Vera Bradley Inc (VRA) 2013 Q3 法說會逐字稿

Welcome to today's Vera Bradley fiscal 2013 third quarter results conference call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session, and instructions will be provided at that time for you to queue up for your questions. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Paul Blair of Vera Bradley's investor relations department. Please go ahead.

Good afternoon, and welcome. We would like to thank you joining us this afternoon for Vera Bradley's fiscal 2013 third-quarter 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. 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 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. We understand that this is a busy period for reporting, and intend 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 would 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 two main topics, the highlights of our fiscal 2013 third-quarter performance and our outlook for the holiday season and remainder of fiscal 2013. We are pleased with our performance during the third quarter, the result of a compelling product portfolio that drove sales gains across our operating segments. During the quarter, we experienced continued selling strength in the back-to-campus collection, as well as the successful launches of our fall fashion and Ribbons collections. Our results were further enhanced by the updated timing of our seasonal releases, allowing for natural marketing themes more in line with how and when our customer is shopping. As a result, consolidated net revenue increased 14% over the prior year to $138 million, consolidated gross margin increased 380 basis points to 58%, reflecting operational efficiencies, the prior year opportunistic sale of retired inventory, and lower input costs, partially offset by a $1.2 million charge related to damaged inventory, written off during the quarter.

The resulting net income increased 37% to $17.7 million or $0.44 per share, versus $13 million or $0.32 per share in the prior year. In our indirect segment, net revenue grew 7% reflecting strong demand through both our specialty retail and department store partners. And our direct segment net revenues grew 24%, driven by the opening of five new stores, solid comparable-store sales, and a slight gains in e-commerce. Comparable-store sales grew 7.1%, reflecting the strength of our product offering and the impact of incremental traffic-driving events. Our e-commerce business grew 1.2% during the quarter, reflecting reduced levels of discounting as compared to the prior year. That discounting drove growth of 55% in the third quarter of fiscal year 2012. While the reduced level of discounting this year impacted the growth rate, it also resulted in increased gross margins within the channel. Regarding our efforts in Japan, we continue to gain valuable insight from our market entry there. We had an avid Japanese customer, and our experiences to date, both in our permanent shop-in shops and through a number marketing events, have given us a foundation by which we can map a long-term vision for the market.

We are actively developing that vision, bearing in mind our successes and learnings to date, as well as a shorter-term priorities here in the US. As we look to the fourth quarter, we believe we are well-positioned, with traffic driving events to execute through the remainder of the holiday season. On November 2, we launched our winter collection featuring two new patterns, Dogwood and English Rose, and signature styles as well as an expanded assortment of holiday gifts. Although the quarter got off to a slow start in November as a result of slower overall traffic and the impact of Hurricane Sandy, demand rebounded over the post-Thanksgiving holiday weekend, and since then sales have been in line with our expectations. I would like to briefly mention that we recently identified an issue related to our inventory planning process that inadvertently resulted in order quantities in excess of forecasted demand, which we will receive in the fourth quarter and the first quarter of fiscal 2014. Jeff will provide additional details during his remarks. However, I want to assure you that we have addressed the underlying process issue and felt confident it will not recur in the future.

Looking ahead to January, we will launch our spring collection on the January 9, with four new patterns, Jazzy Blooms, Plum Crazy, Midnight Blues and Go Wild. The collection also features several new cross-body, tote and backpack styles, as well as many of our signature silhouettes in solid black microfiber. In addition, we are finalizing plans for a new baby gift assortment that will launch as part of the summer product offering in March. In conclusion, we are pleased with our accomplishments throughout the third quarter, we believe the progress we have made to enhance our teams and processes that support how we go to market was evidenced in our performance. The desire to continually improve that permeates our culture, coupled with our ongoing commitment executing our growth strategies, makes us optimistic about our future prospects. I would now turn the call over to Jeff Blade, our Chief Financial and Administrative Officer, who will provide additional details regarding our third-quarter financial results as well as guidance for our fiscal 2013 fourth-quarter and full-year.

Thanks, Mike, and good afternoon. I will begin my remarks with a review of our fiscal 2013 third quarter, and then provide you with our outlook for the fourth quarter and full-year. As Mike mentioned, we are pleased with our performance during the third quarter. We delivered financial results that met our top-line expectations while delivering strong earnings-per-share results. That revenues for the third quarter increased by 14% to $138.3 million from $121.1 million in the prior year, with growth across our operating segments. The performance was on top of revenue growth of 32% in the third quarter of last year. Indirect net revenues increased 7% to $74 million, above our expectations for the quarter. This includes $3 million of sales that were expected to ship in the fourth quarter. However, better inventory and stock levels allowed us to meet our specialty retailer partners' requested delivery dates. The overall increase was due primarily to the strength of the product portfolio, resulting in consistent reorders from our specialty retailers as well as the continuing success of our partnerships with Dillards and Von Maur.

In the department store channel, we continue to build on our positive momentum at Dillards, opening in an additional 54 locations during the quarter. We are now represented in 230 Dillards locations, and expect to open the final 54 stores in conjunction with our spring launch in January. in the direct segment, net revenues increased 24% to $64 million, primarily driven by growth across our full price and outlet stores, as well as slight gains in e-commerce. The direct segment accounted for 46% of total revenues in the third quarter versus 43% in the prior year. In our stores, net revenues grew 44% during the quarter, driven by the opening of 17 full price and three outlet stores during the past year, as well as an increase in comparable store sales, up 7.1%. Our performance is attributable to our compelling product assortment and the expansion of traffic-driving events related to our new product launch, Kate. In the third quarter, we opened four full price stores and one outlet store in both current and new markets, ending the quarter with 64 full price and 11 outlet stores. In November, we opened our final store for the year, bringing total new store openings for fiscal 2013 to 20.

Our e-commerce business grew 1.2% on top of 55% in last year's third quarter and delivered higher gross margin due to reduced levels of discounting. E-commerce accounted for 20% of total net revenues during the third quarter. Gross profit for the third quarter increased 22% to $80.2 million, resulting in gross margin of 58% compared to 54.2% in the prior year. The third-quarter increase in gross margin was due primarily to operational efficiencies, the prior year opportunistic sale of retired inventory, and lower input costs, partially offset by a $1.2 million charge related to damage inventory written off during the quarter. Total SG&A expense was $53.6 million for the third quarter, compared to $45.4 million in the prior year. SG&A as percent of net revenues was unfavorable by 130 basis points versus the prior year, due primarily to annualizing fiscal 2012 infrastructure investments made in the second half of last year. And increased marketing expenses, some of which are related to development of the marketing strategy for the launch of our baby gift assortment.

Operating income for the third quarter increased 28.1% to $27.6 million, or 19.9% of net revenues, compared to $21.5 million or 17.8% of net revenues in the prior year. Operating income in our direct segment increased by 32% to $17.7 million, with operating margin of 27.6% in the third quarter of this year, compared to 25.9% in last year's third quarter. Operating income in our indirect segment increased by 13.5% to $30.3 million, compared to $26.7 million in the same period last year, with operating margin of 40.9% compared with 38.6% in the third quarter of last year. The effective tax rate for the quarter was 35.2% compared to 38.9% in the prior year. The effective tax rate was positively impacted by nearly 4% due to three tax projects that were finalized during the quarter, including a state tax incentive we received based on the completion of our distribution center expansion. These tax projects are expected to favorably impact the effective tax rate by 1% in the fourth quarter, driven by the distribution expansion, which only benefits fiscal 2013.

The resulting net income for the third quarter increased 37% to $17.7 million or $0.44 per diluted share, compared to net income of $13 million or $0.32 per diluted share in the prior year. The third-quarter results include $0.03 per share related to indirect sales we expect to incur in the fourth quarter, and $0.03 per share due to the tax projects previously mentioned, partially offset by $0.02 per share due to the damaged inventory. The balance sheet highlights as of the end of the third quarter include cash and cash equivalents of $4.5 million, accounts receivable of $46.9 million compared to $38.6 million in the prior year, and related days sales outstanding of 64, compared to 55 in the prior year and 74 days in the second quarter of this year. The higher days sales outstanding compared to the prior year reflect the timing of the winter release at the end of the third quarter versus mid-September in the prior year. Inventory at the end of the third quarter was $135.3 million compared to $111.1 million in the prior year, an increase of 21.8% compared to revenue growth of 14.2%. The increase in inventory growth compared to revenue growth, which was anticipated, due primarily to earlier release dates for the spring and summer product offerings compared to the prior year.

Before I review our outlook, I would like to further expand on Mike's comments regarding our inventory. During the third quarter, we identified an issue related to our inventory planning process that inadvertently resulted in increased order quantities. The result was the ordering of approximately $15 million of inventory, which would have been ordered in the first half of fiscal 2014. As a result, we expect inventory growth to outpace revenue growth in a range of 10% to 20%, primarily in the fourth quarter and the first quarter of fiscal 2014. The inventory, while in excess of current demand, is in popular patterns and styles, and we expect to sell the majority of this product where our normal sales channels throughout next year. We have since revised our inventory planning process to include additional oversight and controls to ensure this won't re-occur. I would now like to review our outlook for fiscal 2013 fourth quarter as well as the full year. In the fourth quarter of fiscal 2013, we expect net revenues to be in a range of $147 million to $152 million, compared to $135 million in the prior year.

This includes comparable store sales growth of low single digits, and indirect net revenue growth of low single digits, which includes the shift of indirect sales into the third-quarter as previously mentioned. The lower consolidated net revenue guidance reflects the weakness in sales we experienced in early November, including the impact from Hurricane Sandy, that will be difficult to make up during the balance of the quarter, as well as our expectations for the remainder of the holiday season. Gross margin for the fourth quarter is expected to expand over the prior year by approximately 130 basis points into leverage of supply chain overhead costs driven by the increased inventory units previously discussed. Diluted earnings per share are expected to be in a range of $0.55 to $0.57.

This includes $0.03 per share related to indirect sales we expect to occur in the fourth quarter, $0.01 per share impact from Hurricane Sandy, plus an additional $0.01 to $0.015 per share to support this year 's investment in Japan, partially offset by the previously mentioned tax benefit of $0.02 per share. Our earnings-per-share estimate assumes an effective tax rate of 38% and fully diluted weighted average shares outstanding of $40.6 million. For full year fiscal 2013, we expect net revenues to be in a range of $526 million to $531 million, compared to our previous guidance of $531 million to $536 million. Driven by the third-quarter e-commerce performance, the early November sale softness, and the impact of Hurricane Sandy in the fourth quarter. This includes indirect net revenue growth of low single digits, and comparable store sales of mid-single digits for the full year. We expect gross margin to improve by approximately 100 basis points for the full year.

We expect earnings per share -- diluted earnings per share for the full year to be in a range of $1.63 to $1.65. This assumes an effective tax rate of 37.5%, and fully diluted weighted average shares outstanding of 40.6 million. Going forward, we expect our normalized tax rate to be approximately 38.5%. With regards to capital spending, I would like to mention that during the quarter we completed the expansion of our distribution center in Ft. Wayne, which doubled the capacity to 400,000 square feet. Project was successfully completed on time, and is now fully operational. We expect the expanded distribution center will support our growth for the next several years. Overall, capital spending for the fiscal year remains on track, as previously guided, at approximately $36 million. With that, I will turn the call back over to Mike for some closing remarks.

Thank you, Jeff. In closing, we are very pleased with our performance in the third quarter, and are optimistic about our prospects for the remainder of the holiday season. I would like to thank all of our team members and our retail partners for their hard work and dedication. Our team, our unique culture, the strength of our brand and the ongoing commitment to serving our customers gives us confidence that we will achieve our long-term objectives. Operator, we are now ready for questions.

(Operator Instructions)

In the interest of time, we ask that you limit yourself to one question and one follow-up. You may re-prompt if you have additional questions.

(Operator Instructions)

We'll pause for just a moment to give everyone an opportunity to signal for questions. Erika Maschmeyer, Robert W. Baird.

Could you talk a little bit about the comp cadence that you saw throughout Q3. I know August was strong for you, what did it do for you after that? I know Sandy would have hurt early November a lot. Could you talk a little bit about your results for Black Friday and early December?

Erica, this is Mike. I had a hard time hearing the very first part of your question. You said something about Q3?

Apologize, your comp cadence in Q3?

Okay. If you recall, coming out of Q2 we felt some nice momentum from the back-to-campus collection, and really Q3 was the first full quarter where we implemented that new cadence. And so, on the heels of the back-to-campus collection, we had the launch of fall fashion, we had the launch of Ribbons, we had a number of traffic-driving events. So really what we experienced was strong demand across the quarter, and carried into early Q4. And then Q4 (multiple speakers). Yes, it was early November we felt some softness in the business. Just the traffic overall, and then the impact of Hurricane Sandy, certainly, in some of our markets. The business rebounded very nicely over the post-Thanksgiving holiday weekend. We had record sales that weekend in line with what we expected, and our demand since then has been in line with our expectations.

Great. That's very helpful. Just a follow-up. The $0.01 from Sandy, does that include a weaker comp in your own stores as well as expected lower reorders on the part of your indirect partners?

Erica, this is Jeff. The $0.01 would be primarily in our own stores, so that is where we felt the majority of the impact. Certainly some of our indirect retailers have been impacted as well, but that's a lesser amount of the overall impact.

Great. That is very helpful. Are you able to reduce the quantity of your future orders to offset some of the higher inventory that you have coming in due to the issue?

Yes. So as I mentioned in our prepared remarks, the inventory issue that we identified affected approximately $15 million of inventory, and that is inventory that we would have brought in largely in the future anyways. And so, it becomes largely a timing issue. So to the extent that we would have brought it in in the future, both for full price sales as well as continuing to round out the assortment when those patterns retire. We will adjust future purchases next year accordingly.

Okay. That makes a lot of sense. So it's essentially, instead of you reordering that product later in the year, it is just coming in slightly earlier. But given the long life of your product, it's not going to cause dramatic pressure.

That's what we believe.

Okay. Great.

Neely Tamminga, Piper Jaffray.

I want to talk a little bit more about the composition of those $2 million of the inventory, Jeff? Is this product been printed with existing patterns, and does it fit in any particular style or category of styles? Just trying to get a sense -- was it a fat-finger trade off of a very strong bestseller trend that you are seeing? Just trying to really get a sense of what the potential risk here is on the inventory. And I have a follow-up.

Sure. Yes, Sure. So the -- as I mentioned, again, in the prepared remarks, that this was essentially all patterns and styles that are top sellers. So the process there that occurred was really a higher level of reorder cadence than it should have been. But the good thing is that it is all in current, strong-selling patterns and styles. So that's the reason that we made the comment that we believe that this will sell through our normal channels throughout next year.

Okay. All right. So, a little bit more, too, in terms of the -- it seems to be, overall, you guys are pleased with the cadence here of fewer patterns flowing more frequently with more traffic-related events in the store. As you look into next year, is that part of the strategy that you hope to implement? It seems like things have been locked down already for the first half. But would you anticipate repeating a similar cadence in the number of patterns and the flow of the patterns throughout the back half of your next year?

Neely, this is Roddy. Yes, you can think of next year pretty much mirroring this year. Particularly in the cadence side, as it relates to traffic-driving events, we're constantly tweaking that, but we're very pleased with how the year has laid out so far.

And could I just sneak in one housekeeping then, to Roddy, for you? The 30th anniversary, obviously you only have one 30th anniversary, but -- kicking off right now in the stores. Is that incremental to events that occurred last year?

It is, yes.

Okay.

In many ways, it was -- we put a lot of time and effort in planning out the holiday season, assuming that Black Friday was going to be big and traffic might go away until the weekend or two before Christmas. And so the -- a lot of the events. And naturally having a 30th anniversary plays well to having a common theme for the current event.

Great. Good luck this season.

Jennifer Davis, Lazard Capital Markets.

First, congratulations on a very good third quarter. Gross margins looked really good, and I was glad to see less discounting online. Should we expect that going forward? In the fourth quarter next year? Are you going to continue to pull back on that promotional activity, potentially at the expense of sales, but at much better margins?

Yes, Jenn, this is Mike. Our intent long-term is to continue to migrate away from the level of discounting we've seen historically. We got a little taste of that in Q3. Certainly, we have to be mindful of the current environment in Q4. We need to be mindful of what's going on in the marketplace. But over the long haul, the intent is to continue to migrate away from the amount of discounting we've done historically. And it's really a balancing act between revenue growth, gross margin, and really doing what's right for the brand long-term. And so that's how we think about it.

Okay. And then, can you go through, Jeff, the $5 million decline in revenue guidance? How much of that is from online? And I'm sorry, I think you mentioned it, but I missed it. How much of it is from the lower online, and how much of it is from Hurricane Sandy, and how much is for the lower start to November?

Yes. So we didn't break out the specific dollars, but it's a combination of those items. So, we did get off to a slower start at the beginning of November. We had the impact of Hurricane Sandy, and then -- yes, so those were the primary drivers.

Okay. Great. Best of luck.

Edward Yruma, KeyBanc Capital Markets.

Not to beat a dead horse, but on this $15 million of incremental inventory, have you put into your plan any incremental promotions that you may or may not need to help move some of that inventory? Or is it because it is best-selling, or inventory you would have already placed? It is items you don't believe you will need to mark down?

Yes. Ed, this is Jeff. So, we have not guided for next year yet, so it's too early to do that. We will do that on our fourth-quarter call in March. But going back to our prepared remarks, what we did talk about was the fact that this is inventory that largely would have been ordered anyways next year to support the continued selling in those current patterns and styles. They are all -- the majority are in bestsellers, so we do feel comfortable that this inventory will sell in our normal channels throughout next year. So that's the reason at this point, we didn't indicate anything incremental.

Got you. Is there more specificity you could provide on the actual cause of the inventory increase? Was it a systems issue, a personnel issue? And what have you done to remediate the problem?

Yes. It was not -- it was absolutely not a systems issue. So I think as we've talked quite a bit over the last year to 18 months, we have continued to make considerable evolution in our overall supply chain and inventory management, but from the from a people, process and systems standpoint. So it was not systems related. It was really a process issue. And we have, as we have continued to evolve and get more sophisticated in our inventory management, this specific issue has to do with the level of safety stock that we were ordering for our best-selling patterns and styles. And we had some process errors that enabled us to order entire quantities than were intended to. So what we've done as a result of that from a process standpoint was, obviously, revisit the process to understand where the breakdown was. Secondly, to address that with a better level of process rigor, including another level of management oversight, as well as some additional exception reporting and process reporting that will help us going forward.

Got you. And a final question. You guys obviously had some nice indirect growth. What specifically -- how do you feel about your indirect inventory levels today, and your inability to manage that going forward, I think, given your increased scrutiny in the channel?

Yes, this is Mike. We feel very good about the channel overall. The response to the change in the cadence. That was always a question, and I think the retailers by-and-large have embraced that. I think it's -- they benefited from the changes that we've made. I think they've managed through that fairly well. And what we've seen is just nice, consistent reorder activity. That tells us -- when you see that, it's a decent proxy for sell-through, and so we feel very good about the channel. We're not hearing anything from the field, or from the independents that there's an inventory challenge in the channel.

Got you.

Evren Kopelman, Wells Fargo Securities.

I wanted to ask about the gross margin in the third quarter. It was significantly ahead of your guidance. Was that just driven by the upside to sales, or is there something else? Despite the charge, It was a lot better.

It was driven -- Evren, this is Jeff. It was driven by, certainly, the upside to sales, the fact that we had lower level of discounting in e-commerce. And then we also had some very nice operational efficiencies as well. So we were -- because of the overall flow of the inventory, we had enough air freighting less during the quarter. And we have also been testing the full operational use of smart post on our outbound shipping, both for our e-commerce business and delivery to our indirect retailers, which continues to generate nice savings for us. So it was a combination of all those things.

Okay. And then on the e-commerce, was the level of discounting even lower than you planned? And also, was the sales impact maybe greater than you expected? Could you just give a little bit more color around that?

Evren, it's Roddy. I would say that the level was lower than we had planned. We've -- it was certainly lower than last year, but we didn't plan it to be as good as it was. And I think we saw the nice pickup as -- in margin, as a result. (multiple speakers)

With regard to sales being essentially lower than we thought, you're always trying to find that balance. And I think we were -- again, we were trying to Mike's comment earlier, you're always trying to find that balance of being competitive in the marketplace. Trying to continue to migrate to lower levels of discounting on the web and more full price over time. So in any given quarter, that's a function of trying to make all those things balance.

Okay. And then, lower levels of discounting. Did it have to do with, maybe, you're feeling much better about the inventory levels on the e-commerce side? Maybe, what were the reasons why you ended up discounting lower than you even planned at the end of August, when we last spoke?

The promotional cadence online was essentially in line with what we did a year ago Q3. What we were able to do was reduce the level of discounting relative to those promotions, so that was primarily the driver of the improved margins, and also have the impact on the top-line.

Great. And the lastly, on the new patterns, fall one and two, maybe sitting here now looking at your reorders. How do you feel about the tail of sales from those patterns versus last year's patterns, where the tail was a little bit disappointing?

I think we've seen, over the last several launches of patterns, the portfolio gets incrementally stronger. It is hard to say, sitting where we are today, what the tail of those recently launched patterns is going to be. But I think just, if you broaden the view, we feel better about the portfolio than we did, say, a year ago.

Oliver Chen, Citi Investment Research.

This is Nancy Hilliker filling in for Oliver Chen at Citi. We are wondering if you could give us a little bit more color about the outlook strategy currently, and going forward? And how is it going versus your expectations, and maybe how do you see AUR trending, going forward?

I think that the focus for us has really been to outlet merchandise in a brand-right way, prior to having our own outlet channel, we had the outlet sale here in Ft. Wayne. And when we launched the web in 2006, unfortunately it was one of the few ways we had to outlet inventory when the economy slowed in late 2007, 2008. Since we started opening our own stores, the desire is, to the extent that we can, move all the outlet merchandise through that channel. And I think that we're dialing that in better. We have more capacity, obviously, as a result of opening more doors. We are also doing a better job of assorting those outlet stores. We have the ability to round out the assortment with top-selling styles as patterns retire. So we're seeing improvement in the metrics within that outlet channel.

Also, just a little bit more color on the accounts receivable increase versus last year. Is that just because the sales were moved into third quarter?

It's just really the timing. It's just really timing-related to the release, given the cadence change that we had this year. We have the release at the end of the quarter versus mid-quarter last year. So it's just a matter of timing.

Okay.

Amanda Sigouin, Jefferies.

It's actually Randy Konik. So quick question. As I looked at the last seven quarters, on our gross margin line, essentially you had about five quarters of down gross margin. You had a nice gross margin uplift in the current third crowd margin. You're guiding up-margin, up-gross margin for the fourth quarter. Are we at the inflection point in the margin -- in the gross margin cycle? Can you give us a yes or no on that? And then, with regards to normalized gross margin as we think about the next few years, is there any -- is some -- is it going to be high 50%s, is it going to have a six number -- six (inaudible) on it? Just a little color there on how you think about getting -- or not getting there. And then lastly, just on the $15 million of inventory, is that basically a core-type replenishment channels, or is it patterns? Just give a little bit more color on where that inventory is residing would be very helpful.

This is Jeff. Let me take your first part of the question and the -- regarding gross margin. So, from a gross margin perspective, we did have a strong third-quarter gross margin for the items I just mentioned before. So it's a combination of the strong sales, the lower discounting in e-commerce, as well as operational efficiency savings. So that was the primary driver of Q3. We have also guided up Q4. Q4, you get some benefit because of the inventory issue we mentioned. You're essentially bringing in more units, so you get some of gross margin left. We're also getting benefit in the back half, if you recall, from lower input costs. So the back half of this year was the first time in the last year plus that we've seen the benefit of lower cotton costs.

We haven't guided for next year, so I am reluctant to give you any gross margin guidance at this point. But I'd refer to our long-term guidance around margins, which essentially says that, from an operating margin standpoint, we think that we should be able to achieve at least 30 basis points a year of improvement. And that would be a combination of ongoing evolution of supply chain, as well as the fact that you will continue to get nice evolution as we continue to migrate to being more of a full price retailer. And over time, and again, it will take us a while. But over time, as you do migrate the web to a more full price channel, you also get some gross margin benefit from there. So those would be some of the primary ways that we believe that margin will continue to evolve over time.

And then secondly, with regard to the $15 million in inventory characterizing the profile of that. As you mentioned in the prepared remarks, it is all in current patterns and styles, and it is all in best-selling current patterns and styles. So that is the reason that we indicated we believe we will be able to sell it through our channels during the next year.

Last question, if I may. Mike, just how do you feel about the consumer right now? How do you feel out the environment?

You know what, we feel excited about the holiday season. Certainly, a lot of things weighing on the consumer's mind, but I think just, given the strength of our brand, our accessible price points, the cadence of new merchandise that's flowing, the excitement that's being generated within our doors through the marketing events that we mentioned. I feel very optimistic about our ability to manage through what is a bit of a challenging time right now.

Great.

(Operator Instructions)

Peter Walhlstrom, Morningstar Investment Research.

Maybe just as a quick follow-up to Randy's. Have you seen the customer coming into the store, your sale growth largely traffic-driven? Or is the customer more willing to put more items in the basket at this point?

Primarily traffic-driven, Pete.

Okay. And thinking about some of the new category launches that you've had over the last few quarters, whether it's new bedding or dorm categories, or even into the baby bags. Is it a little bit too early to think about distribution beyond the traditional indirect stores, and made into maybe into more specialty, like a Buy Buy Baby, or Babies R Us, or Pottery Barn, something like that? And second, as an add-on to that, have you been able to attract a new customer to the brand and move beyond the core?

With regards to distribution beyond what we have today, I think as we extend the brand into new categories, it is going to open up opportunities for us to partner with other retail partners. Certainly, we want to be mindful of what's right for the brand, and mindful of the existing distribution that we have. But we believe, over time, there will be incremental opportunities for distribution points as a result of extending the brand into new categories. And then, Peter, remind me of the second part of your question was?

Have you been -- with those new categories, have you been able to attract a new customer to the brand beyond the core Vera Bradley customer that's quite familiar with the brand?

I will let Roddy speak to that.

Yes, we have definitely expanded our customer base, as it relates whether it's something for more on the younger side for back-to-campus, or bringing in more moms. The way we think about our core is probably more on an attitudinal basis, and her thoughts about fashion, about color, fun, as well as the brand. And we think we are just expanding further into that sweet spot with new customers.

Okay. And perhaps a follow-up -- sorry, a housekeeping question. Is there a little bit of background that you can provide on the damaged inventory? This is obviously, perhaps the first time we've seen this. Wondering if it's fairly unique, happens from time to time, and if it is also covered by insurance?

Sure. This is Jeff. So the write-off that we took during the quarter is $1.2 million. It was inventory that arrived and had been damaged by water, which we think happened in transit. So it is -- it's not something, from time to time, you have some instances where inventory gets damaged for various reasons, but it tends to be fairly infrequent. And we are working with our insurance carrier right now to determine if some portion of it is recoverable, but given the uncertainty surrounding that, we wanted to be conservative and record the write-off.

Okay. And the last item, if I may, as you cycle through some of the infrastructure investments and the finishing of the DC build-out, can you help us think about a normalized CapEx level?

Yes. So this year's CapEx was $36 million, and that included finishing the distribution center. What we have talked about in the past is that a normalized level of CapEx, assuming that you are opening 14 to 20 new stores a year, which is our long-term guidance, that CapEx annually would be in approximately $15 million range. With that said, there are a number of things that we continue to think about. So the good thing is that, given the strength of our balance sheet, relatively low debt levels, a large revolver in place at attractive rates, we're very interested in high return on invested capital projects. So we'll continue to look at a number of things. But a normalized rate would be -- CapEx would be around $15 million, if you are not doing any other major projects with good returns.

Okay.

Janet Kloppenburg, JJK Research.

I think someone had asked a question about -- and I am sorry I did not hear the answer, about the inventory levels in the indirect segments. And what your order trends look like there going forward?

This is Mike.

Yes.

What we're seeing right now is just good consistent reorder activity from that channel.

Good.

And what we hear from our retail partners, and the field who works directly with the independent retailers, is that the channel is pretty right in terms of inventory levels.

Right.

So we don't have concerns at this point that there's too much inventory in that channel.

Bright. No, it sounds like it's clean. So the question is, are there -- are you optimistic about the spring order trends, Mike? Or have you already taken a look at those? I think they were light last -- the order trends were light in the first quarter or so? Perhaps there's an opportunity there?

We have to start selling in spring to the channel.

Right.

And it's always a trick, balancing between the selling and what will come in the way of reorders. Certainly our service levels have improved, and our ability to respond quickly has worked in our favor. So we feel, between the selling and reorders, that the season will be in line with our expectations.

Okay. Are you feeling better about that channel on a go-forward basis?

Yes, I've always felt good about the channel. It's just very, very difficult to predict.

Okay. And then, this -- we'll add a follow on to that. All of the new categories that you've added to your own stores, have you started to sell those into the indirect channel as well? The baby, the house, the kitchen, et cetera?

The kitchen accessories are available for that channel. There are certain independent retailers that are ripe for the baby collection.

Right.

Yes. But we need to make sure we are placing that merchandise in the right points of distributions, so we are being selective there. And going forward, we want to make sure that we are sorting right by each channel. And so that will be a category-by-category decision as we build our plans for merchandising for the future.

And just -- and in respect to the direct -- the e-commerce channel, where I think you had a lot less discounting in the third quarter. Should we expect that strategy to continue on a go-forward basis?

Over the long term, yes. We may need to react from time to time to what's going on in the marketplace. Our intent, over the long term, is to continue to migrate towards a more full price channel through e-commerce.

Okay. Great.

Evren Kopelman, Wells Fargo Securities.

Back on the e-commerce, do you have, off-hand, an increase in the gross profit dollars in e-commerce for the quarter?

No. We typically don't disclose that.

Okay. And then -- I promise, the last one. For the fourth quarter, your guidance -- it seems like it's embedding about a low single-digit growth for the e-commerce channel, but the compare doesn't look as difficult as the third quarter. Can you talk about, maybe the trends you've seen in November, and over the Black Friday, Cyber Monday periods on e-com?

Evren, as we said in the prepared remarks in the script, we felt both good about the post-Thanksgiving holiday sales overall, and that included both Black Friday and Cyber Monday. So overall I think we feel good about it.

Jennifer Davis, Lazard Capital Markets.

I'm going to try to squeeze a couple in. And so, one last one on the inventory, and then two quick bigger-picture ones. So on inventory, the $15 million in, say, last year. How much inventory did you end up reordering later in the season? Is it comparable to that amount?

I'm not -- Jennifer, this is Jeff. I'm not sure I fully understand the question.

So, last year in the first quarter, or when you would normally have reordered this inventory in the current patterns, current styles last year, can you tell us the amount that you ended up reordering? Is it a comparable amount, or more last year, less last year?

It's hard to give you an exact amount, just because every season is different, and the flow of patterns and styles is different year-over-year.

Right.

But other than this happening sooner because of the process issue we identified, that our normal cadence of placing inventory orders to start a selling season, for the EOP is solid. And then a -- and then placing orders for a reorder cycle are essentially consistent.

Okay. And then, looking at Japan, how many locations are you in now, and is there any update on your thoughts there? Are you going to continue open up shop-in shops on your own, or have you thought about maybe partnering up with anyone?

We are (laughter) -- I think we are in six locations. That's just the shop-in shops.

Right.

Yes, there is a total of 15, including just from consumer perspective, the number of department stores we're in. Some of them are more highly branded shop-in shops that we're calling them six, and the remainder are just in-line merchandise.

Okay.

As Mike mentioned, we are in that process now of figuring out how to grow the brand in Japan. And actually, I should say, not figuring it out. Mapping out that plan, and whether that plan includes some sort of partnership. To what degree it includes working further with department stores, or working through, ultimately, our own stores. We'll map that out, and we'll share that in the near future.

Okay, great. And then lastly, on brand awareness. I believe last year, on the East Coast, it was around -- or unaided brand awareness was around 70% to 80%. And it was around 20% to 40%, I believe, in the West. Is there any more recent numbers, or any updated numbers for that?

The -- our most recent study was back in January, and it basically had -- so, generally speaking, those numbers -- I think it was actually more in the 60%s on the East Coast. But it had us roughly in the low-to-mid-50%s, and that was roughly -- it was a slight increase over the prior year. So we have consistent growth and brand awareness, but it's not the significant change that we saw a few years ago. We're pleased with that.

Okay, great. Again, best of luck.

And that concludes today's question-and-answer session. Mr. Ray, at this time I would like to turn the conference back to you for any additional or closing remarks.

Okay. We just wanted to say thank you for joining us today and for your continued interest in Vera Bradley, and we look forward to speaking with you during our fourth quarter conference call, which will be held March 13 at 4.30 p.m.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation.