Vera Bradley Inc (VRA) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Vera Bradley fourth-quarter fiscal 2016 earnings 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 given at that time if you would queue up for questions.

As a reminder, today's conference is being recorded.

I would now like to turn this conference over to Stacy Knapper, Vera Bradley's Senior Vice President and General Counsel.

Please go ahead.

Thank you.

Good morning and welcome, everyone.

We would like to thank you for joining us for Vera Bradley's fourth-quarter and year-end earnings 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 January 31, 2015, 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 Chief Financial Officer; and Sue Fuller, Chief Merchandising Officer.

We are pleased with our fourth-quarter sales of $154.1 million and our $0.41 EPS performance, both which were within our guidance ranges.

These results were achieved despite continuing retail headwinds, including a promotional environment and continued weak mall traffic.

We took a very disciplined approach to enhancing gross profit in fiscal 2016, and we are especially proud of our year-over-year 580 basis point improvement in the fourth quarter, largely driven by sourcing efficiencies, reduced promotions and discounting, and our made-for-outlet products.

For the full year, these same drivers led to our year-over-year 370 basis point gross profit improvement.

We eliminated our hyper-promotions of 60% to 70% off, and pared back the number of days on which we ran promotions by nearly 20% during fiscal 2016.

While our overall fourth-quarter comparable sales, including eCommerce, fell 4.6%, our comparable store sales were essentially flat, declining just 0.2%.

eCommerce sales were once again negatively impacted by reduced promotional activity.

However, both comparable sales and comparable store sales sequentially improved each quarter of fiscal 2016.

Customers are responding to our new offerings.

For the third quarter in a row, our direct comp sales trends were better than our traffic trends.

We see indications that awareness of our brand is increasing, and we are beginning to see customer retention improve and new customers come into our brand.

We are also seeing continued support from our department store partners.

Our top priority continues to be to make Vera Bradley more relevant in order to attract even more new customers to the brand.

We are continuing to execute our long-term strategic plan laid out in March 2014, focusing on the key planks of product distribution and marketing.

Fiscal 2016 was the second year of our multiyear turnaround, and we made significant progress against key elements of our long-term strategic plan.

Specifically, in the product area, we delivered innovation, newness and diversification through the introduction of several new fabrications, the launch of our Collegiate collection, and partnering with industry experts to launch our fragrance collection and expand our jewelry collection.

We continued to strategically segment our offerings by channel.

And, importantly, we substantially enhanced our gross profit percentage through multiple sourcing efficiencies, higher penetration of our MFO product, and meaningfully reducing our promotional activity, particularly on verabradley.com.

In the distribution area, we opened 15 full-line stores, all in our new, modern store design; opened 11 factory stores and successfully transitioned to an NMFO model; made key improvements to verabradley.com, including enhanced search, which increased conversion; and nearly doubled our department store presence at Macy's, added distribution at select Belk and BonTon stores, and began our Amazon partnership.

We began to modernize our marketing and increased brand and product awareness through launching our IM multimedia national ad campaign; increased investment behind social media, resulting in a significant increase in our social community, as well as coverage from a broader range of fashion and lifestyle bloggers; editorial and media attention at such fashion publications as Elle, InStyle and Teen Vogue, as well as online partners like Pandora, SheKnows, Polyvore and Spotify; and the introduction of our Campus Ambassador program.

In addition, our balance sheet remains strong.

We carefully managed our inventories; made strategic systems and other capital investments; repurchased over $31 million in common stock; and ended the year with a very solid cash position and no debt.

We have taken a very methodical approach over the last two years in evolving, modernizing and diversifying our product offering and laying the foundation for stronger distribution channels.

While these two planks are still critical and evolving, our focus also is broadened to branding and marketing.

As you know, in mid-2015, Theresa Palermo joined us as our Chief Marketing Officer.

And she and her team have accomplished a lot in a short period of time.

Over the last several months, we have been working closely with an outside agency to evolve our brand in order to create the most exciting future for Vera Bradley.

We have more clearly defined our target aspirational customer and evolved our brand positioning.

As a result of this collaborative work, we now have a clearer direction and roadmap to assure our brand is more modern and relevant to our customer.

We call our target aspirational customer the Daymaker.

She strives to make her day and the days of others.

She is organized, thoughtful and, most of all, appreciates beauty in color and print, in thoughtful details and in her relationships.

We are all about creating beautiful solutions for the Daymaker, and believe we have a great opportunity to attract more Daymakers to our brand.

Our three main objectives for fiscal 2017 are to complete our brand transformation, drive core growth, and to begin to explore additional licensing and international growth opportunities.

Activation of our new company branding and brand positioning will include updating elements of our visual identity, including our logo and further evolving our marketing to speak more directly to the Daymaker.

We will drive core growth through optimizing our existing product portfolio and by strengthening our distribution channels, including improving performance in our pro line stores, prudently growing our factory stores, enhancing and expanding our department store relationships, and building our digital flagship.

As we explore new growth opportunities, we will continue to focus on product innovation and move even faster on brand extensions.

We are making progress in gaining some traction, but we realize it will take more time and effort to return the business to solid growth.

Our long-term goal remains to build out the Vera Bradley lifestyle brand both domestically and globally.

We are excited about our evolving brand positioning and direction for the future, and we believe that we are positioned to begin generating positive comparable sales growth sometime in the second-half of the year.

I will now ask Kevin to give us a brief update on our fourth-quarter and fiscal-year results, and our outlook for fiscal 2017.

Kevin?

Thanks, Rob.

And good morning.

Let me go over a few highlights for the quarter.

Current-year fourth-quarter net revenues totaled $154.1 million, a 1% increase over $152.6 million last year and at the higher end of our guidance range of $151 million to $155 million.

Net income totaled $15.7 million or $0.41 per diluted share compared to $17.3 million or $0.43 per diluted share last year and within our guidance range of $0.40 to $0.43.

In our Direct segment, revenues totaled $112.9 million, a 4.9% increase from $107.7 million last year.

This revenue number reflects the comparable sales decline including e-commerce of 4.6% which was more than offset by sales from new store growth.

Indirect segment revenues decreased 8.4% to $41.2 million from $44.9 million in the prior-year fourth-quarter, primarily due to lower average order size from our specialty retail accounts and a modest year-over-year reduction in total number of specialty accounts.

Gross profit for the quarter totaled $89.6 million or 58.2% of net revenues compared to $80 million or 52.4% of net revenues in the prior-year.

The 580 basis point improvement primarily related to sourcing efficiencies, modestly reduced promotional activity, and increased sales penetration of higher-margin MFO products.

The gross profit percentage fell slightly below our guidance range of 58.3% to 58.7%.

Also, remember that our prior-year gross profit rate was negatively impacted by approximately 160 basis points, primarily related to charges associated with the closing of our domestic manufacturing facility.

SG&A expense totaled $64.9 million or 42.1% of net revenues in the current-year fourth-quarter compared to $54.7 million or 35.8% of net revenues in the prior year.

As expected, SG&A dollars increased over the prior year, primarily due to investments in new stores, $2.3 million of incremental store impairment charges, incremental incentive compensation, and additional marketing expenditures.

SG&A as a percentage of net revenues fell at the low end of our guidance range of 42% to 42.5%.

Fourth-quarter operating income totaled $25.4 million or 16.5% of net revenues compared to $25.9 million or 17% of net revenues in the prior year.

By segment, direct operating income was $30.3 million or 26.8% of sales compared to $29.4 million or 27.3% of sales in the prior year.

And indirect operating income was $16.7 million or 40.5% of sales compared to $15.6 million or 34.8% of sales in the prior year.

Now let's move on to results for the full year.

The current fiscal-year income statement numbers that I will discuss exclude the first-quarter charges related to our manufacturing facility closing, other severance and restructuring costs, and the income tax adjustment.

Prior fiscal-year income statement numbers referenced below reflect our continuing operations.

For the current fiscal-year, net revenues totaled $502.6 million compared to $509 million in the prior year and near the upper end of our guidance range of $499 million to $503 million.

Excluding the aforementioned charges, income totaled $31.8 million or $0.82 per diluted share compared to $40.8 million or $1 per diluted share last year, and within our guidance range of $0.80 to $0.83.

Direct segment revenues for the current fiscal-year totaled $351.3 million, a 4.7% increase from $335.6 million last year.

Comparable sales, including eCommerce decreased 10.6% for the fiscal year, which was more than offset by new store growth.

Comparable sales were negatively impacted by year-over-year declines in store and eCommerce traffic, partially resulting from reduced promotional activity.

Indirect segment revenues decreased 12.7% to $151.3 million from $173.4 million in the prior year, primarily due to lower average order size from our specialty retail accounts and a modest decline in the total number of accounts.

Excluding the aforementioned charges, gross profit for the fiscal year totaled $284.6 million or 56.6% of net revenues compared to $269 million or 52.9% of net revenues in the prior year.

The 370 basis point improvement primarily related to sourcing efficiencies, increased sales penetration of higher-margin MSO products, reduced promotional activity, and lower levels of liquidation sales.

Gross profit was in line with our guidance of approximately 56.7%.

Excluding the aforementioned charges, SG&A expense totaled $234.4 million or 46.6% of net revenues in the current fiscal year compared to $208.7 million or 41% of net revenues in the prior year.

As expected, SG&A dollars increased over the prior year, primarily due to investments in new stores, incremental marketing spending, and additional incentive compensation as well as incremental store impairment charges.

The SG&A rate was in line with our guidance of approximately 46.7%.

Excluding the aforementioned charges, operating income totaled $52.6 million or 10.5% of net revenues for the current fiscal year compared to $64.1 million or 12.6% of net revenues last year.

By segment, direct operating income was $77.6 million or 22.1% of sales, which excluded $3.5 million of the aforementioned charges, compared to $74.1 million or 22.1% of sales in the prior year.

And indirect operating income was $61.6 million or 40.7% of sales, which excluded $1.1 million of aforementioned charges, compared to $66.2 million or 38.2% of sales in the prior year.

Net capital spending for the fourth-quarter and full-fiscal-year totaled $3.5 million and $26.3 million, respectively.

Capital spending for the year was modestly below guidance of approximately $28 million.

In December 2015, our Board of Directors approved another share repurchase program, authorizing up to $50 million in common stock repurchases after the August 2015 completion of our existing $40 million program.

The new share repurchase program expires in December 2017.

During the fourth quarter, we repurchased approximately $4.1 million worth of our common stock, equating to approximately 300,000 shares at an average price of $14.64.

These fourth-quarter repurchases bring the total repurchased during the fiscal year to $31.2 million, equating to approximately 2.5 million shares at an average repurchase price of $12.57.

Cash and cash equivalents as of year-end totaled $97.7 million compared to $112.3 million at the end of last year.

We had no debt outstanding at fiscal year-end.

Year-end inventory was $113.6 million compared to $98.4 million at last fiscal year-end, and below guidance of $118 million to $122 million, primarily due to timing of fourth-quarter receipts.

Now let's talk about our outlook for the first quarter and fiscal year.

We believe we are approaching the first quarter and the full year realistically in taking into account continued headwinds in the handbag space, ongoing challenges in mall traffic, the overall promotional environment and other macro factors at play.

That being said, we are in a highly unpredictable environment.

Keep in mind that, as I discuss our prior-year comparison, prior-year numbers exclude the aforementioned charges.

For the first quarter, we expect net revenues of $105 million to $109 million compared to prior-year first-quarter revenues of $101.1 million.

We expect direct segment net revenues to increase in the mid to high-single digit percentage range with a comparable sales decrease, including eCommerce, in the low-single digit range.

We believe our indirect net revenues will be flat to up in the low-single digit range during the quarter.

This indirect trend is better than the expected trend for the full year, due to the timing of a product launch, which will positively impact the first quarter.

The gross profit percentage for the first quarter is expected to range from 56.7% to 57.2% compared to 54.5% in the prior-year first-quarter.

The planned improvement reflects sourcing efficiencies primarily related to the closing of our domestic manufacturing facility, and increased year-over-year sales penetration of higher-margin MFO product.

SG&A as a percentage of net revenues is expected to range from 53.5% to 54.8% in the first quarter compared to 54.5% in the prior-year first-quarter.

We expect first-quarter diluted EPS to be in the range of $0.04 to $0.06.

This compares to diluted EPS of zero in the prior-year first-quarter.

We expect inventory to be $114 million to $119 million at the end of the first quarter compared to $101.8 million at the end of the first quarter last year.

This projected inventory level reflects investments in key growth classifications, including new fabrications.

Keep in mind that year-over-year inventory was down nearly 20% at the end of last year's first quarter, which, in hindsight, was probably too low.

For the full year, we expect net revenues of $510 million to $525 million compared to $502.6 million last year.

Our revenue guidance includes direct segment net revenue growth of mid-single digit percentage increase, with comparable sales, including eCommerce, flat to down in the low-single digit percentage range.

As Rob noted, we expect comparable sales to turn positive sometime in the second-half of this year.

Indirect net revenues are expected to decline in the low to mid-single digit percentage range for the full year.

The gross profit percentage for fiscal 2017 is expected to range from 57.7% to 58.1% compared to 56.6% last year.

The planned improvement reflects sourcing efficiencies and increased sales penetration of higher-margin MFO product.

We expect to realize more gross profit rate improvement in the first half of the year, as we will anniversary certain sourcing efficiencies and the buildup of our MFO product to its current penetration level in the second-half of the year.

SG&A as a percentage of net revenues is expected to range from 47.2% to 47.5% for fiscal 2017 compared to 46.6% last year.

The planned increase is primarily related to incremental expenses related to new stores, eCommerce, and incentive compensation.

Increases in SG&A are expected in the second, third and fourth quarters of this year.

We expect diluted EPS for the full-year to range from $0.90 to $0.98.

On a comparable basis, diluted EPS totaled $0.82 this year -- this last year.

We expect our net capital expenditures will total approximately $20 million for the full-year, primarily related to new store openings, store renovations, and continued technology investments.

Our inventories are expected to grow in the first-half of the fiscal year and then be relatively flat with prior-year levels in the second-half of the fiscal year.

Let me turn the call over to Sue, who will give us an update on products.

Sue?

Thanks, Kevin.

In the product area, our three main objectives continue to be, number one, delivering innovation, newness and diversification of fabrications; number two, segmenting our offerings by channel; and, number three, enhancing our gross profit percentage.

With the completion of our recent brand work, we have solidified five key businesses where we can win by offering the Daymaker beautiful solutions.

We are still focused on majoring in the majors and optimizing our existing product portfolio.

Let me take a minute to talk about each of these five businesses.

Our Fashion Bag and Accessory business continues to be our largest opportunity, and allows us to showcase our innovation, function and fashion.

Travel remains a core differentiator for Vera Bradley, and allows us to both embrace our heritage, and to showcase newness and functionality with products like Lighten Up, our collapsible luggage that just launched this winter, and our new hard-sided luggage, which will launch this summer.

Our campus business is an economic driver for us.

And we believe the addition of our Collegiate collection will help continue to propel our campus authority forward.

Wellness and Beauty is a growing category, as our Daymaker is looking for experiential events, and wants to find Wellness and Beauty products that enhance her holistically.

Our January Home and Body Fragrance launch and our current line of multipurpose sport bags play into this theme.

In the future, we believe Home can be a significant growth opportunity for Vera Bradley with market attractiveness and a great brand fit.

Further expanding our Home offering will allow us to build out the Vera Bradley lifestyle and go beyond traditional home to include such things as hostess gifts and organizational products.

This category is a great fit for the Daymaker, as home is often her fashion statement.

In each of these areas, fabric and pattern innovation and newness remains critical in order to stay relevant.

We have recently added outside talent to our design group, which is providing new perspective and fresh ideas to the design process, and we are working to further streamline processes for a quicker test, analysis and implementation.

Customers have responded positively to our new Sycamore leather, Streeterville, Lighten Up, and Preppy Poly fabrication.

Of course, we continually test, learn and edit, and will make appropriate adjustments to our assortment.

At the end of the fiscal year, less than 50% of the SKUs in our full-line business were cotton, with the remainder in new fabrications and other categories, compared to less than 20% at the beginning of the year.

We are not walking away from signature cotton.

Cotton remains the largest and most important piece of our business, and our design team is working hard to reinvigorate and modernize our cotton assortment with new patterns and styles.

And we will have some new ideas to share in the next few months.

Brand extensions are an important part of offering newness and diversification, and providing beautiful solutions for our Daymaker.

In addition to our recently added Collegiate fragrance and jewelry collections, we believe there are other licensing and strategic partnership opportunities for brand extensions for us going forward, beginning with Home.

Rob?

Thanks, Sue.

Let me take a minute to update you on distribution.

We are focused on enriching the experience in each of our distribution points, particularly in our own stores, on our website and with our department store partners.

As of year-end, we had a store base of 110 full-line and 40 factory stores.

During the fourth quarter, traffic remained challenging in many of the malls that housed our full-line stores.

We are working with both our full-line and factory store teams to drive traffic and sales through building a service and selling culture, nurturing more community outreach, and building more localized assortments.

We will continue to tweak our new modern, full-line store design and update our visual in-store presentation in both factory and full-line stores.

Our factory stores continue to perform well and gain strength throughout the year, with our MFO product transition from 25% at the beginning of the year to nearly 70% at year-end, which was significantly ahead of our original schedule.

Ample opportunities remain for both full-line and factory growth.

But as you might recall, we have slowed our new store growth this year.

Our plans include opening four new full-line stores, and each of these is a very unique property.

We are particularly excited about our new SoHo flagship store that will open in September.

This modern showcase location will embody innovative products and design elements.

Early next month, we will open a new store in the Woodfield Mall in metro Chicago, which is already a good market for us.

We will also open a store in Disney Springs in Orlando in May, which will feature a mix -- mixture of our core assortment and our signature Disney-themed Vera Bradley offerings.

And we will open a store in the international marketplace in Honolulu in August.

On the factory side, we expect to open four stores this year in Foley, Alabama; Auburn Hills, Michigan; Columbus, Ohio; and Branson, Missouri.

Building our digital flagship remains a key part of our distribution strategy.

The redesign and conversion of our website to a new platform will be complete this fall, allowing us to better convey our brand and product story, increase consumer engagement with the Daymaker, and ultimately generate more full-price selling.

This new platform will provide us with a site that reflects our rebranding and more modern positioning, gives us more robust consumer data, allows us to strategically tailor content and offers to targeted groups or individuals, and will give us order online/pick-up-in-store capabilities.

We will also optimize our email strategy in an effort to drive productivity and customer reactivation through showcasing new fabrications, building open rates and driving more full-price traffic.

Our department store relationships allow us to expose our brand to new customers and showcase our new product assortments.

Since spring 2015, we have doubled our department store presence to about 620 locations, which includes 250 Macy's stores, and we added Lord&Taylor.com as a distribution point last fall.

We expect to add about 100 more department store locations this year.

However, our main focus is to build the productivity of our existing doors through editing and curating assortments by location and delivering visual consistency across all locations.

In addition, we are adding jewelry to select Macy's and Belk stores.

Our door count in the specialty gift channel is now approximately 2,600.

While overall trends continue to run behind last year, we began to see more stores return to positive sales performance, particularly at some of our larger multi-store accounts that have embraced our new product offerings and improved their in-store visual presentations.

This year, we intend to be more aggressive in adding other appropriate specialty stores, such as local high-end apparel and accessories stores, to our distribution network.

Now let's switch gears and talk about marketing.

As you know, we really just began our marketing efforts in earnest in the fall of last year with IM campaign.

But these efforts have started to pay off.

We are attracting new customers to the brand, and our overall aided brand awareness increased by over 600 basis points since the beginning of last year.

We have reallocated our media spend to drive higher efficiency and improved content.

Marketing and brand positioning are both critical elements as we continue to both engage new consumers and strengthen our bond with our existing customers.

With our increased brand awareness, our focus now shifts to increasing brand relevancy and desire for the brand.

We believe that highlighting our new products and enhancing our brand creatives, to assure her that we understand her, will give the Daymaker a new reason to look at Vera Bradley.

Well-timed and well-executed brand activation is critical to increasing her purchase intent and our brand relevancy.

Through comprehensive consumer research, we feel confident we have a media plan that will effectively target our Daymaker consumer, reaching her where she already is looking, and giving her content that provides her with beautiful solutions.

Our media will be a fully-integrated mix of digital, social, experiential, and print, with our goal being to surround her with our brands.

Our marketing will include Glamour, InStyle, People StyleWatch, Pandora, Spotify, Pinterest and SheKnows, just to name a few.

As we surround our Daymaker, we will continue to connect with bloggers and other fashion and lifestyle influencers.

Our new creative campaign will launch this fall, and will connect women with one another, celebrating their femininity, and bringing the idea of beauty and solutions to life.

We are heading to our photo shoot next week, and are absolutely thrilled with the spirit, creativity and energy that this campaign will deliver.

Stay tuned.

This will be a high-impact and exciting fall for Vera Bradley.

Operator, we will now open the call to questions.

(Operator Instructions) Ed Yruma, KeyBanc Capital Markets.

Thanks for taking my question.

I guess, first, on the promotional front, you know, you've been successful at ratcheting back promos.

And I know you still have a little bit more headway to make through the beginning of the year.

But I guess in terms of the intensity of the promotional offer, given some of the product success you are seeing, do you think you could take it down perhaps even further than you have been, going forward?

Ed, thank you for the question.

In terms of the promotional activity, we continue to focus on pulling out the hyper-promotional activity, which we have been very effective at doing last year.

And you are right; we still have some more to do at the beginning of the year.

And so we feel really good in terms of how we are beginning to balance it out, and we will continue to look for opportunities to return to a strong full-price presence.

And you are absolutely right, that the new product gives us an opportunity to really focus on that in a unique way and bring customers in.

I think you guys noted in previous quarters that obviously the strength of the new product was kind of being overshadowed by the continued weakness in cotton.

I guess, have you hit a kind of equilibrium where the power of the new product can kind of drive growth?

Or are you still seeing kind of continued erosion in the cotton?

Then I guess when could we hit that tipping point?

Thanks.

In terms of cotton, we have seen that the rate of decline in cotton has begun to stabilize, which is good news.

So, we still are seeing cotton trending down.

So there still is a negative trend in cotton, but much stronger than we've seen.

So, we think we are getting closer to that tipping point.

And as we've talked about comps getting positive sometime in the back-half of the year, we really feel that the stabilization of cotton, along with our new product, the combination of, is what will get us there.

Great.

Thanks so much.

Thank you.

Mark Altschwager, Robert W. Baird.

Thanks for taking the question.

Congratulations on the continued progress.

I wanted to focus on the direct business for a moment.

You have shown nice sequential comp improvement.

Could you just dig in a little bit more to the comp trend you are seeing in the full-price stores versus the outlet?

And I know MFO has been a big conversion driver, so trying to get a better sense of whether the new fabrications in the full-line store are having a similar effect and how that kind of gap is closing.

And then, just still on the direct, fiscal 2016 was a big reset year on the eCommerce side.

Do you expect trends to return to positive territory in eCommerce in 2017?

And how are you thinking about the timing?

Thank you, Mark.

A couple things -- one, in terms of direct, we are definitely seeing sequential improvement in our comps across our direct business, which is very encouraging to see.

We are seeing that our comps are stronger in our factory business than our full-line business, but we are seeing the comps improve in full-line.

And we do believe that the new product is definitely attracting in new customers; our research shows that.

But there is more work to do in our full-line stores, and that's really where our focus is.

Regarding eCommerce, we still have hyper-promotional activity that will be taken out of the eCommerce business in the first quarter, and going into just the beginning of the second quarter.

So we feel that the biggest headwinds are at the beginning of the year.

And obviously, as we get to the back of the year and the launch of the new site, we expect to see improvements in the eCommerce performance as we get to the back-half.

That's very helpful, thank you.

And then I wanted to touch on new store openings as well.

Thank you for the clarifications on 2017.

Could you just update us on how you are thinking about longer-term store targets and the balance between full price and outlet?

And I know you've tested some new formats.

And some of your newer stores do have quite a different look than some of the earlier vintage stores.

So curious -- as you evolve and clarify your brand positioning, do you see a need for a broader remodel program in order to align the stores with this new vision?

And if so, how should we think about the CapEx needs over the next several years?

I'll go ahead and let Kevin take the CapEx needs, but just kind of start before that.

In terms of our full-price stores, what we have seen in the new design, that consumers are responding to the freshness.

It's definitely getting a new customer to take a look at Vera Bradley, which is encouraging.

But you are also right, that as we have done our brand work and our brand research, and really focusing on the Daymaker, we feel there's an opportunity to continue to refine that model.

And so you will see us again to roll some of that out this year.

And we are looking towards the back-half of the year as we launch the new branding, to go ahead and roll that out to some of our stores.

So, more details to come on that.

I mean, Kevin, do you want to give a little bit of color around capital?

Yes.

From a CapEx perspective, we expect about $10 million of that $20 million to really relate to stores.

And so that's the eight or so stores we expect to open this year, as well as we expect to refurbish at least some stores in the back-half of the year.

More to come on that.

And in terms of full-line store growth, as we are looking at the forward, we still believe there's an opportunity to expand, but we are going to be a little bit more cautious in our outlook, as we have been this year, going into next year, as we just watch what's happening in the mall traffic and really work on getting those comps to be strong again.

So we are taking a little bit more of a conservative approach as we plan into next year, compared to where maybe we were this past year.

Thank you very much.

Best of luck, and I'll jump back in the queue.

Thanks.

Oliver Chen, Cowen and Company.

Great job on the improving fundamentals here.

Regarding the opportunity for positive comps in the second-half, is the real opportunity here in conversion?

And how do you think average unit retail may trend?

And then as we dissect that glide path to positive comps, what -- which products would you isolate as kind of being the needle-movers for the newness factor in terms of what may drive these comps?

And also, if you had any context about the channel -- channels in which you see the most opportunities, whether it be full-price online or outlet, in terms of the delta and the improvement in the comp store sales?

Thank you, Oliver.

In terms of really what will change our comps sales, we definitely see the improvement in the eCommerce business and the full-line business as we anniversary taking out the hyper-promotional activity.

We believe those are the two channels that will see the biggest impact to the sales trend.

So we believe that that will be a core driver.

In terms of AUR and conversion, in terms of AUR, we definitely expect to see continued increases there.

One thing that is playing a little bit against us, though, is what you see going on in the market right now is the consumer is buying smaller pieces in terms of crossbodies and those type of items that are slightly less.

But on the flipside, we do have a lot of newness in terms of our Streeterville and our Sycamore, which is driving a higher AUR.

At the same time we are, though, also doing our brand extensions like fragrance and some other things which are balancing that out.

But we see a little bit on what we will call the ADF, the total sale, and continuing to see conversion improvement, particularly in our eCommerce site.

We've seen significant conversion improvement on our eCommerce site with the new search, and we expect to see more improvement as we go to the new platform during fall.

In terms of specific product categories, so you want to talk a little bit about some of the key products that you believe will be the drivers?

Yes.

So from a fabrication perspective, which is what you had first asked, we are really seeing three as the main drivers: the microfiber, which we've spoken about before; Lighten Up, Fabrication and Sycamore continue to perform for us.

And we believe that that will continue into this next year.

And then from a product classification perspective, we continue to believe in our bag classification -- obviously, the smaller pieces that Rob mentioned, with crossbodies as well as travel.

Okay.

And on micro, Lighten Up and Sycamore, what percentage of total approximately is that?

Right now approximately other fabrications outside of cotton roughly represents about a quarter of our business.

Okay, thanks, that's really helpful.

And Rob, you mentioned -- and I know you have been working with Amazon.

And in that relationship, what are you most cognizant about regarding trying to ensure that you have as little cannibalization as possible, and you also explore that relationship in a brand-appropriate way?

So what are you doing regarding either product or how you think about the channel in terms of evolving that relationship to help really broaden traffic?

Great question, Oliver.

And when we opened up the Amazon relationship, our number-one driver to do that was to really clean up our presence on Amazon.

Amazon obviously has a lot of consumers going to their website all the time.

We have a lot of discounting of Vera Bradley product on Amazon.

So we have really been trying to work with Amazon to really put forward a strong full-price presence.

And that is really kind of the key.

We are not -- we want to make sure we grow it right and we grow it in the right brand-appropriate way.

Amazon is not a huge business for us and we are not expecting it to become a huge business, but we do believe it's important to control our presence in that distribution point.

And that's really what we're focusing on.

Okay.

And our last question -- Kevin, on the gross margin front, you mentioned that it was slightly below what you -- it's a little bit below your previous guidance range.

What was the rationale there?

And then as we look at the year ahead, at the year-over-year in terms of the merchandise margin, will the merchandise margin and promotionals like decrease and merch margins go up steadily on a quarterly basis?

I'm just curious about the glide path and how we should model that and think about that, as we look at markdowns and check the stores.

Yes.

If you look at Q4, we expected to reduce our promotional days by between kind of 5% and 10%.

We ended up being on the low end of that range, given the promotional environment out there.

And we found our customer really finding the retirement product on the web more so than we thought.

So that's really the small miss from a gross margin perspective.

If you look at gross margin as you look at next year, really the first half of the year will annualize the MFO.

So we got to our kind of annualized MFO penetration right after Q2.

But even during Q2, it was a pretty high percentage.

We exited that quarter around 60%.

So we will see improvements as we go throughout the year there.

Also, as it relates to closing down our manufacturing facility, we will annualize that in Q3 and Q4, primarily Q4.

So you will see an improvement in gross margin as you go throughout the year.

Okay, best regards.

Thank you.

Thanks, Oliver.

(Operator Instructions) Eric Beder, Wunderlich.

Congratulations on a solid end to the year.

What should we be thinking about as the longer-term penetration for cotton?

Where does that go?

And the same question for Home.

How are you looking upon Home?

Is that going to be mostly in the stores?

How do you look upon the Home category?

Because obviously there are big pieces of Home that are bulky and wouldn't work in your store size.

Yes.

Thank you, Eric, and good morning.

So, a couple things -- one, in terms of cotton right now, we anticipate that cotton will probably stabilize around that 50% of the business.

Obviously, we will react to the consumer and how she adjusts in the coming years, but we think about 50% is the right number.

In terms of our Home business, I'm going to let Sue talk a little bit in terms of our vision for Home and the strength of our current business, and why we see this as the opportunity.

Right.

So, as you know, Eric, we already have a presence in Home with our beach towels and our blanket classification as well as drinkables.

We do continue to see expanding into soft home and eventually hard home and accessories.

We will take partners in order to do this, both from a distribution perspective as well as from a products perspective.

So those will be the major areas that we would go after initially, in Home.

And what has been the response to the new perfume and some of the other -- the new jewelry products?

What are you seeing in terms of the consumer response to that product?

Yes, we have been pleased with our launches in fragrance and jewelry and Collegiate, both from the perspective of the productivity that we are seeing from a SKU perspective, but also from the response from a new consumer acquisition perspective.

And it does give us confidence as we continue to expand into other brand extensions going forward.

Okay.

And final question -- in terms of -- I know department stores like exclusives; I know you've done some exclusives for your distribution channels -- how are you fitting that into kind of your expansion plans and your pieces here going forward?

Yes.

We do believe that continuing to tie channel segmentation to product segmentation is really important.

Really, what we are aiming to do is, obviously, meet the consumer needs from our own core line first, and then also supplement in with those specific exclusives that are meaningful to her.

We don't see this representing a large percentage of our business, but where we do think that there is opportunity, we will continue to supplement those opportunities in.

Great.

And good luck on 2016.

Thank you.

Thank you, Eric.

Bill Dezellem, Tieton Capital Management.

It's Tieton Capital.

And a couple of questions.

The first is, how does the completing of the brand transformation look like at the end of the year versus what we see today?

Can you give us a window into how that might feel different to us?

Yes, I'll give you a couple of things.

First of all, we really are going out with the brand transformation and the new brand position.

From a consumer standpoint, basically September is really kind of the target.

How you will see that is you will see our new platform launching on our global flagships, so that will look very different -- the creative, look and feel, the new logo, the storytelling, and how we really put content out there and really connect with our consumer emotionally as well as just from a commerce standpoint.

So that obviously will be critical in the rebranding, since we know that the vast majority of consumers interact with Vera Bradley on our website.

Second of all, it will also impact our consumer campaign.

So, as we go into all the new photography, and the new look and feel of how we are communicating to our consumer, that will happen in September.

And we will see that carry forward.

You will begin to see the new logo hit our Halo product or our top collections this fall.

And we will continue that transition through our summer deliveries of next year.

It will take us about that long to get all the way through the supply chain, but then all of the product will be re-logoed.

We are going to go out, with our new stores this year, with a new logo and new design, which will be built upon the one that we have been rolling out for the last year.

But the logo will be different and we will be rolling that logo out into some of our existing stores this year.

We are finalizing those plans as we speak right now.

And then we will continue that process as we go through next year.

So the new imaging that you referenced with your campaign that you are doing the photo shoots for here in the next week or two, that is different from what you are going to be bringing out in September?

Or is it just an incremental step in that direction?

No, the photo shoot that we will be doing now is what the fall campaign is.

So that's what we are speaking to.

Understood.

And then lastly, I believe there was a reference to an indirect product launch that was going to be benefiting the first quarter.

And I was hoping you would discuss that, please.

Yes, sure.

So last year, we had a small launch that hit the middle of May.

And we actually moved that up to the end of April.

So if you think about when we will be shipping that product, it will be in April.

So that's why you can see in the guidance, Bill, that the indirect segment looks like it's performing a little bit better in Q1 than the remainder of the year.

Understood.

Thank you both.

Thanks, Bill.

Thanks, Bill.

(Operator Instructions) Oliver Chen, Cowen and Company.

Rob, on one of your earlier comments, just regarding the outlet channel, it sounded like you guys were pretty encouraged there.

Would you attribute that to MFO?

What's driving that?

Because I know it's -- it does remain a somewhat competitive channel overall.

Yes, we definitely believe that the MFO assortments have really helped our factory channel, and for a couple reasons.

One, the assortments are much stronger since we have been manufacturing to it, so they are more balanced.

And that is definitely working, as well as putting in the exclusive MFO patterns are working, as well as just really focusing on key items in key classifications.

So the discipline of controlling our assortments and our outlets is definitely paying off for us.

And Oliver, the second thing there is the team execution has been very good this year compared to the prior-year as well.

We changed over some of the leadership team on that side of the business and they have executed extremely well.

Okay.

And the logo change sounds new and interesting.

Could you just brief us on what's underpinning the strategy in terms of how you did the research around why now?

And will it be -- do you think this will be a material difference in terms of how the customer analyzes your brand?

That's a great question.

You know, first of all, when we went through this brand work, we made sure that -- you know, worked with a great partner in doing it.

We did a lot of analytical research, a lot of quantitative research to really look at the consumer segment.

As we talked about this Daymaker, what we were able to identify is a potential target of 22 million women in the US.

And as we talked to them, we found a lot of unique things.

First of all, that 60% of them were open to Vera Bradley.

So, we definitely knew that there was a propensity to experience our brand.

But we also heard from our consumer that we were a brand that she loved or knew people who loved but she was not purchasing today, that she knew us for our cotton/quilted business, but she did not know much more about the brand.

So we felt it was important to tell our story in a fresh new way to attract new customers to the brand.

And our research really led us down this path that we are rolling out.

We felt that the logo was really important, for a couple of reasons.

Part of the reason why the logo became so important is that we had used our script logo for so long, and as we went to the block logo that you have seen on the lot of our new product, it was too generic.

And it was not a really strong brand identifier and we really wanted to unify around one brand.

And so as we built this new logo, we wanted to make sure that the logo was distinct, it felt very handcrafted.

And when you look at the logo, the way the logo is designed is very special and very unique.

And we feel that it will really position us different in the market.

Okay.

And as we look at the marketing programs, the Daymaker idea sounds really big and interesting.

How would you analyze how your marketing was then versus where it's moving now, in terms of -- you've touched upon this in different aspects during the call, but what would you focus on as the major delta between the new program ahead versus programs you've had before?

I think a couple things.

I think, one, Theresa and the team have been working very hard on the media, and just where are we placing our ads and how to do it much more efficiently, reach the right consumer.

And what we are seeing definitely, as we look at fourth-quarter, we are beginning to feel good about our vehicles.

And so a couple things we are seeing in the fourth quarter last year, we saw our prints impressions go up by 50%.

We've seen PR impressions double in fourth-quarter.

We've seen increases on Instagram, we've seen increases on our Facebook reach.

So we're definitely beginning to feel that we are beginning to lay the pipe, shall you say, in terms of how we communicate out to the consumer.

Now we believe the next piece is really the content, and making sure that the content really is focused on her and her lifestyle and connecting with her, and really surrounding ourselves.

So we are becoming much more content-oriented, much more story-oriented, and really trying to engage her deeper on an emotional level, which we think is critical to building the brand long-term and attracting new customers in.

Okay.

And just lastly, I thought it was important to ask you about the new modern store design.

As you do engage in the evolution of the portfolio product, what are the highlights for the best way to present product such that she understands from an editorial perspective, and it kind of matches changes you are making to the assortment and to the brand?

That's a great question.

And I think we are still working through different visual presentations.

One of the challenges we definitely have in our store is we still have a very broad assortment.

We have a history of choice, our customer likes choice.

And so finding the balance between a curated assortment and an assortment with choice is what we are still kind of working through.

What we have definitely found is we are putting new product in our windows, and really kind of curating the windows and making them highly impactful.

And we definitely are seeing new consumers come in.

So that gives us a lot of confidence as we go forward that a cleaner, more focused store design is really important.

I think what you will see from us as we move forward is just bringing in a little bit more excitement into the environment and adding a little bit more femininity into the environment as we move forward.

So it's just, shall you say, putting that female touch on the store design is kind of the next element.

But it should be -- it will be just an evolution; it won't be a revolution.

Great, thanks for answering my questions.

Thank you.

Thanks, Oliver.

Corinna Freedman, BB&T.

Thanks for taking my question.

Wondering if you could talk about the differences between the core demographic and the new demographic that you are targeting with the new product and marketing?

Thank you.

Yes, absolutely.

A couple things -- one, in terms of our current demographic, we've always had a very wide customer reach -- as we've said in the past, from 8 to 80.

You know, a very, very broad multigenerational customer.

But what we found is that, as that consumer moved out of college -- so kind of, we'll say, the 24-year-old to the 40-year-old -- we saw that we weren't retaining her as well.

We were not penetrated as highly in that part of the demographics.

This Daymaker is definitely focused on attracting that customer, really building out that 28-year-old kind of age band.

And what's been really encouraging over this last half of the year is we are seeing more of our growth coming out of that consumer.

So we are seeing more Daymaker type consumers coming into our business than any other category.

So we are getting some traction already with the initiatives.

And we feel, now that we begin to tell the story and not just the product, but we really begin to tell the story, we think we will see even more growth going forward.

Great.

Thank you.

And that concludes today's question-and-answer session.

I'd like to turn it back over to the speakers for any additional or closing remarks.

As I reflect back on the last year, I am so pleased with the second year of our turnaround and all the progress our talented team has made.

At Vera Bradley, three of our core values are ingenuity, tenacity, and optimism.

And I can't think of better words to illustrate how our team collaborates with creativity, a relentless passion for our customer, and a positive view towards the future.

We expect this year will propel us forward as we complete our brand transformation, drive core growth, and to begin to explore new growth opportunities.

I remain confident that we are taking the right steps for the future of our business.

Thank you for joining us today and for your interest, time and questions.

And we look forward to speaking to you on our first-quarter call on June 1.

And this concludes today's conference today.

Thank you for your participation.