 4.9% to $21.8 million, or 17.7% of net revenues, compared to $22.9 million, or 22.1% of net revenues for the prior year. Operating income in our direct segment increased by 24.6% to $16.3 million, with operating margin of 24.7% in the second quarter this year, compared to 27.3% in last year's quarter.

Operating income in our indirect segment declined by 1.6% to $23.7 million, compared to $24 million in the same period last year, with operating margins of 41.3%, compared to 43% in the second quarter of last year. The resulting net income for the second quarter was $13.4 million, or $0.33 per diluted share, compared to net income of $13.6 million, or $0.34 per diluted share in the prior year. The second quarter results included earnings per share investment of $0.02 per share for our Japan market expansion. Key balance sheet and cash flow highlights as of July 28, 2012 include cash and cash equivalents of $7.6 million. Accounts receivable of $49.3 million, compared to $44.7 million in the prior year, with day sales outstanding at 73.9 days, compared to 67.5 days in the prior year reflecting the timing of the fall back to campus sale. Inventory at the end of the second quarter was $117.9 million, compared to $118.1 million in the prior year, essentially flat year over year despite revenue growth of 19% and the opening of eight new stores in the second quarter. The lower growth in inventory compared to revenue reflects improved inventory management.

We continue to be pleased with the progress we've made in evolving our supply chain and inventory management processes, and feel confident that inventory will grow in line with revenue over the long-term. Cash flow from operations during the second quarter totaled $25.5 million, compared to a net use of cash of $11.8 million in the prior year, an improvement due to inventory management. Cash flow from the quarter was used to fund capital projects including expansion of our distribution centers, which is nearing completion, as well as opening stores ahead of schedule.

I would now like to review our outlook for fiscal 2013 third quarter as well as the full-year. We have visibility into our third quarter based on demand in our indirect segment and we are experiencing positive momentum to the comparable store sales in our direct segment. However, we have less visibility into fourth quarter sales with uncertainty around the challenging consumer environment and the potential effect of the changes we have made in our launched cadence. Therefore, we are adjusting our guidance for the remainder of the year.

In the third quarter of fiscal 2013, we expect net revenues to be in the range of $134 million to $136 million, compared to $121 million in the prior year. This includes comparable store sales growth of mid single digits. Indirect net revenue growth in the third quarter is expected to be flat to the prior year. As a result of the cadence change, we have orders received from the majority of indirect demand for the third quarter. As we shared on the first quarter call, there were events in the prior-year related to the pull forward of indirect sales for a holiday build of approximately $3 million and the opportunistic sales to the off-price channel of approximately $3.5 million. Gross margin for the third quarter is expected to expand over the prior year by approximately 200 basis points. Of which, approximately 120 of those basis points is attributable to the previously mentioned opportunistic sale to the off-price channel of $3.5 million in the same quarter of the prior year.

Although inventory growth in the first half of the year was below sales growth, inventory levels for the third quarter may grow above the rate of revenue due to the timing of the spring launch one week earlier than the prior year, as well as a concerted effort to ensure we are adequately prepared for a successful holiday season. For the full year we expect inventory to grow in line with sales growth. Diluted earnings per share are expected to be in a range of $0.37 to $0.39. Our earnings per share estimate assumes an effective tax rate of 39% 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 $531 million to $536 million, compared to our previous guidance of $535 million to $540 million. This includes indirect net revenue growth of low single digits for the full year. Comparable store sales are expected to be mid-single digits for the full year. We expect gross margin to improve by approximately 30 basis points for the full year. We expect diluted earnings per share for the full year to be in a range of $1.60 to $1.63. This estimate includes the previously mentioned net full year investment of approximately $0.06 per share to support our market entry into Japan. In addition, this estimate includes an effective tax rate of 39% and fully diluted weighted average shares outstanding of 40.6 million. Capital spending for the year remains on track at approximately $36 million. With that, I will turn the call back over to Mike for some closing remarks.

All right, thank you Jeff. In closing I would like to reiterate that while the second quarter was challenging, we are encouraged by the success of the fall back to campus launch, the current momentum of the business, and the layout of great product introductions for the remainder of the year. We also remain optimistic about the long-term prospects for Vera Bradley and the progress we continue to make in executing our growth strategies. I would also like to thank all of our team members and our retail partners for their hard work and dedication during a challenging period. Our optimism around the long-term prospects for Vera Bradley is based on the strength of our brand, our unique culture, and the ongoing commitment to serve our loyal and passionate customers. Operator, we will now take questions.

Thank you.

(Operator Instructions)

Neely Tamminga, Piper Jaffray.

I just wanted to follow-up a little bit on the momentum. You guys keep referring to the momentum post the back to college launch. And it sounds like it was more than just a modest improvement or rather more of a market improvement. Jeff, it seems to me that your comp guidance of being just mid singles for Q3 relative to the number you have for Q2, are you currently experiencing trends that are above that and you are baking in some conservatism? Just trying to get a sense of squaring all the comments that you are making. Thanks.

Sure. As we mentioned, with the fall back to campus launch at the end of June, beginning of July, we did see very nice consumer response to that launch. And that helped drive our overall comps to 5.3% for Q2. We are seeing momentum into August, both in comparable store sales as well as reorders from our indirect retailers. So while we have good momentum and we're feeling good about it, we also want to make sure that we are guiding in a way that is reflective of the overall marketplace, and the fact that we still have half a year to go.

You are trending better than that but there is conservatism? Is that how we are supposed to interpret that?

I can't tell you -- I can't comment on that either way other than to say that we're pleased with the way that August has trended. But it has been in a choppy environment this year.

And then if I may as a follow-up, dare I ask if you have enough inventory at this point considering where we have been? I know you made a couple comments as to what you are expecting for Q3 and the full year. Are you feeling good about you have the appropriate level of inventory to feed into the momentum right now?

I think we're feeling good about overall inventory levels. So as we mentioned, we just finished the sell-in of winter to our specialty retail partners, and that has been well received. I think overall inventory levels, we're feeling good about, both for winter and fall fashion, which launches tomorrow. And Ribbons.

Great, thank you.

Thanks Neely.

Jennifer Davis, Lazard Capital Markets.

Hi guys, I was wondering if you could comment on the response that you have gotten from the indirect retailers regarding Fall 2. On your blog there was some commentary that seemed a little more negative, but it sounds like with guidance for the third quarter, you're a little bit more optimistic.

This is Mike. The sell-in of Fall 2, fall fashion, which launches tomorrow is very good, and that season tested very well. We've got a great degree of confidence in that offering. When we posted those images on the blog, I will have to say it probably wasn't our best foot forward in terms of images that we used. We quickly put up updated images. We also posted on Facebook, I think earlier this week, all three of those patterns for Fall 2. And the responses that we have gotten since then with better imagery has been overwhelmingly positive for that collection.

So that said, I wouldn't put too much emphasis on what you see on a blog, again, until the consumer season. It is difficult to replicate the actual product. But we feel very good about Fall 2.

Okay great, thanks and best of luck.

Thank you.

Erika Maschmeyer, Robert W. Baird.

Hi, great. Thanks so much. Could you talk a bit more about the cadence of your comp trends in Q2? How May and June looked versus July? Did things drop off dramatically after you gave guidance, was June really the month that led the under performance. And then, does the guidance that you gave assume that July and August trends continue? Thanks.

Sure. This is Jeff. To give you some complexion on the cadence for the quarter, May started out fine, and at the time we guided May, we have seen some choppiness but overall it was looking okay. Right at the end of May, we did see a deceleration.

June was a very tough month for us. And we really didn't see the consumer bounce back until we launched fall back to campus on June 28. And then in regards to what we saw the balance of July and into August, our guidance for Q3 does reflect the fact that we saw a nice steady comps and a comped trend that has continued through July and into and through August.

Okay and just to go forward with that, could you talk a little bit more about what is giving you less confidence in Q4 and does the guidance take into account the shift in the launch timing? It seems like that should certainly be a positive for the holidays.

Yes, I think go back to our prepared remarks, again, it has been a somewhat unpredictable and uncertain consumer environment. And with the cadence change, while we feel very good about the cadence change, we think it's the right thing to do for our consumers. We think it will play very well in our own retail stores in terms of opportunities for new news. And while our sell-in of winter to our independent retailers has been good, the reality is this is the first year we have done a cadence change so we still don't know exactly how it's going to play out. A combination of those two things is the reason that we are more cautious on the back half and especially Q4.

Thanks so much. Best of luck.

Thanks.

Thank you.

Evren Kopelman, Wells Fargo.

Great, thank you. Can you talk a little bit more about -- you mentioned the reorders in May and June were weaker and then they picked up in July. Maybe give us a little bit more color on what is the product portfolio that your customers are reordering from? Did you get new products, is that why the reorder picked up? Or do think there is a change in reorder patterns of your customers? If you can give a little bit of color, a little bit more about that, that would be great.

This is Mike. We discussed on the last call the challenges that we were having in the portfolio. We were also sharing the challenges that the independent retailers had just in terms of the assortment they had in their stores, the level of inventory they had. And we said that it was really going to take us through the end of the second quarter to work through that.

And so what we have seen, our sales consultants were in the field, we provided assistance just in terms of marketing tools. We helped the retailers move through that merchandise, again, primarily by supporting marketing efforts. And so now largely, they have moved through a lot of that merchandise. The inventory challenges that existed early on are largely resolved, and the launch of back to campus has been very strong. So what they are reordering right now is primarily the fall season that launched June 28 and July 7.

Okay. And then a follow-up is on your comments around the increased promotional activity. Is that primarily in your direct channel, e-commerce and your own stores, because I believe you don't do mark down allowance type of things with your indirect customers? And also along with that, could you talk about why the indirect segment margin was down. Thanks.

Sure, because of the sales challenges that we saw, especially early on in the quarter, we were more promotional than we normally would be and it was in both our indirect and direct segments. In the direct segment it was primarily in our outlook stores and e-commerce, so our full price stores were still largely full priced, other than our normal sale period in June.

In the indirect segment, we had some sales of retired products, as well as expedited shipping to some of our indirect retail partners. So because of a lot of our sales to them came in late in June, we wanted to make sure they had the product for the launch because a number of them were actually staging launch events. And as a result of that, we wanted to make sure that they had the product to be able to have those events. So we expedited shipping in a number of instances to make sure we were doing the right thing for our customer and ultimately their customers as well. Those were the things that drove the margin issues in the indirect channel.

Great, thank you.

Thanks, Evren.

Amy Noblin, William Blair.

Thanks, good afternoon. I was curious if you could talk -- I know it's early but what are some of your early learnings from the shift in your delivery cadence? It sounds like you're pleased with how you're managing through the shifting cadence with your wholesale partners and maybe if you could talk a little bit about the plans for spring and any adjustments you are going to make there.

I think a derivative question of that is, as you are changing these cadences and gearing them more towards self purchasing, given the broad appeal of your product, how do you ensure that you have patterns that are relevant to everyone that will be purchasing? This is really in reference to some of the comments that are on the blogs about Fall 2 patterns. I view the blogs as a younger customer set. Are those necessarily who those patterns were geared for? How do you manage that process given how broad in appeal your product is? Thank you.

Amy this is Roddy. To start on the cadence change question, the feedback -- reasons for confidence around the cadence change as it relates to our specialty retail partners, to this point, they have been pleased with what we are doing. They completely understand that we are shifting to the consumer schedule rather than to more of a traditional wholesale schedule of launching. We are also excited about shifting the winter release later into the season and closer to holiday. So that it's not such a big gap in time between our last calendar release of the year and the actual holiday period. So we've gotten good feedback on that, and it seems like winter has been -- to this point, we are pleased with how it is selling in.

As it relates to the patterns themselves, again, the blog, it maybe a young customer. I think there are as many younger customers on Facebook now positively commenting on it. So we do think that a lot of that was just how we featured those. The patterns themselves, the design team is actively working, they are looking out well in advance at the trends, reacting to what they believe is in fashion. Certainly bearing in mind that we are marketing to a younger consumer increasingly and I think you'll actually see over time the evolution of the patterns in that way. We feel very good about the patterns and they are the right blend for our customers across all the generations that we are marketing to.

Okay, thanks. Are you in a position to give us any visibility into spring and how you will be shifting your pattern deliveries, if at all, after spring?

Yes. Spring will look like spring of this year. It will be more of a traditional release that we've had. It will be apples to apples.

Okay, thank you.

Thanks, Amy.

Peter Wahlstrom, Morningstar Investment Research.

Good afternoon. I was hoping to get it more color behind the full year gross margin expectation for the year. Now you're expecting 30 basis points expansion and you had been assuming some channel mix benefits and potentially some tailwinds from lower cotton cost. Just trying to drill down a little bit as to how much do you attribute to a function of lower volumes, some pricing pressure on newer product coming to market or discontinued, outgoing patterns.

We had originally -- when we gave guidance originally to the full year, we had guided to positive 50 basis points, we had raised that to the 90 when we gave Q2 guidance, so the reduction back to 30 is a function of two things. It's a function of the miss in the second quarter because of needing to be more promotional. And then secondly, some of the uncertainty around fourth quarter that we've reflected in our guidance. So it's really these two things. In terms of cons savings, we're fully realizing those. And in terms of margin on any new products on an overall blended basis, we are still in line.

Okay and quickly taking a look at the retail real estate landscape today. As you look at your pipeline for new stores and continue negotiations with some of the A mall landlords, how much is the discussion surrounding rent, length of lease, location within the mall and concessions changed within the last few months?

This is Roddy. It has not over the past few months. We have seen a general shift since the downturn of -- since the recessionary period. We were having better tenant allowances at that point. Tenant allowances have ticked up a little bit, but nothing meaningfully over the past few months. We do continue to get great locations offered to us in the malls and that has been consistent over the past few years related a lot to our performance.

Okay, thank you.

Oliver Chen, Citi.

Hi, guys. Thanks much. I had a question related to the patterns that had performed a little bit worse than expected in terms of the prior seasons. Going forward, do those still exist in your portfolio? Are there ones that you still have to clear through?

And then my follow-up question is broadly related to your indirect line. It looks like it has been trending more consistently than in the past. Do feel like -- and in some of your comments lead me to believe that you guys have a little bit better visibility into how that moves. Is that a true statement? If you could offer some commentary there, I would appreciate it. Thank you.

I will take the first question. This is Mike. In terms of portfolio, we retired just recently about five patterns. Deco Daisy, Watercolor, Viva la Vera, Plum Petals and Safari Sunset and collectively those patterns had under performed. They might've performed well in season, but the lag or tail on those patterns dropped off.

The encouraging news is that from both the spring and summer seasons, we have strong patterns that continue to sell well in addition to the three we just launched in fall. Island Blooms and Lime's Up are in the top tier of patterns. We continue to refresh the portfolio with stronger patterns, we are parsing out some of the older under performing patterns, so we feel good about the quality of the portfolio. And understanding what's coming down the pike in terms of newness and freshness, we are pretty encouraged by what we're seeing in the product performance and feel good about the back half of the year.

And with regards to your question about the indirect channel and visibility, as we mentioned in our prepared remarks, we have been working with our independent retailers, during the year. Obviously as we work through it, they managed through a weaker product portfolio. So we work with them to ensure that they were able to work through inventory to refresh their overall lineup. Work with them to make sure that as we launched the fall back to campus collection, which we have long anticipated, would be very strong, that they were properly inventoried.

Since then what we have seen is that they are seeing nice consumer traffic, nice sell through, it is reflected in reorder volume. And then because of the cadence change and the timing of selling in the winter collection, we do have higher visibility that we normally would during a quarter like Q3, because that sell-in has ended. Overall we are feeling good about where we are at from a visibility standpoint, with the one exception that as we go to the back half of the year, we do have some uncertainty around Q4.

Thank you. Thanks for all the detail and great luck. I really like the back-to-school products, so good luck.

Thanks Oliver, appreciate it.

Steve Marotta, CL King and Associates.

Good evening. Thanks for taking my question. Quick question regarding new stores. Can you talk about the new stores that have opened up in the last year? And how productive they are versus the average of the chain, as well as the newer stores that have been added to the comp recently, so just over a year old, and how those are comping to the balance of the chain? Thank you.

Sure. We have talked for a number of quarters about the fact that what we have seen in the last two plus years is that the classes that we have been opening have been extremely productive, and we think that's a combination of several factors. One, we continue to learn so we opened our first retail store in 2007. So we are still relatively new as a retailer and continue to learn what it takes to open a successful store.

As we have become more successful, we are also getting much better real estate locations, so I think that has continued to help us from an improvement standpoint. We continue to dial-in the associate staffing of those stores and the overall experience. So all of that combined, our stores, what we have seen in the last two plus classes, the stores that have opened thus far this year look like there going to follow a similar trend. The stores are opening very productive so they are opening at the high-end or above our first-year target store economics.

In terms of stores rolling into the comp base or the stores that are coming into the comp base this year, overall some of the ones that are opening with very high productivity, they are coming into the comp base with more moderate comps as we have talked about in the past. And that is a functional of the fact that they are already operating, in many instances, well below -- well above the sales per square foot of the mall average.

That is helpful. One quick follow-up. Do you anticipate opening up roughly 20 doors again next year? Is that safe to assume?

We haven't guided for next year but our long-term guidance is 14 to 20 stores per year.

Terrific, thank you very much.

Randy Konik, Jefferies.

Hi this is Amanda Sigouin on for Randy. A question about the winter collection, you mentioned it's been well received. Have you done any consumer testing around that? Just curious how that compares to prior releases if you have.

And then also on the new online outlet store, how does that fit into the overall strategy? Is it something you plan to use regularly going forward? Or more selectively? Thanks.

This is Roddy. Just beginning with the last question, the online outlet store We are evaluating how we use that. Right now, it's on a selected basis. And what was the first one?

Just asking about the winter collection.

Yes, the winter collection. Yes, we have tested winter, and are pleased with how it has tested. Actually, we're quite leased with how Ribbons itself tested, such that we were actually going to originally bring it in a limited assortment of styles and have decided to bring it in the full assortment of styles as a result.

I think the other thing that would be good to point out is while we are very bullish on the patterns that are coming down the pike, what is different about where we are today relative to history is we are refreshing the assortment with patterns, but also with great new styles. With the back to campus collection, we had bedding, we had throw blankets, we had pillows, we had dorm rugs, we had a lot of things for decorating the dorm and then other new styles. We had an expanded backpack collection, a number of cross body styles that we launched on July 10. And those have invigorated the portfolio as well. We are becoming, over time, less dependent on patterns, which I think is an important thing for everybody to understand. This will be a style story, as well as merchant team starts to impact the overall assortment. Operator, anyone else?

Ike Boruchow, JPMorgan.

Hi, guys. Thanks for taking my question. A question about the gross margins in the quarter, you guys were a little more promotional like you pointed out. The question I have is the momentum that picked up mid July and into August, was that a function of something within the portfolio, was that a function of that's when you became more promotional or was it both? And then your outlook for the back half of the year, does that incorporate being incrementally a little more promotional or not?

What was driving the business in July, Ike, was the new product. And what continues to drive the business and the momentum we see right now is the new merchandise that we launched in late June and July. And we expect to see that continue. The nice thing about where we are right now is that we are launching a new collection tomorrow. A year ago, there was a longer period of time between launches. So we expect to continue to build momentum as we go through the back half.

And we do not anticipate needing to operate in a promotional environment as what is required during May and June.

Okay, great and one quick follow-up. Jeff, on the SG&A, now that we are annualizing a lot of those investments you made, how should we think about SG&A dollar growth and is it possible to get your SG&A guidance for the third quarter?

I think if you do the math, we have provided guidance on revenue margin and EPS, so I think SG&A should model out in line.

Okay. Thanks guys.

Jennifer Davis, Lazard.

Hi, thank you. I was wondering if you guys could talk about the release cadence for next year? Will it be similar to this year? So we will anniversary some of the shifting.

And also wondering if you could tell us what percent of your sales are new product and new patterns. And how did this launch compare to prior launches in terms of that?

And then finally, did you or are you offering similar extended payment terms this holiday, like you did last year? Will that be apples to apples? Thanks.

Jen, this is Roddy. You can think of, generally speaking, think of the cadence next year as looking very similar to what it is this year. As far as the mix of new and old, I think the best representation of that, and we shared this in the prepared remarks, is that the top ten styles since the launch, half of them are new styles and half of them are classics. And this is a trend -- this is something we haven't necessarily seen in a few seasons. So it's a good sign that the styles we are bringing to market are performing well, as well as the classics we have had in line.

I agree with that. What about patterns?

As we shift to -- Mike mentioned the Island Blooms, Lime's Up, essentially the patterns that we have released this year are performing much better than some of the patterns from last year. And typically that's the case as patterns age and tail off. But it's a little bit more marked difference this year, and that is why the portfolio of patterns earlier in the year was more challenging.

Okay, thanks.

Can you repeat your question on the dating again?

I asked about the extended payment terms that you offered for holiday last year. Are you offering those again this year? Will that be apples to apples?

We are not anticipating doing any extended dating terms in the back half in any material way.

Okay, great, thanks. Best of luck.

Thanks.

Thanks, Jen.

Mr. Ray, I'll turn the conference back to you for closing remarks.

We appreciate everybody's time. Thank you for joining us today and for your continued interest in Vera Bradley and our brand. We look forward to speaking with you during our third quarter conference call, which will be held on December 5 at 4.30 PM. Thank you.

That concludes today's conference. Thank you all for joining us.