Vera Bradley Inc (VRA) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley fourth-quarter and fiscal year-end 2014 earnings conference call. (Operator Instructions).

As a reminder, today's presentation is being recorded. I would now like to turn the call over to Stacy Knapper, Vera Bradley's Senior Vice President and General Counsel. Please go ahead.

Good morning and welcome, everyone. We would like to thank you for joining us this morning for Vera Bradley's fourth-quarter and fiscal year-end 2014 earnings conference call.

Some of the statements made on today's 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 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.

I will now turn the call over to Vera Bradley's Chief Executive Officer, Rob Wallstrom.

Thank you, Stacy. Good morning, everyone, and thank you for joining us on today's call.

With me today are Kevin Sierks, our EVP, Chief Financial Officer; Sue Fuller, our EVP of Merchandising; and Julia Bentley, our VP of IR and Communications.

2014 was a challenging year for our business. Sales were soft, gross margins suffered, and our EPS fell for the first time since becoming a public Company. We continue to face external headwinds and certain challenges within the business, and fiscal 2015 will be a year of some continued uncertainty and one of transition as we begin to implement elements of our strategic plan, and this is reflected in our guidance that Kevin will discuss later on the call.

We have spent the last few months developing our comprehensive five-year strategic plan, designed to improve financial performance and shareholder value over the long term. Our vision is to build on our rich heritage and establish Vera Bradley as a premium lifestyle brand that is relevant to the future, expanding our customer reach and growing our customer connections.

We will achieve this vision through our strategic plan, which encompasses three key elements -- product, distribution channels, and marketing. After Kevin gives us an update on the financial information, Sue and I will fill you in on more details related to these three components of our strategic plan.

Of course, our strategic plan will be supported by three key foundational elements -- sustaining and enhancing our unique Company culture, attracting and retaining top talent, and improving our analytics and reporting to drive fact-based decision making. These three things will be core to our success.

Let me make a couple of comments on the talent piece and our organizational structure. My number one priority was filling the Chief Merchant role, and Sue came to us with a wealth of experience at several well-respected retailers, including Ralph Lauren, Lands' End, and L.L.Bean. Her experience at Kohl's and Carhartt are proving particularly applicable and valuable to Vera Bradley, and she has hit the ground running.

Merchandising, merchandise planning, and product sourcing all report directly to Sue. I'm excited for you to hear directly from Sue about our product vision and initiatives.

In early February, we announced several key executive promotions and realignments. We have a lot of talent and experience within our Company and these appointments will help position us for the future. Kevin Sierks, who served as our interim CFO since early 2013, was deservedly promoted to the post of EVP and CFO. Roddy Mann has assumed the oversight of IT and operations, in addition to strategy, in his role of EVP of Strategy and Operations. And Pam Sours was promoted to SVP of Operations after serving as our VP of Manufacturing and Global Quality for the last nine years, and she is reporting to Roddy. And finally, Stacy Knapper, who served as our VP and General Counsel, was promoted to the SVP level.

I am confident that we are in the process of assembling the right team to achieve our long-term goals, drawing from both our own leadership team and attracting new talent to the organization. We still have some key positions to fill, including the Chief Marketing Officer, the head of sales, and the head of e-commerce, but the team is coming together.

Even though fiscal 2015 will be a challenging and a year of enormous change, our entire team is aligned and very excited about the future of our brand. By successfully executing our five-year strategic plan, we believe that we can grow to $1 billion in revenue and generate an operating margin in the high teens.

With that, I will turn it over to Kevin, who will provide additional details regarding our fourth-quarter and full-year financial results, as well as guidance for our fiscal 2015 first quarter and full year.

Thanks, Rob, and good morning.

Net revenues totaled $157.5 million for the current-year fourth quarter, compared to $162.6 million in the prior-year fourth quarter. Net income totaled $19.4 million, or $0.48 per diluted share, for the current-year fourth quarter.

These results included a pretax inventory write-down of $4.8 million, equating to approximately $3 million after tax, or $0.07 per share. The inventory write-down primarily related to fabrics and certain retired patterns no longer considered saleable and to certain merchandise in the baby gift category, which is being discontinued by the Company.

Net income totaled $25.1 million, or $0.62 per diluted share, in the prior-year fourth quarter.

Keep in mind that the fourth quarter and fiscal year ended February 1, 2014, represented 13-week and 52-week periods, respectively. The prior-year fourth quarter and fiscal year ended February 2, 2013, represented 14-week and 53-week periods, respectively.

The 53rd week of fiscal 2013 contributed $4.9 million of net revenues and approximately $0.02 per diluted share to both the fourth quarter and full year of fiscal 2013.

Our fourth-quarter sales and earnings were below last year's levels. However, net income exceeded our expectations as revenue; gross margin, excluding the aforementioned write-off; and SG&A expenses were all favorable to our projections.

Current-year fourth-quarter direct segment revenues increased 5.2% to $108.7 million from $103.3 million in the prior year. Fourth-quarter year-over-year net revenues in the Company's stores grew 14.5%. This growth reflected the opening of 19 full-line and four outlet stores during the past 12 months and was partially offset by a comparable stores decline of 10.2%.

E-commerce revenues decreased 7.2% compared to the prior year. The decreases in comparable-store and e-commerce revenues were due to year-over-year declines in traffic, a lower average transaction size, and underperformance of the product offering. Severe winter weather also negatively affected store traffic during the quarter.

The direct segment accounted for 69% of total net revenues in the fourth quarter versus 64% in the prior-year fourth quarter. Indirect segment revenues decreased 17.5% to $48.9 million from $59.2 million in the prior year, primarily due to lower levels of inventory orders from our specialty retail accounts, combined with closing approximately 400 wholesale accounts during the year.

Gross profit for the quarter totaled $83.3 million, or 52.9% of net revenues, compared to $94.1 million, or 57.9% of net revenues, in the prior-year fourth quarter.

The previously mentioned inventory write-down negatively affected the fourth-quarter gross margin rate by approximately 300 basis points. In addition, the gross margin rate was negatively affected by increased year-over-year promotional activity, as well as an increase in the sales mix of lower margin product. Excluding the write-down, our gross margin rate was actually better than expected, primarily due to freight expense improvement and a focused effort to reduce packaging costs.

We continue to focus on expense management. SG&A expense totaled $53.6 million in the current-year fourth quarter, compared to $55.8 million in the prior-year fourth quarter. SG&A as a percentage of net revenues decreased 30 basis points to 34%, compared to 34.3% in the prior year, primarily as a result of tight expense management, including reductions in discretionary spending and a reduction in variable compensation expense associated with the Company's financial performance.

Operating income totaled $30.8 million, or 19.6% of net revenues, in the current-year fourth quarter, compared to operating income of $40 million, or 24.6% of net revenues, in the prior-year fourth quarter.

Now let me provide more details on the full-year performance. Net revenues totaled $536 million for the fiscal 2014, compared to $541.1 million for fiscal 2013. Net income totaled $58.8 million, or $1.45 per diluted share, for fiscal 2014, which included the previously mentioned inventory write-down. Net income totaled $68.9 million, or $1.70 per share, for fiscal 2013.

For fiscal 2014, direct segment revenues increased 11.5% to $326.2 million from $292.6 million in fiscal 2013. Year-over-year net revenues in the Company's stores grew 21%. This growth reflected the opening of the previously mentioned new stores and was partially offset by a comparable-store sales decline of 5.7%. The decrease in comparable-store sales was due to year-over-year declines in traffic, a lower average transaction size, and underperformance of the product offering. E-commerce revenues were essentially flat on a year-over-year basis.

For fiscal 2014, indirect segment revenues decreased 15.6% to $209.8 million from $248.6 million in fiscal 2013, primarily due to lower orders from our specialty retail accounts, combined with closing approximately 400 wholesale accounts during the year.

We ended the fiscal year with distribution in approximately 3,100 specialty retail doors. The direct segment accounted for 61% of total net revenues in fiscal 2014 versus 54% in the prior year. We ended the fiscal year with 84 full-price and 15 outlet stores.

Fiscal 2014 gross profit totaled $295.4 million, or 55.1% of net revenues, compared to $308.3 million, or 57% of net revenues, in fiscal 2013. The inventory write-down negatively affected the full-year gross margin rate by approximately 90 basis points.

In addition, the gross margin rate was negatively affected by increased year-over-year promotion activity, as well as increase in sales mix of lower margin product. There was a slight offset to these negative factors from improved freight rates and a reduction in packaging costs.

SG&A expense totaled $206 million in fiscal 2014, compared to $204.4 million in fiscal 2013. SG&A as a percentage of net revenues increased [60] basis points to 38.4%, compared to 37.8% in the prior year. The increase in SG&A expense as a percentage of net revenues was primarily due to fixed expenses being spread over lower revenues in the indirect segment, the deleveraging of store operating expenses, and the impact of increased employee-related expenses from the headcount additions in the first half of fiscal 2014, all of which was partially offset by discretionary spending cuts and reductions in variable compensation expense associated with the Company's financial performance.

Fiscal 2014 operating income totaled $94.3 million, or 17.6% of net revenues, compared to operating income of $110.1 million, or 20.4% of net revenues, in fiscal 2013. Cash flow from operations for fiscal 2014 totaled $87.9 million, compared to $51.5 million for fiscal 2013. The improvement was driven primarily by slower growth in inventory level.

Key balance sheet highlights as of the end of the fiscal year include cash and cash equivalents of $59.2 million, compared to $9.6 million at the prior year-end; a debt-free balance sheet; accounts receivable of $27.7 million, compared to $34.8 million at the prior year-end; and related days sales outstanding of 43, compared to 48 in the prior year.

Inventory of $136.9 million compared to $131.6 million in the prior year, an increase of 4%. This increase was lower than expected inventory balance of approximately $160 million, due to approximately $6 million of summer products, which was expected to be received in the fourth quarter of fiscal 2014, but was received early in 2015; higher-than-expected revenues; and the $4.8 million inventory write-down.

Net capital spending for fiscal 2014 totaled $22.9 million, which primarily related to new store openings, IT investments, and initial spend on our corporate campus consolidation.

I would now like to move on to guidance for fiscal 2015 first quarter and full year. Weather has impacted our business during February and early March. The winter storms, severe cold weather, and related store closures have negatively affected sales in our stores and in the specialty gift channel.

We also expect that the challenging consumer environment and the softness in consumer response to our current merchandise assortment will continue in fiscal 2015, resulting in continued weak traffic and promotional activity.

In addition, there may be certain disruptions in the business as we begin to make product and distribution channel changes related to our strategic plan.

In the first quarter of fiscal 2015, we expect net revenues to be in the range of $116 million to $120 million, compared to $123 million in the prior-year first quarter. We expect the direct segment net revenues to increase by low to mid single digits, with comparable-store sales down high single digits. Indirect net revenues are anticipated to decline in the low to mid teens.

The gross margin rate for the first quarter of fiscal 2015 is expected to range from 52% to 52.6%. This represents a year-over-year decline of 300 to 360 basis points, primarily due to not leveraging overhead and the planned inventory liquidation.

First-quarter SG&A is expected to range from 46% to 46.6% of net revenues, which represents a 110 to 170 basis-point decline in leverage. First-quarter diluted earnings per share are expected to be in the range of $0.11 to $0.13. Our earnings-per-share estimate assumes an effective tax rate of 40% and fully diluted weighted average shares outstanding of 40.7 million.

We estimate inventory to be in the range of $128 million to $133 million at the end of the first quarter, compared to $138.9 million at the end of last year's first quarter.

For full-year fiscal 2015, we expect net revenues to be in the range of $545 million to $565 million, which includes up to $12 million of sales to a third-party liquidator. This revenue guidance includes direct segment net revenue growth of high single to low double digits, with a comparable-store sales decline of low to mid single digits.

Indirect net revenues are expected to decline in the mid to high single digits.

The gross margin rate for fiscal 2015 is expected to range from 53% to 54%, which represents a year-over-year decline of 110 to 210 basis points. This reflects our planned inventory liquidation, not leveraging overhead costs, and continued promotional activity in fiscal 2015.

SG&A is expected to range from 39.5% to 40.5% of net revenues, which represents a 110 to 210 basis-point decline in leverage. While expense control remains top of mind, we will be making certain investments in the business in fiscal 2015, including key management hires that will increase SG&A, but that are intended to enable us to realize our long-term objective.

In addition, incremental incentive compensation expense for the entire year is expected to be approximately $8 million.

We expect diluted earnings per share for the full year to be in a range of $1.20 to $1.30. This estimate includes an effective tax rate of 38.4% and fully diluted weighted average shares outstanding of 40.7 million.

We expect our total capital expenditures to be approximately $40 million for the full year, with approximately $20 million related to our corporate office campus consolidation. The balance primarily is related to the planned opening of 13 new full-line and seven new outlet stores and continued investment in our systems, including our e-commerce platform.

Let me turn the call back over to Rob.

Thanks, Kevin.

As I noted earlier, our vision is for Vera Bradley to be a true lifestyle brand. While rooted in our rich heritage, it continues to remain relevant and modern. We certainly want to keep our existing customers, but it's imperative that we broaden our reach and our customer base.

As we implement the three key elements of our five-year strategic plan -- product, distribution channels, and marketing -- I believe we can achieve that goal.

First, product. We have a relevancy issue with our existing product. While we have a very loyal customer base and a dominant share of market in the cotton casual handbag and travel accessories business, we still own a narrow percentage of the total market in these categories when all fabrications are included.

Demand for existing products is declining, as evidenced by our recent comp-store and e-commerce sales performance, and I believe that we have oversaturated our existing customer base with our current offering.

As Sue will describe, over the next year and continuing into the future, we will work to become more relevant by modernizing and elevating our product to appeal to a wider range of customers. For example, we are very focused on creating products and an environment that will appeal to the career professional.

As Kevin noted, however, we expect that our fiscal 2015 performance will be challenged as we work through our existing products and prudently work to evolve our product offering.

Let me ask Sue to provide more details on our product strategies. Sue?

Thanks, Rob.

First of all, I feel very privileged and honored to be part of such a great Company. I am inspired by the level of knowledge, talent, and creativity within the organization. Our associates have such passion and a sense of pride in Vera Bradley, and we're really committed to working together to make our business even better.

Over the last couple of months, I have received feedback directly from many of our retail partners and customers and have worked closely with Barbara Baekgaard and the rest of the design team. Together, we have developed a comprehensive product strategy that we believe will update and elevate our assortment. These action steps are not only intended to stabilize the business in the short term, but I believe they will expand our customer base, drive sales, generate gross margin improvement, and dramatically simplify the way we run our business over the long term.

Our product strategy is four pronged and includes an elevated product assortment; a focused product assortment, and one that is narrow in the short term; brand extensions; and gross margin expansion.

Allow me to go into a bit more detail on each of these. First, we will elevate our product assortment beginning later this year. We will extend our price offering, which is currently very narrow, and build aspiration by creating halo product in new fabrications, particularly in the handbag category, while maintaining a solid opening price strategy. We are not walking away from the core, but building on it.

We will work to stabilize the business by majoring in the majors, making a bigger impact in the classifications Vera Bradley is known for and what we do best, like travel, backpacks, bags, and accessories. We will also invest in emerging growth and brand-enhancing opportunities that will strengthen the core of the future, such as scarves and jewelry.

Second, we will focus our assortment and narrow it in the short term. We believe that we have too many styles and patterns available today. By early next year, we will reduce our SKUs by 30% to 40% and our signature patterns by approximately 20% to 30%. While this sounds like a lot, these SKUs and patterns only represent a little over 5% of our sales volume. This assortment editing will make our remaining signature patterns more special.

In the recent past, we have introduced approximately 18 quilted cotton patterns annually. This year, we are paring back to 14, and beginning in fiscal 2016, we plan to launch only 10 to 12 signature patterns each year.

In conjunction with pattern editing, we will add more solids to the assortment to showcase our signature patterns even more. By the end of this year, we expect solids to represent approximately 15% of our assortment, moving to 30% to 40% over time. For the fourth quarter, black was our number one color in both our full-line stores and in our e-commerce channel. Solid in particular will help us modernize our collections and add career elements into the assortment, which we believe will expand our customer base.

We are creating what I am calling franchise businesses, more cohesive collections that tie together both visually and functionally with stripes, solids, and other modern patterns coordinating to signature patterns and all relating to each other. We will begin introducing these collections by the end of this fiscal year. In addition, we will minimize the creation of one-off styles and items unrelated to the core.

Later this year, we will introduce strategic lifecycle planning. Every product launch will not be treated equally, as they generally are today, and will have a predetermined lifecycle. In the future, our patterns and solids will be broken down into four categories.

Trend, aspirational products with limited channel-specific quantities designed to sell through quickly, usually one pattern with a three-month life.

Seasonal, creating newness with a spring/summer or fall/winter aesthetic, which may not be in all channels or geographies. Typically two to four patterns with a six-month cycle.

Emerging core, available in most channels at any time, with potential to become core. Generally one or two patterns with a six- to nine-month life.

And core, items that are seasonless and available in most channels at any time, two to four signature patterns at any one time, with a 12- to 18-month life.

We will, at least temporarily, discontinue non-core categories. For example, beginning this fall we will discontinue offering baby clothing and gifts and refocus our assortment on baby bags.

Third, over the long term we will pursue brand extensions that will enhance our position as a lifestyle brand via a structured approach. We may look for the right strategic partners and licensees that could augment the brand to provide established distribution networks. Examples could include tech accessories, stationery, eyewear, or fragrance.

Finally, we are also in the early stages of thoroughly evaluating several other aspects of our business, determining if we can make other changes to improve our gross margin rate over time. Specifically, we are reviewing our product pricing model, determining if there is upward elasticity on certain products; determining how we can make our supply chain more efficient and cost effective; exploring low-cost manufacturing facilities and countries, while maintaining our high quality standards; assessing how we can shorten the design cycle; examining our distribution and other overhead costs for possible savings; adding more discipline to our overall merchandise and planning and allocation processes; and working to better align the order and manufacturing cycles for the indirect segment of our business, particularly within our top accounts.

Currently, our designs are created and produced, and then orders are taken. We need to produce what is ordered, rather than try to sell what is produced.

All of these changes will take time, but hopefully these refined assortments and improved disciplines will begin to positively impact sales, gross margin, and inventory turns by next year. Rob?

Thanks, Sue.

Let me now talk about the second key component of our strategic plan, our multichannel distribution opportunities. Our objective is to shape Vera Bradley into a tightly integrated multichannel business. Our distribution channels must support our overarching goal to expand our customer reach and our customer base.

We will grow our direct distribution channel, including full-line stores, factory outlet stores, and e-commerce; right-size and work to strengthen the performance in our gift channel; and further develop our department store and other indirect channel relationships.

We continue to have a long-term vision of around 300 full-line Vera Bradley stores. Since we only have 84 full-line stores today, after adding 19 stores last year, there are a myriad of essentially untapped geographies for Vera Bradley, like the West Coast. We plan to add 13 new full-line stores in fiscal 2015 and believe we can accelerate that pace beginning in fiscal 2016 to add approximately 20 to 25 new stores per year.

I'm especially excited about our plans to introduce a new prototype store design in fiscal 2016, which will make our locations more modern to align with our new product strategies and showcase the lifestyle aspects of the brand.

In the meantime, we are working to further refine and de-clutter the visual presentation of merchandise in our existing stores.

Managed prudently, the outlet channel is a huge opportunity for us. All of our peers employ factory outlet stores to a much greater degree than we do. We will continue to use our outlet stores as a clearance vehicle for merchandise from our full-line stores, but the cornerstone of our outlet strategy will become product specifically manufactured for the outlet, which is not done today.

Within three years, we expect approximately 40% of the product in the outlet channel to be made specifically for our outlets, growing to approximately 70% in the five-year timeframe. We believe this MFO strategy is a profitable financial model which should drive both sales and gross margins.

The factory outlet stores offer value and will help us reach a new demographic. As research indicates, less than 10% overlap between our full-line shoppers and outlet shoppers. We opened four outlet stores last year, bringing our current total to 15, and we expect to add at least seven more in fiscal 2015.

We believe that we can accelerate this growth rate going forward to approximately 10 to 15 new stores per year and think there is an opportunity to have well over 100 factory outlet stores in the long run. We expect to have a ratio of two to three full-line stores to every one factory outlet store in the long term.

I am confident there is enormous growth opportunity in our e-commerce business, which compromises between -- which comprises between 20% to 25% of our total revenues. E-commerce will be a key part of the foundation to support our brand and marketing strategies. Our eventual goal is for the e-commerce experience to mirror the in-store shopping experience by segregating our full-line and factory outlet product onto different sites.

In the meantime, we are continuing to make enhancements to the look, feel, and features of the site to improve the shopping experience. We are also improving and streamlining our search capabilities and increasing segmentation of our emails between our full-price and outlet customers with more targeted messaging. All of these efforts are designed to improve full-price selling and long-term conversion rates.

We have a database of over 2.7 million customers and over 69 million people visited VeraBradley.com last year. We are proud that we consistently rank among the top in the number of annual website visits compared to our most closely related peer companies.

As we work towards improving the productivity in our indirect segment, we are placing greater focus on our department store relationships and have realigned our internal resources accordingly. We have a presence in all 280 Dillard's stores and have a relationship with Von Maur in the Midwest.

We believe there are immediate opportunities to improve our brand presentation and productivity within our existing department-store distribution. We will have a mixture of hard shops and less branded spaces within the department stores. Most importantly, we will continue to explore other expansion opportunities in the department-store space, especially since this is the number one destination for career handbag purchasing, which is a key focus of our product strategy.

The indirect specialty gift channel is a heritage of our business and remains very important to us. Deep customer engagement with the brand has been built and continues to be built in this channel. However, as you know, this channel is in a state of declining sales and margins, due to overassortment of patterns and styles. Consequently, we reduced this distribution by a net of approximately 400 retailers in fiscal 2014 through a combination of remediation, natural attrition, and a more selective approach to opening new specialty gift stores.

Our current specialty gift distribution stands at around 3,100 stores. We will continue to add select accounts, while discontinuing unproductive accounts. About 30% of our accounts make up about 70% of our specialty gift channel revenue. We are updating our service and support model to make these top accounts in particular even more productive by reducing SKU counts and maximizing the retailers' margins.

While the specialty gift business is rapidly becoming a much smaller percentage of our total revenue base, it is still an important piece of our business, and we are working hard to stabilize this channel by narrowing our product assortments, changing the order cycle, and doing a better job of segmenting our assortments by door.

Turning quickly to Japan, our experience in Japan over the past three years has proven to us that there is a lot of opportunity there. We believe we are at a point in our market-building efforts where we can now turn our attention towards establishing a business model focused on long-term profitability. We will be exploring options during fiscal 2015, which may include working with an outside partner, to capitalize on our potential there.

While we believe there is opportunity for additional international expansion in the long term, improving and growing our domestic business remains our primary focus.

Last, let me touch on the third strategic component, marketing. Our marketing goal will be to generate excitement and desire for the aspirational Vera Bradley brand, attracting new customers while continuing to foster strong connections with our loyal fan base. We have underinvested in marketing compared to our peers, and we will be increasing our spend beginning later this year, which is reflected in our guidance.

We plan to build a cohesive brand story that connects with our target customers, and more of our spend will be allocated towards the halo brand enhancement assortments and less to what is already well known. We will advertise the brand in relevant national magazines and leverage our database and insights to conduct more segmented and even personalized digital and direct mail marketing.

Operator, we will now open up the call to questions.

(Operator Instructions). Edward Yruma, KeyBanc Capital Markets.

Good morning and thanks for taking my question. First, you indicated that there will be some additional inventory liquidation in 1Q. How should we think about the medium-term inventory liquidation picture, particularly as you wind out of some categories that maybe you had done yourself and look to license?

Yes, it's a good question, Ed. I think with regard to liquidation, we planned for $12 million this year and that planning is to put us in a better position as we exit the year. And it's also to help us with our MFO strategy that Sue can touch on, but that's why we are planning for the liquidation.

We have done this in the past. We didn't have much in the prior year, so if you think about it from a comp perspective, it's mostly additional this year compared to last year.

Got it, and how should we think about -- you've talked about some of the new products you're introducing, some new patterns. How do we think about product flow for the back half of the year, I guess your comfort level with products that are already in the pipeline, and the kind of flow as we progress through the year? Thanks.

Yes, great question, thanks. We believe that -- so the back half of the year is where we are going to be, for the first time, [reflected] our assortment utilizing our biometrics, and where we actually did, in fact, make a change to the assortment using a more scientific approach. However, we realize it's also a blend of art and science from a pattern perspective.

Secondly, we also are in the process of currently introducing a few new fabrications, such as faux leather and leather, into assortments to touch upon the elevation of our product assortment.

And last but not least, we are continuing to increase our solid penetration. We mentioned earlier that black is our number one color, and we believe that this represents very much an opportunity for us in the back half of the year as well, and we plan on increasing our penetration. (multiple speakers)

Just a couple things I would add in comments on the product standpoint. I think what you will begin to see happen in fall is that Sue and the team have really been able to start editing significantly.

We believe that this oversaturation was our number one issue, and so the team took quick action as soon as they could in the lifecycle of the product to start pulling the assortment back. You'll see that in fall. You will see the introduction of the new fabrics that Sue spoke about, and also the introduction of some more graphic patterns in terms of utilizing some of the smaller patterns that have been inside the bag and bringing it outside the bag.

And all of those actions, we think, will help focus the assortment and modernize the assortment and begin this repositioning, but it just will be the first steps, we would say, along that path. We still have a lot of excitement coming out even as we go into next year, but you will begin to see some early changes in fall.

And then maybe as a reminder, back to campus is our second biggest time during the year, and we're introducing four new styles this year. We had two new styles last year, so we are very excited about that. One of those styles is water resistant, and not very companies compete with us in terms of colorful backpacks, so we're excited about back to campus, as well.

Great. Thanks so much, guys.

Mark Altschwager, Robert W. Baird.

Good morning and thanks for taking the question. First off, I appreciate all the detail. It's great. Rob, just following up, what do you see the optimal mix of direct to consumer versus indirect over time? And then, could you talk a little bit more about where international growth fits into that five-year plan?

Yes, we definitely -- as we look at our five-year plan, we definitely see the direct penetration continuing to grow. As we laid out, we see significant growth in both our full-price and outlet channels.

In regards to the indirect channel, what we see is a stabilization of our gift channel, which still we think we'll be shrinking and contracting slightly as we go through the five years, but then offset with an expansion in the department store world. So, we believe we will see some small expansion in the indirect world, but the majority of our growth will be coming out of the direct world.

In terms of international, like we said, we believe that Japan is the first area that we've been able to grow internationally. It's been very encouraging. I was over there this year to really look at how we were positioned in the market. I was impressed by our productivity in our current spaces, even though I was not necessarily happy with our current real estate. And so, that's why we are looking for an opportunity to strengthen our positioning from a real estate perspective and potentially work with an outside partner to really even leverage the brand further.

I think we have significant opportunity, but we want to make sure in the short term that we are really focused here in the US getting the product right, and then we will expand internationally after that. But we don't have a lot of international growth in our current five-year plan in how we built out the revenue line.

Okay. And then, you talked about plans to modernize and elevate the product. As you move more into solids and potentially more premium materials, how will you differentiate the Vera Bradley brand in an increasingly competitive handbag marketplace? And what do you want the brand to represent to that career customer?

Yes, I think a few things. I think, one, as we look at the Vera Bradley brand, we believe that there is so much in the brand DNA in terms of our -- we really connect with the consumer. It's a fun brand. It's a brand that is not overly serious, and so as we do career introductions, we think we can keep some of that spirit. It can be a little bit more fun.

So as we look at some of these products on the outside, it would still be very appropriate for the office, whether that's leather or whether that's faux leather. Obviously, much more solid driven. But inside, there is still going to be that surprise and delight of the happy Vera Bradley patterns, and we think there's a real opportunity in the entry price point in this leather and faux leather business that we think Vera Bradley can have a very strong market position in.

So as we talk about aspiration, we are looking at our current cotton bag business as around a $100 price point. We think that our faux business can probably be in the $200 price point and the leather business up to the $300 price point, so that's how we are thinking about the business today.

I would say the other major differentiator is our functionality that our bags provide, and that is a key component of our DNA that we are continuing to make sure that we build into every new program that we're introducing, as well as every major classification, as well as every new material that we introduce.

Great, thank you.

Randy Konik, Jefferies.

I guess my first question is along the lines of how the consumer visualizes the brand. I guess right now if you ask a woman what she thinks of Vera Bradley, what she thinks in her head, it's a paisley type bag, and I have asked this question when we had the sell-side event. We saw something similar with Deckers where the top-of-mind thought process was that -- with the woman was that major kind of boot that they have, and the Company expanded their product offering and diversified so the consumer would think of more than just the core boot from UGGs.

Do you see similarities or differences in what you're trying to do with the product here at Vera Bradley in terms of the consumer mindset of what they think of what the brand stands for? That's my first question. Thanks.

I think that -- a couple of things to, I guess, talk about there is, one, I think that UGGs is an interesting analogy, but I do think that we are slightly different, because I think UGGs was so dominant in a very focused, one-item type of boot that as they expanded, they did a nice job.

But I do think with Vera Bradley, what we are finding from our consumer is that she is not limited to our printed cotton quilted business. We are already seeing such strong response to our solid microfiber bag, which is different. We've introduced a few more in terms of the other fabrications into the line, whether it's straw or some of the other things, that we know that our customer will go beyond the printed cotton quilted already. So that gives us some confidence, and we believe that really will allow us to launch these other businesses.

Right now as we look at our five-year plan, though, we still believe the majority of our business will remain in the cotton quilted business. We really feel that this faux leather and leather business is the halo product for us that will allow our customers to engage with the brand when she goes to the office, because what we've found right now is that she is not taking Vera Bradley with her to the office, and we think there's an opportunity from our customer research to be able to do that and to keep that relationship going.

That's super helpful, and then, when you think about your distribution, let's say, west of the Mississippi, do you think -- do you think of the channel -- any channel differences about the western part of the United States versus the eastern part of the United States regarding retail versus potentially department stores? I guess in the comment in your commentary and in the press release, it sounds like there is potential more department store distribution beyond Dillard's that you could foresee on the horizon. Could you comment on that?

And lastly, can you just reconfirm -- did you say that 30 accounts in the specialty channel account for 70% of that channel? I just want to clarify that. Thanks.

Yes, let me clarify that, and then Rob will take your first question, Randy. It is 30% of our accounts, of our customers, make up 70% of the revenue. And that's just related to the gift channel, so just think about those specialty accounts. It doesn't account for the key accounts like Dillard's and Disney and QVC, et cetera.

Understood.

So as we talk about the West Coast, I think, one, your first statement is right that we do believe on the West Coast that the gift channel will not represent a significant portion of the West Coast strategy and that the department stores will represent a larger part of that strategy.

We do believe, though, that there is a significant retail -- direct retail opportunity on the West Coast. Part of the reason that we've been looking at -- you hear us keep talking about modernizing the brand, whether it's through the assortments or also through this new store prototype design, we feel that part of becoming stronger on the West Coast is communicating the Vera Bradley message in a store environment that's a little bit more applicable to the West Coast.

So, we are not looking at revolution, but we are looking at evolution and moving from what I would call a much more classic brand to a modern classic brand. We're not trying to move to contemporary, but we are trying to move to a more modern classic brand, as I think you have seen some other retailers do, and one that I have always admired is how Ralph Lauren managed that transition over the years. And we think there is a real opportunity for us to follow a similar path.

Got it. Just one last question, if I may. At the sell-side event, you talked about the issues of executive communication with the various headquarter buildings or different buildings on the campus. Can you describe to the buy side what you currently have from an office location set-up? What was the communication like or not like, lack of their communication in the past, and what you're moving towards, and the timeline of consolidating offices? Thanks, and that's my last question.

Yes, so currently in Fort Wayne, we have five different buildings.

Five buildings in four locations.

Yes. As you think about the executive team, what we really had is we had our north -- one of our north buildings where we had a lot of our finance, operations. Mike Ray sat up here, the northern part of Fort Wayne, and then the creative team was down in our VBD design center, and so there was really a separation between the creative design group and more the operational and administrative part of the Company.

And what we have done in the short term is to make sure that we really start integrating a lot more. I moved my office down to the design center. We have our executive meetings down in the design center most of the time to really make sure we have strong alignment amongst the team. So I think we have already started to make some nice headway there, but it's not perfect.

So our campus consolidation will be happening. It's being built as we speak, and we will move in about this time next year. And so, that will make that process even more seamless and more fully integrated.

But I wouldn't want to mislead anybody that we think that alignment is going to take until next year to get to. We are working on that right now in just how we are changing our practices on a daily basis, and I think we've made significant headway in aligning everybody.

Super helpful. Thank you.

Neely Tamminga, Piper Jaffray.

I want to say welcome to Sue and congrats to Kevin and the team on their promotions. (multiple speakers).

So if I may, Sue, it sounds like exactly what we need to hear here, right, in terms of process change going on in terms of your role and how you're getting everybody functioning on the same page. Do you actually have the tools that you need to do what you need to do? Like do you have the PLM software that you need, et cetera, or is that a future stage?

And then, related to this, you guys are referencing this five-year plan, strategic plan, are we thinking with the SKU rationalization we could actually get beyond prior peak gross margin levels in five years? Thank you.

I'll answer the first part of the question, which is, do we have the tools necessary to ensure success? And what I am pleasantly surprised about, actually, in working with the IT team is that there has been a large investment made in our software over the years to enable our (inaudible) fantastic.

We actually have -- as of May, we will have upgrades that we've been making to the PLM systems to continue to streamline the processes and to improve two-way communication not only internally, but also to our partners overseas, which will make a huge difference in streamlining our supply chain and also increase and enhance our speed to market, which will lead to more product relevancy at a faster rate.

So I feel confident that the platforms that have been put into place over time will enable us to be successful.

And then, with regards to gross margin, we do believe we can improve our gross margin over the five-year strategic plan. We think SKU rationalization plays into that, modernizing and elevating, and a focused assortment, obviously, will play into that. We're obviously, as we're going through the SKU rationalization, we're taking out the unproductive or the lower productive SKUs, so that will help, as well.

Obviously, we're not able to leverage our overhead costs right now, either, so in the back half of this past year, we really slowed down our inventory ordering, so -- which is the right thing for the business, but nevertheless you have less units to spread that cost over, so we'll naturally be able to get more leverage over time, as well as we work through our inventory, and we think by the end of this year, we'll really be in a better inventory position than we are as we exited this year.

Our retired inventory levels will go down about 10% over the course of this year, which will put us in a really good place from our perspective as we exit the year.

So there is also some supply-chain efficiencies we think we can do, as well. We are looking at lower-cost manufacturing locations over in Asia. We are looking at the use of our facility here in town that manufactures about 6% or 7% of our product, looking at exactly what we produce there and how we can run that more efficient.

So, there's a long list of things we are looking at currently. Most of this will obviously impact next year, not the current year we're in right now, only because we have to work through our inventory position and we also have to make some headway on our MFO strategy.

Thank you so much. Good luck (multiple speakers). Go ahead, Rob.

The only thing I would add to that is I agree with everything that has been said that we do believe there is -- the gross margin long term is going to be moving in the right direction and get back in the historic levels.

The one thing to keep in mind, though, is as we build the factory business, it definitely improves the margin over the current outlet structure, but it's still slightly dilutive in terms of the overall gross margin on the topline.

So, we are making significant improvements in our full-price margin and how that margin is flowing through our department-store channel, and then the mix is holding it back slightly, but we still believe with the mix of that we can get up above the historical levels.

Thank you. Good luck.

Oliver Chen, Citigroup.

Hi, everyone. Thanks for taking my question. This is Nancy filling in for Oliver. I was wondering if you could just talk a little bit about made for factory. As that ramps up as a percentage of the factory mix, how does that play into SKU rationalization? Will it mirror the launches in the full price?

And then, also, could you just comment on your thoughts on promotional cadence going into this year and what your expectations are so far, seeing the trend so far this year?

Yes, a couple things. I think, one, from a promotional standpoint, we are basically planning that we think the environment is going to be similar to last year, so that's how we are approaching the promotional planning at this point.

As we look at the MFO, we do believe that the MFO assortments are going to be similar to what we are doing in full price, but part of the MFO strategy is that the product will be different, and we do believe that's a critical part of the strategy.

It's currently one of our problems in our current outlet strategy is that we are putting retired product in the outlet right on the heels of it being in our full-price channel, and so our indirect channel, in some cases, is holding the same product that were in outlets. We are trying to move that apart so that will not happen in the future. We will have much more MFO product.

But one thing about the factory channel that is so advantageous is that we believe we can keep a very, very tight SKU assortment. We basically can take best-selling styles from our full-price business. We don't have to do as much experimentation in R&D, and so we can take the lessons learned from our full price and monetize it in our factory. So it will be a very, very tight assortment in our factory channel.

Thank you guys so much.

Evren Kopelman, Wells Fargo.

Thank you. My two questions. One is, can you talk a little bit about how you plan to manage the risk of alienating that core loyal customer with all the product changes that you're planning on making and changes to the stores?

And the second question is -- I'm not sure if this was mentioned earlier, but do you plan to reduce the number of -- that 3,100 indirect doors further in this fiscal year? Thanks.

Yes, thank you. A couple things. One, in terms of the overall store count, we do believe that our gift channel will end up with a similar store count by the end of the year. There is always accounts that we are editing out of, but we will add a few, so roughly the same count, if not just slightly lower.

I think your question about alienating our core customer is something that we have spent a lot of time talking about, and obviously watching a lot of brands over the years handle this transition, I have seen some do it very well and I have seen some do it poorly. And I think that what we are talking about with Vera Bradley is we really are talking about broadening and expanding our customer reach, not replacing our customer reach.

Our core quilted cotton bag is still going to be the core of our business. That's our heritage. That's our signature. We have every intention of keeping that. We're just adding to it, and when you talk about the store design, again what we are just trying to do is modernize it. We're not going to make it a revolutionary change. We're just going to bring it forward.

And I have used the example even internally, going back to Ralph Lauren, I just watched over the years how it went from a very strong kind of a mahogany, very polo mallet, brass inspired, starting to introduce white lacquer and chrome and just keeping the whole feel of the brand a little bit more modern and a little bit more current.

And so, we are looking at that same concept in our stores. It's just how do we bring it forward and how do we keep it current and modern, not how do we revolutionize it.

So, we believe that these changes will allow us to attract a new customer without alienating our core customer. And it is a delicate balance. It's something that we will be managing and watching every step of the way, but we feel pretty good about the plan that we've laid out right now and we believe that it will get us to where we need to be.

Thank you.

Dana Telsey, Telsey Advisory Group.

You've talked at the event about new people and adding some new people to the team. Where are you in that process?

And as you think about the appropriate mix of prints, patterns, and solids, and what the margin potential is, how do you see that evolving? And should that be 2015, 2016 as we look out? Thank you.

So I will talk about the people, and then I will turn it over to Sue to talk a little bit about the margins and patterns. So from a people standpoint, one, the number one thing I was working quick on was obviously getting Sue on board. Sue has also been working on building out her team, and so we have been looking at talent there and made some nice progress there.

I have also been simultaneously out. We have been talking and looking at Chief Marketing Officer candidates and head of sales candidates and head of e-commerce candidates, and moving through that process. What's been exciting is we have had very good response from the market in terms of people being attracted to the Vera Bradley brand, and we're just making sure that we are diligent in making sure that we really get the top talent.

So hopefully in the next few months, we will continue to add to the team, but we are right in the midst of those interviews and that process right now.

And then as we think about our prints, patterns, and obviously the margin opportunity there, and as we mentioned in the script, our first point of action was actually to look at reducing the number of patterns that we are offering. And so, again, normally we would have offered 18; we will immediately be going down to 14, and then down to 10 to 12 by early next year.

And the biggest opportunity that we see, obviously, is enhancing that brand assortment with solids. We're really excited. It's something she is already responding to, and so we know that there's incremental opportunity there, which will obviously lead to margin enhancement for us, as well.

Thank you.

Ike Boruchow, Sterne, Agee.

Good morning and thanks for taking my question. I guess the first question I wanted to ask is in regards to the guidance for the year that implies a bit of a ramp in the SG&A spend and also in the CapEx spend. I guess, Kevin, if you could just help walk us through -- I guess Rob talked about increased marketing, but is there anything else that we should be thinking about as you invest to try to grow the business?

Yes, a lot of the investment is the headcount that Rob mentioned in terms of the executive team, and then an increase in marketing, which we believe we have underinvested in over the years.

The other large item, Ike, to keep in mind, though, is that $8 million is a really big number as you convert that to an EPS number. And that's related to the incentive that didn't hit last year because we didn't hit our financial metrics internally.

So those are the large items that are impacting SG&A. Obviously, we still are focused on cost containment. We've got an initiative that will intensify this year. We will keep you updated along the way. To the extent we realize more savings, we will make the decision on whether or not we invest those savings.

Currently, we obviously want to invest to make sure we set ourselves up to meet our strategic goals. But that will be the focus, but those are the three major items from an SG&A perspective.

And then if you look at COGS, cost of sales, Rob mentioned the promotional environment. We plan to be fairly equal to this past year. But we have to get through some of those overhead costs due to ordering inventory levels more appropriate with our sales levels. And so, that does impact us this year as well. And the liquidation impacts us as well, so a little bit accretive to the bottom line, but nevertheless impacts our gross margin percentage.

And then any comment (multiple speakers)

And then, you mentioned -- Ike, you mentioned capital. Capital is really relatively flat year over year, except for the campus expansion or consolidation, so that's about $20 million. Our normalized CapEx each year, as you know, Ike, is about $20 million -- about $20 million. Of that $20 million, about $10 million to $11 million relates to stores. There is around $6 million that relates to IT, and then the rest is what I'd call other in terms of manufacturing and distribution spend.

Okay, thanks, that's helpful, Kevin. And I guess one more for Rob. You talked about the store base and your thoughts -- it sounds like the thought process is maybe even to ramp the new stores 20 to 25 once we get into 2015 and beyond. Just curious, obviously, the retail environment is tough, but the store comps are negative right now. Was there never a thought to maybe slow down the expansion and just try to work on productivity and getting the traffic back before you reaccelerate the store growth, or I am just curious the puts and takes that you think about when you think about expanding the footage?

Great question. As we went through the strategic process, we did think about whether we should maintain or slow or go forward more aggressively, and one thing as we looked at our direct channel, our stores are profitable, even though we have had some challenging comp environment. We believe that the number one driver of the negative comp environment is some of the product conversations that we've been having.

There is a lot of feedback from customer and customer research that we were introducing too many patterns and that we needed to slow that process down, and the customer was really looking for something newer. In the past, it used to be that you could just introduce a new pattern and the new pattern felt new and exciting, but because we've had such a hyper pattern introduction, the customer no longer saw that as new.

So, we believe that the comp issue is really primarily a product relevancy issue, and we feel pretty good about our strategy to improve that. And since our stores are so profitable and our store base is still so small, we felt it was important to continue to build up our store base to really control our brand positioning in the market. We felt that there was a lot of opportunity.

If we had a base of 300 stores already, we might be thinking about this differently, but with only 84 full-price stores and 15 outlet stores, we just have really begun the retail expansion and we feel there is really an opportunity to do it. And we really wanted to wait on that expansion until next year to get the product right and, at the same time, get this new store designed right, and those are the two dependencies on the store growth.

Okay, great, thanks. Good luck.

Janet Kloppenburg, JJK Research.

Hi, everybody, and congratulations to Kevin. (multiple speakers). I wanted to ask about the growth of the majors -- Dillard's, Disney, QVC, what percentage that is of your direct business, Rob, and what percentage you see it becoming, and if you could talk a little bit about the margin attributes of that business. Do they help overall margins, or if that business is to grow, could it pressure overall margin performance?

And for Sue, I was wondering if you could talk about a little bit about your lead times, what they are now, what opportunity you see for those lead times coming down, and also if you would be testing any of your new product this year to lower your risk as you launch these new introductions for next year.

And I was just wondering as you did your research whether you thought that the appeal of Vera Bradley on what I call a transgenerational basis continues and if you will play into that appeal going forward. Thank you.

Janet, maybe I'll start with the sales question. You asked about QVC specifically. So if you look at last year (multiple speakers)

Kevin, Kevin, QVC, Dillard's, and Disney, all three together, those three businesses. I call them the majors, but what do they represent and what should that be of the indirect business?

That's exactly where I was going, Janet. We don't give those numbers out specifically on how -- what percentage they make up. I can tell you last year, though, as the gift channel was obviously declining, all three of these -- QVC, Disney, and Dillard's -- helped us offset some of that decline in the gift channel. We expect to see that happen this year as well in our numbers, but we don't give the numbers specifically.

I can tell you Disney has been a huge success, though, and I know Sue and Rob have spent a lot of time with Disney even since they've been here, and we do expect that business to grow in the current year.

Yes, and I think your other question was related to margins in majors versus everything else, and really it's about building the strategic partnerships with the majors.

And what's been really great is that with these relationships, we can really work together to work on maintaining margins, and even though maybe there is a slight pressure on the margin with your major accounts, there is also some benefits from an SG&A standpoint. So, really from a profitability standpoint, we feel very good about where we are with the major accounts.

Great, thank you.

Janet, as you had indicated, will we begin to test product, and actually I am happy to report that we actually have already started that process, so we have tested our MFO product.

In addition, we are currently in the process of testing some new faux leather product. We will have additional tests that will begin to flow in from March all the way through October. In just about every month or every other month, we're going to be testing the resonance of the new product introductions that we will be having in order to ensure that we are mitigating the risk, as you had indicated.

From a lead time perspective, what I can tell you is that we are very focused on this and a few ways that we are looking to take time out of the supply chain. One is we're looking at streamlining processes, and actually we have started that initiative internally. We have met with some of our strategic partners domestically, as well as we will be headed overseas in order to understand how we can continue to collaborate more efficiently to take timeline out.

Additionally, I mentioned that we will have an upgrade to our systems that will allow two-way communication that will enable streamlining, and then, last but not least, the corporate proximity of some of the teams coming together on the campus will certainly help that effort, as well.

Good luck, thanks so much.

Steve Marotta, CL King & Associates.

With the exception of the upcoming made-for-outlet product, are there other opportunities to segment product by channel, offering either exclusives to specific retailers or to channels of distribution?

Yes, the answer is absolutely yes. We have that underway. I think one of the great examples of that has been even in Disney. What has been really interesting to watch with Disney as we have been exclusive with them is even the bidding up that we have seen in the secondary market, right, in terms of Disney has gone on eBay and how the prices keep going up as they go on eBay.

We believe that exclusivity and scarcity is really going to be key to this brand going forward, because we really want patterns to be much more limited, and so we have already begun some of those conversations with some of our key partners of how we can do some exclusive and unique things with them. And we believe that will become a larger part of the business going forward.

That's great. And the last question as it pertains to marketing, can you quantify what the expense is expected to be this year versus last year?

Our marketing spend in fiscal 2015 is approximately $18 million to $20 million in total, depending on how you look at the number. And it's going up only slightly this year.

All right, thank you.

And at this time, there are no further questions in the queue. I'll turn the call back to our speakers.

Thank you. In closing, I continue to be extremely optimistic about the future for Vera Bradley. Fiscal 2015 undoubtedly will be a year of transition for the Company, but we are taking the right actions to position the Company for the long term.

I believe we're assembling the right team and have the right product distribution and marketing strategies in place to drive improved performance and to enhance shareholder value over the next five years. I look forward to updating you on our progress in the quarters ahead, and thank you so much for your interest and time.

And ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.