Vera Bradley Inc (VRA) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Vera Bradley fiscal 2014 first quarter results conference call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference call is being recorded. I would now like to turn the call over to Paul Blair of Vera Bradley's investor relations department. Please go ahead.

Good afternoon, and welcome. We would like to thank you for joining us this afternoon for Vera Bradley's fiscal 2014 first 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 10K for the fiscal year ended February 2, 2013 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. 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 question 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 Kevin Sierks, our interim Chief Financial Officer and Roddy Mann, our Executive Vice President of Strategy and Business Development. Before be discuss our first quarter results, I would like to spend a moment on the announcement we made this afternoon regarding my plans to retire from my role as CEO. I want you to know that this decision, while difficult for me to come to, was made with great care. Vera Bradley is an incredibly special organization, and my time here has been the most rewarding and exciting in my entire career.

I have enjoyed working alongside such a talented and devoted group of colleagues, and I'm extremely proud of all we've accomplished as a team. This includes the creation of diverse portfolio of highly sought-after products serving an exceptionally loyal and diverse customer base, the continued development of a profitable and direct segment comprised of passionate specialty retail and department store partners, the launch of a Vera Bradley.com, now representing more than 20% of our business, the opening of our first retail stores which created a brand elevating platform for consumer engagement in a highly productive way, the enter into the Japanese market and the development of a team and infrastructure to support future growth.

In my time as CEO, revenue has nearly doubled to $541 million. However, I've decided that after 15 fulfilling years, it is time for me to spend more time with my family and pursue other interests outside of the retail space. It is also the right time for the Company to look to a new leader who has the extensive retail and brand management experience Vera Bradley needs to advance into its next phase of growth and success.

The board has initiated a comprehensive search process and is working with Spencer Stewart to assist in evaluating highly qualified candidates. While no definitive time frame has been established for the completion of the search, the board is moving expeditiously, and I'm confident that they will choose the right leader. As a shareholder, I have a significant a vested interest in the Company's ongoing success, and I will remain fully engaged as CEO during the search and onboarding process to ensure a smooth transition. In addition, I intend to continue serving on the board. And with that, I would like to turn your attention to our first quarter results.

Overall, we delivered on our expectations for the quarter. Consolidated net revenues slightly exceeded our guidance, including comparable store sales of 0.9% growth, and our indirect business met our expectations. Among our achievements for the quarter, we successfully opened seven new full-price and two outlet stores in both current and new markets, debuted our new baby line, which has been well received and was highlighted by Giftbeat magazine as a top performer within the specialty retail channel, grew traffic to Vera Bradley.com by 23%, experienced strong growth in the Dillards stores and conducted our annual outlet sale, drawing over 65,000 brand enthusiasts from every state and several countries.

Our sales for the first quarter were slightly above our expectations at $123 million with net revenues growing by 5% compared to the first quarter of last year. In the direct segment, net revenues increased 24% during the quarter, e-commerce net revenues grew 23% while comparable store sales increased 0.9%. In addition, outlet sale revenues were in line with our expectations at over $11 million.

In our stores, net revenues grew 34% in the quarter, driven by the opening of 19 full price and 4 outlet stores during the past year. We continue to be pleased with the performance of our new stores as we provide consumers the opportunity to experience the brand in an exciting and authentic way in both current and new markets. E-commerce represented 22% of total net revenues during the first quarter. We are pleased with the increased traffic to our site and growth in sales of our full price assortment while we maintain promotional activity levels in line with the prior year. We believe this speaks to the strength of Vera Bradley.com and the opportunity to move into a more full price channel.

We believe our comparable store performance reflects some shift to the e-commerce channel as demonstrated by the growth in full price sales on Vera Bradley.com. It also demonstrates our careful approach to promotional activities in our full price stores despite a challenging retail environment. Nonetheless, we believe that the slow comparable sales are indicative of (technical difficulty) some of the core challenges we face. Many these relate to our assortment and how we manage and present it to our customers in each channel given their inherent interrelationships.

In our indirect segment, net revenues declined 15% compared to the prior year, in line with our expectations. Specialty retailers were hesitant to purchase into the summer collection, and their reorder levels continue to be relatively soft. We believe their cautious approach to ordering was prudent given that they faced the same consumer challenges that we experienced in our stores. Moreover, based on recent surveys of our specialty retail partners, we believe the winter 2012 collection was slower to sell through.

Looking forward, in light of our performance, we have narrowed our focus to ensure that we put our full attention on a number of key strategies in the upcoming quarters. First, we will alter our approach to the indirect segment, placing greater focus on our productive accounts and less than opening new points of distribution. Next, while we feel good about the top line of new stores -- or the lineup, rather, of new stores for the next 12 months based on new store productivity to date, it is important that the team give greater attention to improving the performance of our comparable stores; as such, we will focus less attention on the pipeline and more on productivity and an enhanced customer shopping experience.

Finally, we are actively seeking a partner with whom we can grow our business in Japan. That market represents a significant opportunity for us, and a partner will allow us to move forward without requiring the levels of attention our internal resources have needed to give Japan in the past. We believe this higher degree of focus will allow us to more effectively pursue the strategies we've defined over the course of past year to help us realize our long-term vision for the Company and the brand. These strategies are, one, optimize our offering to the customer, two, evolve Vera Bradley.com to a primarily full price channel, three, enhance the overall productivity of the indirect segment and four, operational excellence and improved profitability.

Our first objective is to drive better performance through enhanced product design, assortment and merchandising in each channel. In order to affect this, given the complexities of our multichannel model, we need to continue to enhance our core merchandising capabilities and processes, including adding key team members. My successor will play a significant role in identifying and recruiting such talent, including chief merchandising officer.

Our secondary focus is the evolution of Vera Bradley.com to a primarily full price channel, which will benefit our brand in our efforts to optimize our offering. In addition, it will better support the performance of our active full price merchandise in our stores and in our specialty retail partner stores. Moreover, enhancing Vera Bradley.com also provides a path toward improving profitability in the direct segment. As we have shared, in order to move forward with this initiative, will be investing in the e-commerce platform and additional human resources over the course of the year, including a dedicated head of e-commerce sales.

Turning to indirect, our ongoing objective is been to enhance productivity, particularly in the specialty retail store channel. This channel currently consists of over 3,000 retail partners, mostly single door operators of bearing business and brand presentation capabilities. As we shared in the last call, we plan to remediate some of that channel, paring out a comp that consistently under represent the brand. We expect this to occur starting in fiscal year 2015. We believe this should increase the productivity of the channel as a whole and provide our best partners improved growth opportunities within their home markets over the long-term.

Finally, considering the soft top line growth, we know that managing profitability is of particular importance this year. As such, we will be focusing on containing costs within a year while still investing in our business and brand to support future growth. This is consistent with our focus on operational excellence and improved profitability over the long-term with a goal of creating a lean business that provides leverage growth consistently into the future. Despite our challenges, which are being addressed, I am confident in the integrity and the strength of the brand. This is illustrated by the numerous positive associations our customers have for the brand and the community as demonstrated in our most recent market research. New stores that continue to be highly productive, quickly performing at our targeted performance expectations and our continued recognition on a sales per square foot basis as one of the top retailers in the country.

One of the best examples of our brand strength is our annual outlet sale. In early April, over the course of six days we had again experienced record attendance as more than 65,000 fans from all 50 states and several foreign countries traveled to Ft. Wayne, Indiana to experience the brand. Many of our customers shared that this was as much about the brand experience as it was about shopping.

Along with our sustained brand equity, we enjoy a sturdy foundation for future growth built across the business. We have top-notch sourcing, production and distribution capabilities, our multichannel business allows our customers both new and knowledgeable to shop in ways that best fit her preferences at any time, and we continue to enhance and evolve and engage in e-commerce platform. Most important, and why I am most confident we will achieve our long-term goals, we have an exceptional team in place and a culture based on continuous improvement. I will now turn the call over to Kevin Sierks, our interim Chief Financial Officer, who will provide additional details regarding our second quarter financial results, as well as guidance for fiscal 2014 second quarter and full year.

Thanks, Mike, and good afternoon. I will begin my remarks with a review of our fiscal 2014 first quarter and then provide you with our outlook for the second order and full year. As Mike mentioned, we are pleased with our financial performance and operational progress during the first quarter in which we delivered top and bottom line financial results in line with our expectations. Net revenues for the first quarter increased 5% to $123 million from $117.2 million in the prior year. This performance was on top of revenue growth of 16% in the first quarter of last year.

In the direct segment, net revenues increased 24% to $73.7 million, driven by increases in our stores as well as continued growth in e-commerce. The revenue increase in stores resulted from the opening of 19 full price stores and four outlet stores during the past year and a comparable store sales increase of 0.9% of during the quarter. The direct segment accounted for 60% of total net revenues in the first quarter versus 51% in the prior year. Full price stores were impacted by an assortment that wasn't as compelling as we would have liked, especially given the highly promotional environment in the mall. This, coupled with maintaining our motional cadence and the account levels for the first quarter of last year, resulted in a reduction in conversion.

Outlet stores benefited from higher conversion and traffic due to higher promotional levels. We ended the quarter with 72 full price and 13 outlet stores. E-commerce net revenues increased $5.1 million, or 23% and represented 22% of total revenues during the first quarter. The increase was primarily due to continued growth and website traffic. This growth was partially driven by a strong response to the spring and summer assortment. Indirect net revenues decreased 15% to $49.3 million, in line with our expectations for the first quarter. We believe that some of our specialty retail partners responded to the challenging retail environment and slower sell-through of the winter 2012 collection by ordering cautiously. Gross profit for the first quarter increased 5% to $68.5 million, resulting in a gross margin of 55.6%, in line with the prior year and above our expectations due to improved gross margins at our annual outlet sale.

Total SG&A expenses were $55.2 million for the first quarter compared to $47.2 million in the prior year. SG&A as a percentage of net revenues was unfavorable by 460 basis points compared to the prior year, primarily due to lower revenues in the indirect segment and full price stores, as well as the annualization of employee related expenses.

Operating income for the first quarter decreased 27% to $15.2 million, or 12.3% of net revenues compared to $20.8 million, or 17.8% of net revenues in the prior year. Operating income in our direct segment increased 10% to $17 million with operating margin of 23% in the first quarter of this year compared to 26% in the prior year. This was primarily due to gross margin impact of promotional activity in our outlet stores, deleveraging payroll in our full price stores and three additional stores added this quarter compared to the prior year. Operating income in our indirect segment fell 21% to $17.7 million compared to $22.4 million in the same period last year with operating margin of 36% compared to 39% in the first quarter of last year, primarily due to lower revenues. Net income for the first quarter was $9.2 million, or $0.23 per diluted share, compared to net income of $12.6 million, or $0.31 per diluted share in the prior year.

Key balance sheet and cash flow highlights as of May 4, 2013 include cash and cash equivalents of $8.2 million, debt outstanding of $5.1 million, which represents the first time since going public in October 2010 that we are in a net cash position. The pay down of debt reflects our strong cash flow generation. Accounts receivable of $26.8 million compared to $36.1 million in the prior year with day sales outstanding improving to 44 compared to 52 in the prior year. The reduction in accounts receivable was principally the result of reduced indirect segment sales in the quarter.

Inventory the end of the first quarter was $138.9 million compared to $98.2 million, in line with our expectations. As discussed on our call last quarter, our inventory of $98.2 million in the first quarter of last year was 8% lower than the prior year and occurred in a quarter when revenue grew 16%, providing a tough comparison.

I would now like to review our outlook for fiscal 2014 second quarter and full year. Before I speak to the specific guidance parameters in light of softer topline growth, I would like to highlight a few of the specific steps we are taking in the next few quarters linked to the strategic initiatives Mike mentioned earlier. First, we plan to augment the assortment in the back half of the year with additional styles that were originally intended to be released in the first part of fiscal 2015. Second, we will continue to work on our store layout to refine our visual displays, make better use of our floor space and enhance the overall merchandise presentation. This builds upon the work we have already done since the beginning of the year to make our stores more shoppable.

Third, we are increasing efforts to enhance relationships with our specialty retail partners. For example, we are listing suggested retail pricing on certain merchandise before we mark it down on the web. In addition, as Mike mentioned, our sales consultants will focus on our most productive accounts and less on generating new business. They will also employee simplified processes for charging our customers freight and emphasize the use of our enhanced online order management system. Last, a sharp focus of expenses will continue including tighter labor management in our stores, reduced reliance on air freight as we improve our supply chain capabilities, actively manage headcount and finally, renewing our focus on vendor negotiations.

In the second quarter of fiscal 2014, we expect net revenues to be in the range of $123 million to $126 million. We expect direct segment net revenues to increase 16% to 19%, with comparable store sales in the range of flat to a decline of single-digits. Indirect net revenue is anticipated to decline in the high teens, impacted by a shortfall in the recently completed sell-in of our fall collection. Gross margin for the second quarter is expected to expand by approximately 200 basis points, primarily due to less promotional activity planned for the second quarter of this year versus the prior year.

SG&A as a percentage of net revenues is expected to be approximately 41%, or approximately 40.5%, net of other income. Diluted earnings per share are expected to be in a range of $0.31-$0.33. We expect an effective tax rate of 38.5% and fully diluted weighted average shares outstanding of 40.6 million. We expect inventory at the end of the second quarter to be very close to where we exited the first quarter, or approximately 20% growth over the prior year. For the full year fiscal year 2014, we expect net revenues to be in a range of $570 million to $575 million compared to our previous guidance of $585 million to $590 million.

We expect the direct segment net revenues to increase in the high teens with comparable store sales in the range of flat to a decline of low single-digits, the opening of 23 full price and outlet stores and an indirect net revenue decline of high single-digits for the full year. We expect indirect net revenue performance to improve based on assortment enhancements and key account growth. And as our specialty retailers work through some of the winter 2012 merchandise that has been slower to sell through, their open to buy level should increase. We expect gross margin to decline up to 20 basis points for the full year, down from our previous guidance of 50 basis point expansion. Declining gross margin reflects a reduction in our net revenue guidance.

SG&A as a percentage of net revenues is expected to be approximately 37.1%, or approximately 36.4% net of other income. We expect diluted earnings per share for the full year to be in the range of $1.74 to $1.78. Our earnings per share estimate includes an approximate $0.04 investment in Japan. This is lower than previous guidance, reflecting reduced expenses in Japan until we have clarity around the long-term business model, including the possibility of a partnership. This EPS range also includes an effective tax rate of 38.5% and fully diluted weighted average shares outstanding of 40.7 million. Capital spending for the full year remains at approximately $20 million. With that, I will turn the call back over to Mike for some closing remarks.

Thank you, Kevin. The 15 years I have spent at Vera Bradley have been exciting and incredibly fulfilling, and the progress we have made as a team has exceeded my wildest expectations. Today we are an authentic lifestyle brand with powerful multichannel business, our beautiful high quality product offerings have made us a girl's best friend to our exceptionally loyal customer base, and we've expanded the reach of the brand in the new domestic and international markets, all of these achievements are a testament to our outstanding team. We have a strong vision in place for the future, and I am confident that our best days are ahead. Operator, we will now take questions.

(Operator Instructions)

Evren Kopelman, Wells Fargo.

The indirect channel, clearly a lot of pressure. Can you give us a little bit more color is there? Is it a certain group of your retailers that you are seeing more pressure with, is there some analysis there that can give us a little bit more color? Is it more just -- I don't know, is it like the colors are off in the new patterns, is it the styles? If you could you could give us a little bit more color why there is so much more pressure in that channel, that would be great. Thanks.

Evren, this is Mike. This goes to one of the core challenges that we face right now, and it really goes to how we manage our offering to the customer through the various channels. This is not a design challenge as much is it is an assortment management and merchandising challenge. We've spoken to this to some degree in the past, but I think what we are seeing that our independent retailers do is self adjust to an assortment that they can manage, much like Dillards does. Dillards narrows down to the top six or eight patterns, the top 20 styles, and they're experiencing great productivity in their doors. I think on the indirect side, many of our partners have touted themselves as basically featuring the entire assortment, and while we've worked with them over time to help them understand that they need to be managing the assortment differently, from time to time, they still get themselves over assorted. I think that is primarily what we are seeing.

Certainly, I think we mentioned during the call, the winter of 2012 buy-in, that buy-in of that assortment, there was probably an over buy across the channel. It is not necessarily a pattern performance issue, it is just that they bought too much of that merchandise, so that's part of the challenge as well.

Okay, and then the follow-up is your sales guidance for the full year, it sounds like you are assuming some improvement in the trends in the indirect channel. What is your level of confidence there, why do you think trends will improve? Thanks.

Evren, this is Kevin. We do expect the trends to improve, first off, pulling some of those styles forward from fiscal 2015 has improved the assortment in the back half of the year, and we think that will pay dividends with the indirect accounts. As well as we have got some accounts in the back half of the year that weren't to participate in the first half of the year. One notably is Disney, so Disney will pick up in Q3, so that helps the back half of the year as well. And then what we are doing is lifting MSRP as well on that winter assortment will hopefully allow them to sell through that assortment and then open up their open to buy dollars so that they can buy in a little more heavily in the back half of the year.

Alex Fuhrman, Piper Jaffray.

Can you talk a little bit more about -- you mentioned it in the prepared remarks, bringing some of the 2015 patterns to round out some of the assortment this year. Curious to why the 2015 patterns and not maybe some of the 2014 ones, I'm not sure if I heard that correctly. Would love to get a sense of what you're really doing there, and will that mean that there will be more patterns than originally planned in the back half of this year, or is it just a matter of different patterns? Thanks.

Alex, this is Roddy. It is actually, what we were pulling forward are really styles from fiscal '15. We're reaching all the way into summer to identify some -- actually some great styles that we feel will not only resonate with the consumer, but will be attractive for our retail partners and increase their buy-in levels up to, probably back to our normal part.

On the pattern side, as we've shared before, we are actually reducing one of the patterns we have in this year is in the fall season, and we feel that's the right thing to do. In the past we have talked about whether or not a particular patterns resonate. We do not think there is any design issues there, we do feel that there is probably too many patterns, especially for the indirect segment. And we are -- we actually will be moving one pattern forward from the spring. That is January, so it's actually all within the fourth quarter, but we're moving that from January into November as part of really a winter assortment. But what we spoke to earlier was really about moving styles forward.

Great, that is helpful, Roddy. And then can you also just comment on, I think you mentioned that you're going to be giving your retail partners a chance to react, the change their suggested pricing ahead of changes that you are making on the website now. Can you talk a little bit more about the motivation for that? Is that something that your retail partners have been asking for a while?

It is. So, there is two parts to this, one is we mentioned that winter 2012, they bought in probably a little too heavy to that, and it has been slow to sell through. They have a little bit too much inventory, and that's across the channel. Coupled with -- in the past, what they have asked for is the ability to sell at a reduced price prior to us marking it down on the web. What we are doing is, we had planned all along to mark some of the patterns down to retire them, as we call it, in the fall. And what we are doing is essentially in stores, we will be marking down some of those patterns, primarily to winter patterns, early. So, it will be available not only in our retail partner stores, but also in our stores at a lower price prior to discounting on the web.

Okay, great. Thanks for the answer, and Mike, I'll just say it's been a pleasure getting to know you over the years, and I will wish you all the best personally.

Edward Yruma, KeyBanc Capital Markets.

Hi, this is Luke Whorton on for Ed Yruma, thanks for taking our question. Wanted to visit on SG&A. Particularly, you called out one of the reasons in addition to lower sales, the annualization of the employee-related expenses. Could you talk a little bit to what that is and how we think about SG&A leverage or deleverage going forward, also given the continued investment in the merchant function in e-comm?

Yes, sure, so most of that does relate to investments in corporate last year annualizing into this year. So, it is all the headcount from fiscal '13 annualizing this year. Now, we did add a few heads into Q1. Most of our headcounts adds this year are really focused in the merchant group as well as e-commerce, because that is tied to our strategic parties for the current year. Other than that, we're really holding the line in terms of headcount to help SG&A as a percentage of sales this year. A few other things we're working on is not only headcount management, but travel and training and some other things, just in light of the uncertain demand side of things. That is what we are focused on, and so you will see some leverage in SG&A in the back half of the year.

Great, thanks. And then just a follow up on inventory, how are you feeling about the quality of the indirect channel? You talked a little bit about some initiatives and you continue to work with them and feel they're taking a cautious approach, but do you feel there's still a lot of work left to do in terms of some of their buying patterns, using the systems to get better insight to that and also that $15 million over buy from several quarters ago. Do you still feel that's going to be used in replenishment and no markdown reserve necessary there?

I will start on the question about the inventory, the levels of inventory in our retail partners. We spoke earlier about the winter. Based on the surveys that we've conducted, that is really the area where we feel there's a little bit -- they're a little bit heavy on inventory. Beyond that, actually, in light of the fact that they have, as Mike called it, self-adjusted, and lightened their buys, both in the spring and summer seasons, we don't feel that there is any over inventory levels within our partners. Specifically, what's helping with that in some ways, not only are they self-adjusting, but their order management system that you mentioned, it is working, it is actually -- we mentioned Giftbeat magazine earlier, there was a recent article in Giftbeat about online ordering and the visibility it provides retailers. Just in the industry in general, and some great positive comments by some of our partners on the Vera Bradley system itself.

And then maybe with regards, Luke, to inventory in general, we are comparable with the mix of inventory to support our growth, but given the shortfall in revenue for Q1, Q2, we do need to be little more strategic to move through some of this inventory in the back half of the year, including manufacturing for outlet for a longer period of time than we expected. We have built this into our gross margin guidance, obviously, but to the extent we underperform on revenue, it does give us a little too much inventory that we have got to be more strategic on selling through. As an example, we have recurring meetings were we talk about whether or not we're going to manufacture for our outlet stores and for the web. And to the extent that we have inventory sitting in the distribution center, we will typically make decisions not to make that inventory and to use what we have. That does put some pressure on the demand side to have to sell that inventory.

Great, thanks so much. Best of luck to you, Mike, and best of luck to the rest of the year.

Jennifer Davis, Lazard Capital Markets.

Hey, let me say, I guess congratulations, Mike, good luck. We will miss you.

You'll still see me around, probably.

I was hoping, Kevin, I'm sorry, but I was hoping that you could maybe dive a little bit deeper into SG&A. It seems like a pretty drastic reduction in the back half going forward so I was hoping that maybe you could help us get our arms around that a little bit more. And then, I do not know if you can talk about this, but is there a way to -- can you compare your inventory in terms of -- the inventory that you have now still relatively current styles, the over order. Could you have a -- can you talk about how your inventory compares in terms of current styles versus older styles, this year versus last year? I think you're probably little more current this year, even though it's --you might have ordered a little too much. So, anyway, if you could answer that, thanks.

Maybe I'll start -- no problem, Jennifer. I will start there. With regards to inventory, we typically do not breakout the retired versus current, but it is fairly similar this year compared to last year. I think as we progressed through the year, that is where we will have to be a little more strategic as things retire and May, just two weeks ago, I guess, and then we have further retirements as we get into the fall. That is when our retirement inventory will creep up a little bit, and we need to be strategic about being able to move that through our channels.

And then with regard to SG&A, the group here in Q1, we saw some SG&A savings. You saw that we overachieved by $0.01 in Q1, and some of that it have to do with the management team here being committed to reducing expenses. So, we saw some success in Q1. The management team understands the importance of being able to manage the bottom line in light of the top line. One other thing that maybe I didn't mention before is we did have some severance that hit in the back half of last year of about $800,000 related two of executives that left the Company. So, we obviously will annualize that, and that gives us some leverage as well in the back half of the year.

Mark Altschwager, Robert W, Baird.

Great, good afternoon, and thanks for taking the question. Just want to start with a big picture question on the strategy, I believe in the press release you did discuss narrowing the focus in the near-term, and I know that you touched on a couple of things in the prepared remarks, but as you look at the strategic initiatives you have outlined in recent quarters, what is on hold, if anything? What is changing and what will continue during the transition period?

This -- I'll field it, this is Roddy. The -- we have actually -- many of the things we've talked about over the past few quarters are a part of the broader strategic areas of focus that we have really developed over the past 12 months. We have known for -- we had a focus for a while on improving our merchandising capabilities, both as a strategic goal as well as a tactical level, and that goes back to the implementation of the merchandising function. We also know that we do need to involve Vera Bradley.com, and we have shared that. And finally, the evolution and the overall enhancement of the productivity in the indirect segment. All of those are in place and active.

Some of the things we are pulling back on and that narrowing of the focus that Mike spoke to really relates to some of the more -- let's call it new distribution points focuses that we have had in the past. So, on the direct side, we had a full pipeline for '14, we feel great about that. We had some of the pipeline full for fiscal '15, but as with the to identify new locations for the pipeline for the remainder of fiscal '15, we'll probably pull back on that and allow the team to give more attention to the comp base itself. And I just want to note that this is not about -- again, this is about focusing attention on the comp base, it not about the productivity of those new stores, we're very pleased with those.

The other area is -- narrowing the focus is incremental doors on the indirect side. We have attrition every year, we usually characterize it as 5% to 10%, we usually make that by opening new doors. We think that going forward we can be probably a little more opportunistic and less focused on opening new doors there. Lastly, in Japan, this is a shift. Japan is working for us, especially on the top line. It has been an investment, but it has also been an investment of time and energy for the team, so we think by identifying a great the local partner we can build that business and turn the overall team's attention back to the US.

Great, that's very helpful, thank you. And then just a follow up on the transition, has the board or search committee identified any candidates at this point, and any sense for how long the search is expected to last?

Just given the fact that my decision was made recently, the board recently convened, formed a search committee, and they are working with Spencer Stewart. So, we're just kicking off the process, so we really do not have anything more than that to share. And as I mentioned in the prepared remarks, the board understands the need to move expeditiously, and I am certain that they will do that, and I'm confident they will find the right person.

Oliver Chen, Citigroup.

Hello, this is Gerard Miller filling in for Oliver, thanks for taking my call. First, I would like to discuss, what type of characteristics are you looking for in the new leader, and how -- what kind of strategic vision do you see him playing in the going forward for the Company?

Sure, as we have said in the prepared remarks, we really are looking for someone with extensive retail and brand management expertise. I would characterize that as someone who has grown up on the front end of the business, someone that has a deep understanding of merchandising, certainly a strategic focus team building, team management. My background is accounting, and I grew up on the wholesale side of the business. Just considering where we are today and where we are going as a brand, the profile of that person really needs to be someone with extensive retail and brand expertise.

And then just a quick follow-up in terms of your pattern and flow strategy, how do see the patterns playing out over the rest of the year?

The overall cadence should be roughly the same. As we shared in the last call, the one shift is last year, we had a fall season and essentially an --there was a -- I'll step back, there was a back to campus release in July, there is another fall release in August and then a subsequent release in September of just a single pattern. We actually like that September time frame, so we are moving that second fall release forward a little bit. And of course, we do not have a separate pattern, that separate pattern was related and tied to breast cancer awareness, our ribbons pattern. Generally speaking, especially at a quarterly level, the cadence is the same.

(Operator Instructions)

Ike Boruchow, Sterne Agee.

Quick question about the pipeline in new stores, I think you said you are going to open 23 stores this year, and I wasn't sure if I heard you correctly on comments for fiscal '15, was there some commentary that maybe we should expect a fewer number of stores in the pipeline for next year, or how do you think about store growth going forward after fiscal '14?

Ike, this is Roddy. Yes, generally we have a range of 14 to 20, in some years we have -- a couple years we've exceeded that slightly, this year we are up at 23. Next year it certainly will not be 23, we have got some of the pipeline filled, but it could more towards the lower end of that range. We do not really have that visibility right now that we can share.

And the other question I had was, the inventories are 40%, but your gross margin guidance for Q2 is very strong, up 200 basis points. But then you took down the back half guidance to get to the full year, down 20. Is there something timing related there? Can you help us understand why -- where your inventories are, why Q2 could be so strong and in the back would be weaker? Just trying to connect the dots there.

Yes, Ike, a lot of that has to do is promotional environment. Our planned promotions for Q2 are much lower than what we experienced in Q2 of last year. It is really how we've planned the promotions. Last year in Q2 we were heavily promotional, and our plan is not to get as promotional in Q2 this year. And you can think about, the back half is kind of fairly normal compared to the prior year. Slightly down, obviously, given the 200 basis points in Q2.

Dana Telsey, Telsey Advisory Group.

Good afternoon, everyone, and Mike, we will miss working with you, but I'm glad that you're still going to be around. As you -- two things, number one, as you do the search for CEO, and Kevin I know is -- either you are the candidate for a permanent CFO, anything you are looking for different? I know that John obviously is going to be conducting part of the search and be involved in the search too. What is the skill set that you are looking for? And then as you think about the indirect business and the direct business, ultimate operating margins, given the changes in process that are going on, how do you see them being able to evolve?

Dana, I will address the first question. Obviously, with my announcement and my plans to retire, it makes sense to get my replacement in place to evaluate and consider what they may want in the way of a CFO. Kevin is done an outstanding job of stepping in, and he has performed very well, but I think it just makes sense to get my seat filled. Kevin is certainly capable of keeping the ball rolling here and will allow that new CEO to determine how we want to move forward with the CFO role.

And then Dana, specific to the operating margins, the indirect side, the way I think about that is if you look at our historical operating margins, I really feel pretty good about that. I think there is an opportunities maybe to improve that, but I think we make use of those dollars of savings to maybe further support our key accounts and some of the new accounts we have on -- in our department stores. I see that as more of a reallocation as we realize savings there. So, as you are thinking about that, I would think about how we have performed over the last year or two. On the direct side, because we're still young in the retail space, I do feel like there is still significant opportunity there to improve the operating margins. We have got some stores obviously from '07 and '08 that have lower operating margins than some of our stores we've opened over the last three years. I think as we look to improve the operations of those stores or exit those malls over the long-term, I think that can help us provide an increase to the operating margin there.

Another initiative, obviously, that we talk about a lot is e-commerce. As we migrate that to more of a full price offering, you obviously get that pick up from a operating margin perspective. Other things we are doing to help the operating profit of the direct segment is with regards to labor management. We've implemented a refined process -- manual process in the interim to make sure we are managing labor a little more tightly in our stores. And that is really a payroll matrix that ranks the stores based on volumes and making sure the store managers know exactly how many hours they are allowed to have people work. That, as we implement a system in the back half of the year, will help us manage those expenses better. So, those are some of the things that we are doing. We have also changed the comp plan for our store managers, so I think that will help us as well just drive revenues. We have got them focused on ADS and conversion primarily, and I think in the past we have had them focused on maybe too many metrics. Those are some of the things that I think we can do to move the operating margin of direct at least closer to indirect.

Amy Noblin, William Blair.

A couple quick questions. First, you mentioned investing or needing to invest in the e-commerce channel, including hiring someone to oversee that channel. Can you elaborate on that a little bit? Whether other investment might be needed within that channel, timing and if this year is not included in your guidance, I assume it is. And then my second question is on baby. You easy pleased with that, can you elaborate a little bit on the performance of baby, what worked, what didn't work? Did you pick up a new customer, build an existing customer? And then curious what you saw from the Tiny Prints partnership. Thanks. And Mike, I wish you all the best. Thank you.

Thanks, Amy, I appreciate it.

Amy, I will start on the e-commerce and let Mike speak to baby. First of all, the investments that we plan to make this year, they are all baked into the guidance. There is human resource investments, a number of them just increase in the bandwidth of the team/ From an analytical perspective, from a creative perspective, all of this is to make sure that we have the capability to really focus on growing the full price sales aspect of our web business, and we have been pleased with what we saw, the uptick that we saw in Q1. And we think there's opportunities to build on that, but it does take resources to do it. The other one is the head of e-commerce sales that we mentioned in the prepared remarks, that is essentially -- that's a dedicated resource. Someone with the experience but also importantly, someone who is waking up every morning thinking about how we can grow that business and how we can evolve it.

Over on the infrastructure side, there's a few investments that right now are more capital in nature. Infrastructure just on the backend as it relates to one tying our -- the customer base across customers -- I'm sorry, across channels so that there's greater visibility to transactions and, say, full price stores, as well as online that allow us to do certain things in the future. Such as whether it's registries, loyalty programs, it just gives us greater flexibility to do things in the future. There's also some more building blocks to allow us to evolve the user interface more efficiently in the future. Those are -- give you a flavor of what we are doing this year. It is all baked in as we evolve through the -- move through the year, we may intend on buying some additional investments to make next year, but we really feel that we can start that evolution in fiscal '15 to some extent.

Amy, this is Mike, I will speak to baby. Just at a high-level, I would say baby has performed relatively well. It is kind of an a niche category. We are seeing good response on both the indirect and the direct side. I think primarily what we are seeing is sales to existing customers, but we are seeing new customers. We are opening new doors as a result of having the category.

I would also say that I think one thing that we've learned is that while baby is a great category for the brand and there are other extensions that will make sense, I think that understanding that we need to continue to focus on the core categories and continue to invest in the handbags, accessories and travel; and continue to exploit what we have built over 30 years, there's still tons of opportunity there, and we want to make sure the team remains focused on growing through the core assortment. And so that is what the focus will be going forward. But baby is performing relatively well.

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

Okay, brief closing remarks, thank you for joining us today and for your continued interest in Vera Bradley. We look forward to speaking with you in our second quarter conference call which we held on September 5 at 4.30 PM. Thank you.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation.