Vera Bradley Inc (VRA) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Vera Bradley fourth quarter and FY17 year-end call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Mark Dely, Vera Bradley's Vice President and Chief Legal Officer. Please go ahead.

Good morning and welcome, everyone. We'd like to thank you for joining us for Vera Bradley's fourth quarter and fiscal 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 30, 2016, 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 CEO Rob Wallstrom. Rob?

Thank you, Mark. Good morning, everyone, and thank you for joining us on today's call. I am joined today by Kevin Sierks, our CFO. Sue Fuller, our Chief Merchant, and Theresa Palermo, our Chief Marketing Officer, are also here to respond to questions following our prepared remarks.

I want to take a minute to thank Kevin for his five years of service to Vera Bradley and for all that he has done for our Company. Kevin will be leaving the Company at the end of this month and we have appointed John Enwright, our VP of Financial Planning and Analysis, as interim CFO. We wish Kevin all the best.

The retail environment became even more challenging in the fourth quarter. Consequently, both total revenues and our gross profit percentage were modestly below our expectations; however, we exceeded our fourth quarter EPS guidance, primarily due to diligent expense management and a lower than expected tax rate.

Even though FY17 was a challenging year, we made meaningful progress against key elements of our long term strategic plan. In product, we continue to create beautiful solutions for our target customer through functionality and innovation in our core classifications of fashion bags and accessories, travel and campus, and continue to add product categories to enhance her lifestyle, such as in home and beauty, expanded our collegiate initiative to represent over 70 schools, and announced six licensing agreements in the areas of bedding, hosiery, swim, tech, stationery and publishing for products that will debut throughout 2017. These products should increase our brand exposure, allow us to attract new customers, provide additional distribution and drive traffic to our digital flagship.

In distribution, we: opened four full-line stores, all in our new modern store design, including our flagship store in SoHo and our highest traffic and volume store in Disney Springs in Orlando; completed the remodel of our Jefferson Pointe store in our hometown of Fort Wayne; refreshed 13 of our higher traffic, higher volume full-line stores with our new branding, including storefront facade, logo and interior changes. And rebranded the facades of our 15 newest full-line stores so that about 33% of our full-line fleet now reflects our new logo and signage; opened six Factory Outlet stores; continued to make improvements to verabradley.com, preparing for the relaunch of our digital flagship, which was completed in February 2017; and added additional distribution to approximately 130 Macy's, Belk and Bon-Ton department stores.

Our marketing efforts drove customer engagement by: increasing brand visibility and igniting a social movement with our multifaceted It's Good To Be a Girl campaign; an intensified emphasis on influencer social mobile and video content; and generating over 500 million impressions. A nearly 20-fold increase over last year, through national ads, editorial content and gift guides in such publications as People, StyleWatch, InStyle, Glamour and 17, and even appearing in Oprah's Favorite Things holiday gift guide online, and digital ads on Hulu, Pandora and the Conde Nast network, an increased influencer and celebrity marketing.

In addition, our balance sheet remains strong. We carefully managed our inventories, made strategic systems and other capital improvements, repurchased over $24 million in common stock, and ended the year with a very solid cash position and no debt. We have a strong brand, a talented team, and a solid financial foundation, and are focused on ensuring Vera Bradley's prosperous future. However our transformation is taking longer than we had originally planned, and the overall retail environment and accessories space are significantly more challenging than anticipated.

We expect this year to be another challenging year, while we remain keenly focused on the future and the long-term health and growth of the business. Of course, we will continually challenge our cost structure and look for ways to work more efficiently and effectively, while continuing to invest in areas of the business that will drive revenue growth.

As we enter FY18, our number one goal is to grow our customer count. We must drive more traffic into our stores and to verabradley.com. In order to do this, we have three primary areas of focus. Number one, drive brand desirability through a robust marketing program. Number two, drive product desirability through focusing on our core assortment and strategically leveraging licensing opportunities to expand the brand reach. And number three, strengthen our distribution network, focusing on driving comparable sales in our core businesses, including continuing to strengthen our digital flagship and relocating or closing underperforming stores.

We believe diligently focusing on these three areas will best position Vera Bradley for long-term revenue and income growth. We will delve into these a bit more after Kevin gives us a brief update on our fourth quarter and fiscal-year results and our outlook for FY18. Kevin?

Thank, Rob, and good morning. Let me go over a few highlights for the quarter. Current and prior year fourth quarter income statement numbers that I will reference exclude the previously mentioned store impairment charges outlined in today's release.

Current year fourth quarter net revenues of $134.8 million were modestly below our guidance range of $135 million to $140 million. Prior year fourth-quarter revenues totaled $154.1 million. Excluding impairment charges, fourth quarter net income totaled $10.1 million, or $0.28 per diluted share, better than our guidance range of $0.23 to $0.25 per diluted share. This compares to $17.5 million, or $0.46 per diluted share last year.

In our Direct segment, fourth-quarter revenues totaled $108.9 million, a 3.6% decrease from $112.9 million in the prior year fourth quarter. Comparable sales, including e-commerce, decreased 9.5% for the quarter, which was partially offset by new-store growth. Sales were negatively impacted by year-over-year declines in store and e-commerce traffic.

As expected, Indirect segment revenues decreased 36.9%, to $26 million from $41.2 million in the prior year fourth quarter, reflecting a meaningful reduction in orders from specialty retailers, as well as smaller orders from department stores and other key accounts.

Gross profit for the quarter totaled $75.1 million, or 55.7% of net revenues, compared to $89.6 million, or 58.2% of net revenues in the prior year. The 250 basis point gross profit percentage decline primarily related to increased promotional activity at our Factory Outlet stores, which also caused the gross profit percentage to fall modestly below the low end of our guidance range of 55.9% to 56.2%.

Excluding store impairment charges, SG&A expense totaled $60.2 million, or 44.6% of net revenues in the current year, compared to $62.1 million, or 40.3% of net revenues last year. SG&A dollars decreased over the prior year, primarily due to decline in incentive compensation related to Company performance, as well as diligent expense management, partially offset by expenses related to new stores. The SG&A expense rate was lower than our guidance of 46.1% to 46.7%, due to diligent expense management.

Excluding store impairment charges, operating income totaled $15.2 million, or 11.2% of net revenues in the current year fourth quarter, compared to $28.2 million, or 18.3% of net revenues in the prior year fourth quarter. By segment, Direct operating income was $25.7 million, or 23.6% of sales, compared to $33 million, or 29.2% of sales in the prior year; and Indirect operating income was $9.4 million, or 36.3% of sales, compared to $16.7 million, or 40.5% of sales in the prior year.

Now let's move on to the results for the full year. Current and prior year income statement numbers referenced below exclude the previously mentioned impairment charges and other callout items outlined in today's release.

For the current fiscal year, net revenues totaled $485.9 million, compared to $502.6 million in the prior year. These revenues were slightly below our guidance range of $486 million to $491 million. Excluding the aforementioned charges, we posted net income of $26.8 million, or $0.72 per diluted share for the year. In the prior year, net income totaled $33.5 million, or $0.86 per diluted share.

Direct segment revenues for the current fiscal year totaled $355.2 million, a 1.1% increase from $351.3 million last year. Comparable sales, including e-commerce, decreased 7% 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 e-commerce traffic. E-commerce and full line store sales were also negatively impacted by lower levels of promotional activity in the first half of the fiscal year. Indirect segment revenues decreased 13.6%, to $130.8 million from $151.3 million in the prior year, primarily reflecting a reduction in orders from specialty retailers.

Gross profit for the year totaled $276 million, or 56.8% of net revenues, compared to adjusted gross profit of $284.6 million, or 56.6% of net revenues in the prior year. The year over year 20 basis point gross profit percentage increase primarily related to sourcing efficiencies, partially reduced by increased promotional activity in the Company's Factory Outlet stores. Gross profit was in line with guidance of 56.8% to 56.9%.

Excluding the aforementioned charges, SG&A expense totaled $235.5 million, or 48.5% of net revenues in the current fiscal year, compared to $231.6 million, or 46.1% of net revenues in the prior year. SG&A dollars increased over the prior year, primarily due to new-store expenses, partially offset by a decline in incentive compensation due to Company performance. The SG&A rate was lower than guidance of approximately 49.5% to 49.7%, principally due to diligent expense management.

Excluding the aforementioned charges, operating income totaled $41.9 million, or 8.6% of net revenues for the current fiscal year, compared to $55.4 million, or 11% of net revenues last year. By segment, Direct operating income was $75.3 million, or 21.2% of sales, compared to $80.3 million, or 22.9% of sales, in the prior year. And Indirect operating income was $51 million, or 39% of sales, compared to $61.6 million, or 40.7% of sales in the prior year.

Net capital spending for the fourth quarter and full fiscal year totaled $3.3 million and $20.8 million, respectively. Capital spending for the fiscal year was generally in line with guidance of $20 million.

During the fourth quarter, we repurchased approximately $1.2 million worth of our common stock, equating to approximately 91,000 shares at an average price of $13.33. These fourth-quarter repurchases bring the total repurchased during the fiscal year to $24.5 million, equating to approximately 1.6 million shares at an average repurchase price of $15.27.

Cash and cash equivalents and short-term investments at year end totaled $116.5 million, compared to $97.7 million at January 30, 2016, and we had no debt outstanding at fiscal year end. Year-end inventory was $102.3 million, compared to $113.6 million at last fiscal year end, and in line with our guidance of $100 million to $110 million.

Now let's talk about our FY18 outlook for the first quarter and full year. Our guidance reflects the extremely challenging retail and competitive landscape. We remain in a highly unpredictable environment. Keep in mind that as I discuss our prior-year comparison, the prior-year numbers exclude the store impairment and other charges outlined in today's release and financial statement attachments. Current-year estimates do not include any store closing, impairment or other charges.

For the first quarter, we expect net revenues of $94 million to $99 million, compared to prior year first-quarter revenues of $105.2 million. We expect Direct segment net revenues to be down in the low to mid single-digit range compared to the prior year, including a comparable sales decrease including the website in the mid to high single digit percentage range. We believe our indirect net revenues will be down in the mid- to high-teen range during the quarter.

The gross profit percentage for the first quarter is expected to range from 55% to 55.5%, compared to 56.7% in the prior year first quarter. The planned decline reflects an expected increased level of promotional activity, as well as channel mix changes that has a larger percentage of our sales coming from the lower margin factory channel.

SG&A as a percentage of net revenues is expected to range from 61.1% to 63.3% for the first quarter, compared to 53.6% in the prior year first quarter. The deleverage is primarily due to expected soft sales in the quarter.

We expect first quarter diluted loss per share before charges to be in the range of $0.11 to $0.14. Net income totaled $2.4 million, or $0.06 per diluted share, in the prior year first quarter. We expect inventory to be $100 million to $110 million range at the end of the first quarter, compared to $113.4 million at the end of the first quarter last year.

For the full year, we expect net revenues of $460 million to $480 million, compared to $485.9 million last year. Our revenue guidance assumes Direct segment net revenue to be relatively flat to up low-single digits compared to last year, with comparable sales, including e-commerce, down in the low to mid single digit percentage range. Indirect net revenues are expected to decline in the mid to high teen percentage range for the full year.

The gross profit percentage for FY18 is expected to range from 56% to 56.5%, compared to 56.8% last year. The expected decline relates to increased promotional activity and channel mix changes, partially offset by planned overhead savings. SG&A as a percentage of net revenues is expected to range from 50.8% to 51.3% for FY18, compared to 48.5% last year. The planned increase relates to the annualization of new-store expenses, incremental incentive compensation related to resetting targets, and incremental depreciation associated with the new digital flagship. In addition, deleverage is expected due to soft sales.

We expect diluted EPS, excluding charges, for the full fiscal year to range from $0.40 to $0.50. Before charges, diluted EPS totaled $0.72 last year. We expect our net capital expenditures will total approximately $10 million to $15 million for the full year, primarily related to new Factory Store openings, full line store renovations, and continued technology investment.

Let me turn the call over to Rob, who will give you an update on our focus areas for FY18. Rob?

Thanks, Kevin. As I noted earlier, our number one priority for FY18 is to grow our customer count. We simply must drive more traffic into our stores and to verabradley.com. We will achieve that by: one, increasing our brand desirability; two, increasing our product desirability; and three, strengthening our distribution platform. Let me go into a bit of detail on each of these.

First, let's talk about driving brand desirability, which largely revolves about our holistic marketing efforts. We believe our brand is in a solid position to move forward. Our initial brand reboot, including the logo change and our fall 2016 marketing campaign, began to positively shift purchase intent and brand sentiment. We are building a robust, innovative, and multifaceted marketing program, expanding upon our successful It's Good To Be a Girl campaign introduced last fall. The spring campaign, reinforcing our brand messaging and beautiful solutions and offering stories of optimism and female empowerment, will launch at the end of this quarter. Our marketing campaign and brand positioning are modern and fresh, but are still authentic and continue to reinforce our amazing heritage.

We are reinforcing and building our brand clarity to assure that our target customer is at the heart of everything we do. We will continue to partner with key influencers and to leverage their social media channels to increase our brand awareness. We will broaden influencer reach by extending engagement beyond fashion to musicians, industry experts and sports figures. We will increase partnerships that create content promoting the women who practice the art of empowering other women. We will continue to work with other high profile partners to enhance our image and expand our reach.

For example, as continuation of It's Good To Be a Girl, we are excited to be participating in a new six episode reality competition TV show called Girl Starter, which will air on TLC beginning in early April. This show is focused on helping young women with the tools, knowledge and confidence they need to start their own businesses and become leaders. Vera Bradley was founded by two amazing female entrepreneurs, and we have always been about women supporting women and celebrating the female spirit. So Girl Starter is a perfect fit for us.

The format of the show is five teams of young women ages 18 to 24 competing for a prize of $100,000. The show will integrate our product and It's Good To Be a Girl clips on each episode; and one episode will feature a build-it challenge to design a Vera Bradley bag. Our founder, Barbara Bradley Baekgaard, will be a guest judge on this episode.

Speaking of Barb, we are very excited about her book, A Colorful Way of Living, which will be released in April. The book is another terrific celebration of our heritage and of our brand's authenticity. We will leverage marketing analytics to optimize our media spend, personalize our consumers' experience, and increase conversion. We are laser focused on media that will increase customer count.

Second, we will enhance our product desirability. We will continue to major in the majors, that is, our five core focus categories of fashion bags and accessories, travel, campus, wellness, and beauty and home, and especially exploit the growth of our top 10 best selling items. We are continuing to build and expand our focus on beautiful solutions through our product design, presentation, signage, hang tags and marketing. Thoughtfully offering beautiful solutions incorporates added functionality and innovation into our core classifications, such as charging pockets and RFID blocking technology, that will be fully integrated into all appropriate products by the end of the year.

We are reinvigorating our core heritage through reinventing the most important piece of our business, cotton, with the introduction of our fall 2017 collection, which features our new micro quilting, as well as some other unique quilting and stitching patterns. We will also continue to add new, more modern silhouettes and, of course, focus on pattern and design. Pattern strength continues to be as critical as quilted cotton and lighten up make up over 60% of our Direct sales.

Brand extensions are an important part of offering our target customer newness, diversification and beautiful solutions, and we are strategically layering in licensing opportunities where appropriate. The swim, bedding, stationery and hosiery collections will launch this summer, and we are already seeing a very positive response from the market in terms of placement in both existing and new distribution. We expect to add even more categories in the future.

Lastly, we will strengthen our distribution platform by pivoting from a growth mode to focusing on our core channels and on driving comp sales. Most importantly, we will continue to evolve our verabradley.com digital first strategy, which we believe is our key to long-term growth.

The relaunch of our digital flagship platform went live just last month. This new platform offers: an enhanced ease of shopping and incremental functionality, including an upgraded mobile experience; additional navigation and search enhancements; improved product pages with enhanced imagery; product videos and user generated content; and new capabilities like e-gift cards and order online, pick up in store. The new platform also gives us capabilities to create deeper customer relationships and create value through more personalized and strategic customization.

We will strengthen our full line store base. We will continue with our full line store upgrades, so that approximately half of our 113 stores will feature our new modern design standards by the end of the fiscal year. We will focus on enhancing performance of our top stores through must have key items, superb visual and in-store execution, improved discipline and accountability, and engaging in-store events.

In addition, we will relocate or close up to 15 targeted underperforming full-line stores as leases expire or as we are able to negotiate early exits over the next 24 months or so. We closed our Phipps Plaza store in Atlanta on January 28. We will strengthen our 46 store factory base through more disciplined processes, differentiated products and strategic promotions. We plan on opening approximately six new Factory Stores this year, with three in the first quarter in Laredo, Texas, Myrtle Beach, South Carolina, and Houston, Texas.

Our goal is to build and execute a healthy, less promotional and symbiotic distribution plan between our 730 department stores and 2,600 specialty stores. In the department stores, we will continue to work on enhancing standards and brand presentation to focus on key item intensification and travel and to expand our lifestyle brand offerings. We will build a specialty store distribution plan with a by-door analysis and long term distribution strategy.

As you can see, we have another busy year ahead. Operator, we will now open the call to questions.

(Operator Instructions)

Oliver Chen, Cowen and Company.

Hi. This is Cecile Origenes for Oliver. Thank you for taking our question. Could you share your thoughts on which channel you feel faces the biggest challenge or hurdles to overcome, versus which channel likely presents the greatest opportunity to drive improvement sooner or issues that are likely more within your control and easier to address? And then on that note, could you also highlight some of the key positive catalysts that you expect to drive better performance in the back half of the year?

Yes. Absolutely. Let me jump in.

Our number one focus for channel and future growth, we really believe, is the digital space. So the relaunch of our verabradley.com, we really are very, very focused on improving our full-price positioning, improving our brand story and really using that as a catalyst for future growth. So we believe that is the number one area. It's the number one area where we know the customers experience our brand.

In terms of as we look at the back half of the year, we have a lot of strategies in place between getting the marketing campaign kicked off in first quarter and continuing to build throughout the year. We believe that the e-commerce business will continue to strengthen as we get the new platform in place and consumers take advantage of all of the new functionality that we've built in. In addition, as we look at the back half of the year, we also have the new cotton collection that is launching, which really is bringing increased functionality, some fresh design, and really increased focus on our core product assortment, which we believe all of those things will help us lift our sales as we move through the year.

Thank you.

Drew North, Robert W. Baird.

Good morning. Thanks for taking the question. Regarding your store closures or relocation plan, it sounded like that is mostly focused on the full-price business, which would push the overall mix toward the Factory Stores. How are you thinking about the right mix of the full-price business and Factory over time, and then how do you plan to balance that higher Factory mix with your effort to drive greater brand and product desirability moving forward?

Thank you for the question, Drew. A couple things. You are right that the store closure is focused more on our full-line mix right now. In terms of our Factory channel, we continue to have very positive contribution from our Factory Stores.

As we look going forward, we definitely continue to look at the balance between the two, and that is something that we are constantly evaluating. Because we've stated that we want to make sure that the ratio in terms of full line to Factory, ideally is at least 2 to 1. And then we believe with the digital focus moving more to full price, that's really the key. We believe that the digital space, focusing on brand and product as opposed to price, as the primary driver, is really key to driving our brand desirability and product desirability as we go forward.

Great. Thank you. And then if I could squeeze one more in. On the 53rd week, can you quantify the revenue and the EPS impact related to the extra week?

Sure, Drew. It's really only a few million dollars, and it's less than $0.01 to EPS. So it's not a big impact for us this year, but it is in our guidance.

Okay. Thank you.

Eric Beder, Wunderlich.

Good morning. Could you talk a little bit about the new advertising campaign and the new rebranding and what it showed you in the stores and logos, how the consumer was responding to it?

Sure, be happy to. We've been very pleased with overall consumer response to our new advertising campaign, as well as to our new logo. So we've heard from consumers is that they like the rebranding. They feel like it's a really fresh, new look for the brand and that they find it very relatable. So we're excited.

We also found in third quarter, as we put our marketing campaign out there and really led with It's Good To Be a Girl and really put the brand first, that we had a very positive response from consumers and we saw increased engagement across social channels, influencers, as well as traffic in our stores. And we're really leveraging that focus as we go into this year, which is part of what gives us the confidence in the marketing impact as we go through this year, because we feel that we found the right place to really focus our energies and we think that the Girl Starter partnership is a great example of doing that.

Okay. And one more. In terms of the impact on the stores, were the new rebranded stores doing better in the holiday season than the non-rebranded, and how should we think about the pace of the rebrandings for this year?

What we were hearing from consumers -- we did a lot of customer research and listening to consumers in terms of the new-store format and really continue to receive very positive feedback that they felt it was updated, more modern, still keeping within the heritage, still celebrating the heritage of Vera Bradley. So we received very positive consumer response.

In terms of a dramatic performance difference, we didn't see a huge difference in the overall sales of our new-branded stores, but we did see a lot of positive customer feedback. So that's one reason why we're continuing to go through with the rebranding effort and we will have over half of our stores that will be in the new brand. But at the same time, we're making sure that we've paced it appropriately.

Okay. Thank you and good luck for the year.

Thank you.

(Operator Instructions)

Bill Dezellem, Tieton Capital Management.

Thank you. Did I hear correctly that the Disney Springs store is your number one selling store? And if that is correct, are there other opportunities where you can create a unique design for another entity that really ties similarly to the way that the Disney design is working for you?

Bill, you did hear correctly. Our Disney Springs store is our number one volume store. It is our highest traffic store. It's a great partnership between who the core Disney customer is, as well as the core Vera Bradley customer. The product that we design in partnership with Disney is part of that. It is part of that success. But the vast majority of the store's volume is still coming out of our core product.

So I think the lessons that we're taking from that is looking for what are those really unique entertainment shopping opportunities that are high traffic. We've always talked about for us, we are a traffic brand. Getting people to our stores is really critical to what we do. And so finding the right type of opportunities where you're seeing high traffic becomes very critical for us. Obviously out there in the retail landscape right now, finding destinations with high traffic is definitely not as easy as it once was, but it's definitely something that we're very focused on as we look at real estate going forward.

Thanks for that clarification, Rob.

Ed Yruma, KeyBanc Capital Markets.

Hi. This is Matt [DeBellis] on for Ed. I'm wondering about the relationship between physical and online retail. So after you rebrand a store, do you see a meaningful uptick in e-commerce sales in that geographic area? And also, how much do you believe, if you do end up closing full-price stores this year, how much do you believe of those sales you can recapture from e-commerce or potentially other channels? Thank you.

Matt, thank you for the question. In terms of significant major uplift in e-commerce business in the markets that we've rebranded the stores, we're not seeing a dramatic change in the e-commerce business. In terms of as we're closing stores, we are working to definitely migrate our consumer into our other locations. We're starting that with Phipps in Atlanta, to really make sure that we're managing customer by customer, and whether that's moving them to another one of our full-line stores, whether it's moving them to our e-commerce business or one of our specialty or department store partners, we're working through that process and we know that will be important.

As we look at closing the 15 stores over the next two years, we're obviously working through that process. We expect that the majority of that closing will happen more towards the end of this year, going into next year, just to put that in perspective.

Thank you.

With no further questions in the queue, I'd like to turn the conference back to our presenters for any additional or closing remarks.

Thank you. We know we still have a lot of work to do, but feel confident we are on the right path and have the financial strength to transform Vera Bradley into a stronger Company. We will continue to work diligently to improve our performance and enhance shareholder value. Thank you for joining us today. We look forward to speaking to you on our first-quarter call on May 31.

Ladies and gentlemen, that does conclude today's conference. Thank you all for joining.