Vera Bradley Inc (VRA) 2019 Q2 法說會逐字稿

Good day, and welcome to the Vera Bradley Second Quarter Fiscal 2019 Earnings Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mark Dely, Chief Administrative Officer.

Please go ahead, sir.

Good morning, and welcome, everyone.

I'd like to thank you for joining us for Vera Bradley's Second Quarter 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 3, 2018, 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'll now turn over the call to Vera Bradley's CEO, Rob Wallstrom.

Rob?

Thank you, Mark.

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

John Enwright, our CFO, also joins me today.

We are very pleased that our second quarter results exceeded both expectations and last year's performance, primarily driven by a higher-than-expected gross margin rate related to reduced clearance, improved full-price selling and freight and shipping efficiencies as well as better-than-expected SG&A expense management, and revenues were in line with our guidance.

At this time last year, we initiated Vision 20/20, our plan to strengthen our brand and financial health by drastically reducing clearance revenues and realigning our expense structure in order to create a solid foundation for future growth.

Recall that as we continue to implement Vision 20/20, we are routinely monitoring and reporting on 4 key elements: progress on restoring full-price selling, delivering our SG&A and cost-of-sales reductions, cash flow generation and maintaining our customer base.

We have made tremendous progress against our initiatives over the last year and especially during the last 6 months.

So far this year, we have reduced clearance activity in our full-line stores and on verabradley.com by over 70% and increased full-price selling in these channels by over 20%.

We are continuing to drive brand desirability through product innovation and targeted marketing, while achieving meaningful expense reductions through diligent expense management and implementation of our Vision 20/20 initiatives.

We increased our year-over-year cash and investment balances by over $40 million to nearly $145 million.

Our customer count is down slightly from last year, which is to be expected due to reduced clearance levels, combined with some persistent traffic issues in the factory channel.

The good news is that the customer count in our full-line stores and on verabradley.com exceeded our expectations, and a higher percentage of new customers are entering the brand through full-price purchasing.

Now I will turn the call over to John to review the second quarter financial performance.

John?

Thanks, Rob, and good morning.

Let me go over a few highlights for the quarter.

As I discuss the quarter, keep in mind that prior year income statement numbers exclude previously disclosed strategic plan consulting fees, severance charges and net lease termination charges.

Current year second quarter net sales of $113.6 million were in line with our guidance range of $111 million to $116 million.

Prior year second quarter net sales totaled $112.4 million.

As previously disclosed, Direct segment revenues reflect the movement of approximately $6 million to the second quarter this year from the third quarter last year related to the timing of promotional events.

For the current year second quarter, we posted net income of $9.3 million or $0.26 per diluted share compared to $4.6 million or $0.13 per diluted share before charges.

The promotional event shift I just mentioned equates to incremental income of approximately $0.07 per diluted share in the current year second quarter.

Current year second quarter Direct segment revenues totaled $91 million, a 1.9% increase from $89.3 million in the prior year.

Comparable sales, including e-commerce, decreased 4.9% for the quarter, which was more than offset by new store growth.

As expected, second quarter comparable sales, particularly those of verabradley.com, were negatively impacted by our reduced clearance activity.

Excluding the promotional shift, we estimate comparable sales would have declined by approximately 10% in the quarter.

Indirect segment revenues totaled $22.6 million, a decrease of just 2% from $23.1 million in the prior year second quarter.

Gross profit for the quarter totaled $65.7 million or 57.9% of sales compared to $63.3 million or 56.3% of sales in the prior year.

The year-over-year 160 basis point improvement primarily related to reduced clearance activity and increased full-price selling on verabradley.com and in the company's full-line stores, freight and shipping savings, channel mix changes and a reduction in product cost.

Gross margin was meaningfully better than guidance of approximately 56.2%, primarily due to better-than-expected full-price selling.

In the current year second quarter, SG&A expense totaled $53.8 million or 47.3% of net revenues compared to $55.9 million or 49.7% excluding charges in the prior year.

Diligent expense management drove SG&A expense lower than our guidance range of $55 million to $57 million.

Our operating income totaled $12 million or 10.6% of net revenues in the current year second quarter compared to $7.5 million or 6.7% of net revenues excluding charges in the prior year.

By segment, we also had a nice increase in operating margins.

Direct operating income was $22.3 million or 24.5% of net revenues compared to $17.6 million or 19.8% of net revenues excluding charges in the prior year.

Indirect operating income was $8.8 million or 39.1% of net revenues compared to $7.8 million or 33% -- 33.9% of net revenues in the prior year.

Now let me turn to the balance sheet.

Net capital spending for the second quarter and 6 months totaled $2.2 million and $5.9 million, respectively.

We still expect to spend about $10 million this year on CapEx.

Cash, cash equivalents and investments at quarter-end totaled $144.8 million compared to $102.3 million at the end of last year's second quarter.

We had no debt outstanding at quarter-end.

Quarter-end inventory was $86.3 million compared to $104.1 million at the end of last year's second quarter and at the low end of our guidance of $85 million to $95 million.

Now let's turn to our outlook for the third quarter and full year.

There are a few things to keep in mind as I review the outlook for the balance of the year.

All guidance numbers are non-GAAP.

Prior year non-GAAP numbers exclude the previously disclosed severance charges, store impairment charges, strategic plan consulting fees, tax reform legislation charge and other charges.

The current year non-GAAP estimates would also exclude any potential similar charges.

Our guidance does not include any impact from increased tariffs.

If enacted in September, we estimate that an incremental 10% tariff on specified goods produced in China could negatively affect our fiscal 2019 diluted EPS by approximately $0.02 and that an incremental 25% tariff could negatively affect diluted EPS earnings by $0.04 to $0.05.

The prior year -- the prior fiscal year contained an extra week.

We estimate that the additional week contributed approximately $4.1 million in net revenues and increased diluted earnings per share by approximately $0.01 for fiscal 2018.

Due to the 53rd week last year, comparing this year to last year by quarter is not quite apples-to-apples.

As I previously noted, the second quarter was the beneficiary of and the current year third quarter was negatively affected by a promotional shift as our annual Vera Bradley birthday sale and the factory promotional event moved into the second quarter this year from the third quarter last year.

And finally, keep in mind, in the third quarter last year -- in the third quarter of this year, we are beginning to anniversary the Vision 20/20 SG&A expense reductions that began last year.

So going forward, we will not see the SG&A reductions we have realized over the last 12 months.

As a result, there will be some pressure on second half EPS performance.

For the third quarter, we expect net sales of $98 million to $103 million compared to prior year second quarter sales of $114.1 million.

We estimate that approximately $6 million of sales moved into the second quarter this year from the third quarter last year related to the 53rd -- 53-week calendar shift.

We expect Direct segment net sales to be down in the high single-digit range compared to the prior year, driven by comparable sales decrease, including e-commerce, in the low-teen percentage range.

Excluding the $6 million shift, we estimate that -- we estimate comps will decline in the mid- to high single-digit range for the quarter.

We believe our Indirect net sales will be down in the mid- to high-teen percentage range during the quarter.

We expect our third quarter gross margin will be between 59% and 59.2% compared to last year's third quarter rate of 56.8%, excluding charges.

The expected gross margin improvement relates to more full-price selling, a higher percentage of MFO product sold within the factory channel and freight and shipping efficiencies.

SG&A expense is expected to range between $51 million and $53 million compared to adjusted SG&A before charges of $52 million in the prior year third quarter.

We expect our third quarter diluted EPS will be $0.14 to $0.16.

The previously mentioned event shifts will reduce EPS by approximately $0.07 in the current year third quarter.

On a non-GAAP basis, excluding charges, adjusted net income totaled $8.3 million or $0.23 per diluted share in the prior year third quarter.

We expect inventory to be in the $90 million to $100 million range at the end of the third quarter compared to $100.1 million at the end of the prior year third quarter.

As a reminder, the majority of Vision 20/20 product and pricing initiatives are being implemented this year, and we believe these changes will negatively impact year-over-year annual sales by $35 million to $45 million, which is reflected in our annual revenue guidance of $410 million to $420 million.

This compares to sales of $454.6 million last year.

Our revenue guidance assumes Direct net -- Direct segment net sales will be down by the high single digits compared to last year with comparable sales, including e-commerce, down in the low-teen percentage range.

Indirect net sales are expected to decline in the low-teen percentage range for the full year.

Gross margin for fiscal 2019 is expected to increase to a range of 57.6% to 57.9% compared to 56.1% last year.

The year-over-year expected increase relates to reduced reliance on clearance selling, more full-price selling, lower product costs and operating efficiencies.

We expect SG&A to total between $211 million to $215 million for the year compared to $221.4 million last year.

This estimate reflects expense management and Vision 20/20 savings.

As a reminder, expense reductions have come through rightsizing our corporate infrastructure to better align the size -- to better align with the size of our business, lowering our marketing spend by focusing on efficiencies while keeping our most loyal customers engaged and taking a more aggressive stance on reducing store operating costs and closing underperforming full-line stores.

Based on first half performance, we have increased our full year diluted EPS expectation, excluding charges, to range from $0.55 to $0.62.

Before charges, diluted EPS totaled $0.60 last year.

We still expect to generate $40 million to $50 million in operating cash flow in fiscal 2019.

Rob?

Thanks, John.

Before we make a few comments about product, marketing and our distribution channels, let me tell you about an important new role we have created at Vera Bradley.

The first stage of Vision 20/20 has been to restore brand and company health, and I am excited by the progress we have made so far this year.

Now we are beginning to move to the second stage of Vision 20/20, where we will focus on growth for the next year and beyond.

Over the last few years, retail has been going through a very disruptive cycle and the industry has changed forever.

Technology has revolutionized retail.

The e-commerce channel has become the primary growth engine.

Marketing has transformed to a Digital First strategy.

The physical stores moved from a place of purchase to a place of brand experience.

And artificial intelligence has become the core engine to drive change faster than previously imagined.

And in this new world, we all know that new skills and new leadership were essential.

Therefore, earlier this year, we began to search for a candidate to fill the newly created role of Chief Customer Officer with responsibility for all sales channels and marketing.

Our vision is for the Chief Customer Officer to lead through this exciting new area of retail and improve customer engagement and acquisition with a scientific and technology-based approach.

After a thorough search, in which I had the privilege of meeting many talented executives, one candidate stood out due to his broad background, proven successful track record and highly analytical approach.

Daren Hull joined Vera Bradley as our new Chief Customer Officer last month and has hit the ground running.

Daren comes to us with a broad background in customer experience, customer insights, customer analytics, marketing, social media, merchandising, technology, operations, strategy and leadership.

Most recently, Daren served as SVP of Technology, Stores and West Elm Digital for Williams-Sonoma, where he was responsible for evolving and elevating the in-store and online customer experience and related technology.

His prior experience includes General Manager of MyHabit at Amazon, COO of Outdoor Voices and VP of Luxury Direct at L’Oréal.

As Chief Customer Officer, Daren will assume a revenue-driving role, supporting the implementation of Vision 20/20, helping us chart the next chapter of growth for Vera Bradley and pushing our transformation to a leading retail position.

Daren will be responsible for all sales, marketing and digital initiatives and will further strengthen and integrate those areas to drive customer acquisition and return us to growth.

Now moving on to product.

As you know, we have been focused on implementing our tighter assortment guardrails when introducing new categories, patterns and pricing, assuring the right fit for our brand and that our products reflect our signature attributes of comfortable, casual and affordable.

We have thoroughly analyzed our historical pattern performance, determining the DNA and isolating the characteristics of our most successful prints.

The product development and design teams are busy designing and bringing to market products and patterns that fit within that DNA.

We know that solids and patterns that feature florals, paisleys and medallions resonate most with our customer.

We are seeing great response from new launches, including water bouquet, romantic paisley and charcoal medallion, each of which fits nicely into one of these categories.

An interesting thing about charcoal medallion is that it's simply a recoloration of a very popular pattern, lilac medallion, that was introduced last year.

So we know we can, on occasion, take successful patterns, change the colors and create a new winner.

We are making a lot of headway on pricing agility and assortment optimization by location.

We have implemented processes that better allow us to extend the full-price selling period for patterns that are selling better than planned and to accelerate retirement if a pattern is not selling well.

In addition, we are keeping several patterns of backpacks and lunch totes at full price through the back-to-school period even though some of the applicable patterns have been moved through retirement status.

And speaking back-to-school, back-to-school selling is in full swing, with second quarter full-price sales of backpacks and lunch totes up 50% from last year.

We just started our campus activation program where we will visit 11 large universities on key days like game day Saturdays.

And with the help of our on-campus Vera Bradley brand ambassadors, we will have games, showcase a dorm room setup and distribute a lot of Vera Bradley product.

This will run through early November and is a great opportunity to introduce new customers to Vera Bradley and create excitement around our brand.

We will also continue to look for appropriate brand extensions through licensing opportunities like our Bath Collection we announced just this morning, which is scheduled to debut next fall.

The collection will feature bath towels, bath rugs and shower curtains and will dovetail nicely into our Bedding Collection that we launched last year.

And we have collaborated with DISNEY Theme Park Merchandise to create a limited-edition novelty pattern called Mickey's Paisley Celebration, and this launches tomorrow and will be sold exclusively at our #1 volume Disney Springs full-line store.

As you all know, one of the most crucial initiatives in our Vision 20/20 strategic plan has been to dramatically reduce the clearance activity in our full-line stores and especially through our digital flagship, verabradley.com.

Shifting our focus towards full-price selling is a vital step in restoring the overall health of the company and the brand.

We have made great strides toward achieving this goal over the past 6 months, moving the majority of our remaining clearance business to our newly launched Vera Bradley Online Outlet flash sale site and transitioning to a more full-price selling model on verabradley.com.

These flash sale events are successfully allowing us to feature more full-price product on verabradley.com and to sell-through our current merchandise in a much more discrete manner.

In response to these successes, we are taking further steps to segregate Vera Bradley from the online discount-driven marketplace.

Specifically, Vera Bradley exited our partnership with eBay as an online point of distribution last month.

Our eBay presence was focused on clearance inventory, and so we believe this is the right decision to help us improve customer's perception of our brand and to achieve verabradley.com's full-price sales goals for fiscal 2019 and beyond.

In the marketing area, we continue to increase brand awareness with our Digital First strategy.

Our marketing is focused on high-quality placements in segmented and targeted digital efforts, with much more emphasis on full-price offerings and less on clearance and sale.

We have entered into several successful social media collaborations with our licensed partners and influencers like POPSUGAR.

We continue to test our customer journeys program where our best customers are given incentives and special recognitions throughout the year.

We are excited about the potential and we'll continue to refine and expand this program throughout the year.

As a key part of our marketing and social media engagement plans, we are continuing our community and charitable initiatives with a particular focus on women and children.

And this week, we are wrapping up our Blessings in a Backpack program, which is providing 25,000 at-risk children with the tools they need for a successful school year.

Fun backpack giveaway events have been hosted by well-known personalities in several cities, including Olympic gymnast Shawn Johnson in Chicago and country music star Jason Aldean and his wife Brittany in Nashville with more to come.

It is great to see the impact this program has on children, families, schools and even on entire communities.

These events have garnered a record amount of social engagement and media coverage for us around the country.

On the storefront, we now expect to close approximately 12 full-line stores this fiscal year.

We closed 5 stores in the first half, ending the second quarter with 104 full-line locations.

We expect to close approximately 30 additional stores in fiscal 2020 and 2021, primarily as leases expire.

However, if sales and operating performance improve for the targeted locations, we could see fewer closures over that time frame.

At the end of the first half, we operated 57 factory stores, which includes the 4 new factory locations opened in the first quarter and 2 new factory store openings in the second quarter, stores in Hershey, Pennsylvania and at the Jersey Shore in Tinton Falls, New Jersey.

Each of these new locations are in high-traffic tourist locations.

And in the aggregate, they are exceeding our plans.

By executing Vision 20/20, our business and brand are becoming healthier and cash flow is improving.

We are laying the foundation for long-term operating performance improvements and growth of the business.

Our talented and passionate associates, strong brand, passionate customer base, exceptional balance sheet and clear path forward with Vision 20/20 make me very excited about our future.

Operator, we will now open the call to questions.

(Operator Instructions) We'll take our first question from Mark Altschwager from Baird.

Really nice acceleration in full-price selling, I think over 30% growth this quarter versus high single digits in Q1.

Is there a way to break down how much of that was due to the calendar shift?

And then from a comp perspective, if it's possible to back out the clearance reduction headwinds in the calendar noise, what's your best estimate at the go-forward run rate of that full-price business today?

Thanks for the questions, Mark.

So I guess, a couple of answers for you.

First of all, when we look at what happened with the full price acceleration in second quarter, more of it was really due to additional actions that we took to further reduce clearance activity.

So as our business has been picking up some momentum, we've been using that opportunity to further reduce clearance activities.

So specifically, what does that mean?

During the back-to-school period, we decided to take all of our clearance backpacks and lunch bags out -- off of verabradley.com and out of our stores and focus solely on our full-price assortment.

That decision alone had a major impact in our full-price selling.

And we believe that, that type of decision is something that we can continue to look at as we go forward, especially in the fourth quarter.

So it's less about the calendar shift and just more about the decisions that we're making.

Additionally, the patterns that we are launching are getting stronger.

And so what we saw in second quarter is the launch of water bouquet was a great example of really a pattern that took off, and we're very excited to see the strength there.

But as our pattern and our merchandise assortment become stronger and stronger, we're seeing that also as a driver to our full-price business.

In terms of looking forward and trying to project what full price will look like once we get all the clearance activity out, a couple of things I would say.

First of all, we are excited about the growth that we're seeing in full price.

We think that that's a very good sign as we go forward.

One of the tricks in trying to project forward is really calculating the demand transfer that's moved in from the clearance purchases last year to the full price this year.

So it's still a little bit of analysis we're going through.

But what we're really expecting, as we talked about, as we move into next year, that we will begin to see growth again.

So that's kind of all we can really say on that point at this point.

That's really helpful.

And it sounds like outlet stores may be a bit softer than planned, and correct me if I'm wrong there, but just any color on what's happening with outlets?

And then I think your store growth plans still call for expansion within the outlet channel.

Any change to how you're thinking about that opportunity over the next couple of years, especially given some of the initiatives with the outlet flash sales?

Yes.

No, great question.

So a couple of things.

One, we are seeing in the outlet area that, yes, we're tracking slightly below where we wanted to.

We've seen traffic be a little bit slower than we expected.

But again, we've made a strategic decision in our factory business, that a lot of our peer set has moved to almost a 70% off the majority of the time type of pricing model.

We have actually been more in the 50% to 60% range.

So we do believe that, that is suppressing our factory business a little bit.

It's something that we're continuing to monitor.

But as we were really restoring the brand health, we felt that getting more promotional in our factory stores could be working against us there.

So that's something we're continuing to monitor.

We know that it's something that we could address in the future.

We want factory to grow faster, but we still feel very confident in our long-term growth strategy for factory.

We have 57 locations right now.

We really see moderate growth year-over-year, and nothing's really changed that.

As we think about the online flash sale business, we still want to keep that under control.

It's still a relatively very small business for us.

We want to be very cautious about it.

We want to make sure it's very discrete because we don't want that business to grow too large.

But we will continue to use it as a discrete opportunity to liquidate some old inventory.

Maybe one last one from me, if I may.

But on the SG&A front, it sounds like you're having some nice success with the cost-savings initiatives.

But the guide for the year on SG&A, I think, edged slightly higher at the low end.

So just wondering if there's areas where perhaps you're reinvesting a bit more or seeing some cost inflation versus your initial plans.

No.

Mark, this is John.

No, we're not really seeing any cost inflations versus our initial plan.

As we look out for the remainder of the back half of the year, we are seeing some investments that we may want to make.

So that's why we brought up the low end of the guidance.

We still expect to fall within that $211 million, $215 million.

Moving on, we'll take our next question from Oliver Chen from Cowen and Company.

Regarding the channels and the progress you made, which channels would you say you have the most opportunity in relative to the other channels in terms of the path forward?

And could you speak to your thoughts on achievability and visibility towards consistently positive comps and what you're looking at?

It sounds like there's a lot of encouraging data points.

I would love your thoughts on what you're focused on and how the road map may look to get positive comps more consistently.

Thanks, Oliver.

In terms of channels, I would say the #1 area as we go forward that we're really looking to move to a growth channel for us is our e-commerce business.

To watch the flip at our e-commerce business has been very dramatic in terms of if you look year-over-year, that we were well over 70% of our business on clearance second quarter last year on verabradley.com, and that has flipped to 70% -- just about 70% full-price business.

So we've seen a dramatic shift there.

And we expect that, that dramatic shift will really set us up to be in good position as we move into next year and really return our e-commerce business to growth.

So that's one.

The second thing that we are beginning to see in our Indirect business in totality is we're beginning to see the actions that we took to stop all the discounting on our product on verabradley.com beginning to stabilize our Indirect channel.

So that's been very encouraging to see.

We've been getting a lot of positive feedback from our Indirect partners that margins for them are improving, the sales trends are improving.

And so we're just beginning to see the early signs in our wholesale business, which is encouraging to see.

Okay.

And on the pattern and balancing the art and science and also thinking about innovation but managing risk at the same time, how are you feeling now with more time to process the DNA that you're comfortable with in terms of the customer response to pattern but also your innovation process?

Yes.

I think that Beatrice and the team, along with Kevin, have really done a nice job of really getting very customer focused.

We believe the DNA work that's coming to market is bearing fruit.

We're seeing positive results.

One of our newest patterns that have done incredibly well has been the charcoal medallion pattern.

So we feel really good about the progress we're making on DNA, especially around print.

Additionally, the team has been working on a lot of innovation within styles, and we've seen a lot of the new things that we've brought to market really rise to top sellers.

Things like our journey backpack is a great example.

There's a lot of innovation that will be coming out over the next year, particularly around the travel category.

So we feel really good about that.

Additionally, the consumer has really been responding to new fabrication.

So as we've been bringing new fabrications into the market, it's created interest and we think that that's another area that you will continue to see innovation from us.

Okay.

Lastly, inventory has been impressive.

What do you think will happen to inventory on a longer-term basis?

And in the context of inventory and supply chain, what are some thoughts around speed?

And how much of your inventory is on speedier programs?

Or is that an opportunity that you're looking at?

So in regards to overall inventory, I would expect to see continued improvement over the course of this year -- excuse me, by year-end.

But as we move into out-years, I wouldn't expect to see the improvement that we've demonstrated this year.

I think by the time we exit this fiscal year, we'll probably be in a right place with our total overall inventory value.

And we would expect inventory product to grow at the rate of sales on a go-forward basis.

In regards to speed of inventory, I think there's definitely opportunity for us in fast tracking patterns, fast tracking some inventory to get it to market quicker.

So I think we certainly have opportunity there, and we are certainly looking at things we can do internally to improve that.

I think just to add a little bit more color around the supply chain and what we're doing there is we have 2 different things going on.

One, we're really looking at the whole time frame from concept to delivery and looking at different ways of collapsing that down somewhat.

One area that we have working against us is we diversify the supply chain and move more of our manufacturing out of China into other parts of Asia, that's adding some time.

So that's moving against us a little bit, but we're working on ways of making that up.

The second thing that we're doing, which I think is what John was talking to, is really beginning to move our supply chain to 2 time lines.

One is kind of the core product, that standard operating time line that we work on.

But second of all is really moving up and developing a fast-track program for new innovation, new ideas and how to bring that to market quickly.

Team's made a lot of progress around that.

So a lot of our fast-track merchandise can get to market in probably 1/3 of the time that our core product can.

So that's an area as well as just chasing assortments.

So to make sure that we can order a little bit thinner, chase best sellers, we've been moving to a lot more of a reorder business over this last year than we have been doing previously and that's encouraging to see.

And that will help our inventories stay a little bit tighter as we move forward as opposed to our historical inventory level.

Moving on, we'll take our next question from Dana Telsey from Telsey Advisory Group.

As you mentioned, a higher percentage of new customers are coming into the brand for full-price purchasing.

Who are those customers?

How do they differ from the core?

And with the exit of eBay, how much in revenues would you say eBay was for the year?

And what -- how do you look to replace that?

Is it full price?

And where do you see it happening?

And just an update on the department store channel.

Thanks, Dana.

Let me go ahead and jump into a few of those questions.

If I forget one, please feel free to reask.

But first of all, in terms of the full-price customer coming in, what has been encouraging to see is we've been looking at this full -- this new customer entering the brand, particularly as we look at verabradley.com and our full-line store, that she's really been -- being driven by some of the new pattern work, the new innovation, the new fabrics.

So it's encouraging to see.

From the demographic standpoint, it's still a very broad customer base.

So we've always really attracted a very broad consumer.

We're continuing to see a very broad consumer coming in.

One thing we have been encouraged by is we're continuing to see outsized growth in some of our more, or should I say, targeted ethnic communities, which is great to see.

So we're beginning to broaden out the base of the brand from an ethnicity standpoint, which is encouraging.

But from an age, it's still been pretty broad; and in income, that's still been pretty broad.

In terms of the department store business, what I think we've been seeing in department stores is we've been seeing our department store business improving, margins improving, sell-throughs improving.

So it's encouraging to see it moving in a more positive direction.

We think that the department store business is better than it's been, and so we're encouraged by what we're seeing there.

And in regards to eBay, eBay was a small part of our business, less than 1% of our overall business.

And we expect to recapture some of that business through our Online Outlet.

(Operator Instructions)

Okay.

Well, thank you, everyone, for joining us today.

We look...

And actually, there is another question, my apologies.

We'll take our next question from Kevin Foll from GRATIACAPITAL.

Just a question about the guidance for the back half of the year.

Can you just bridge out what GAAP and non-GAAP adjustments you're going to exclude from the guidance in the back half of the year?

As we look at last year, I think there was about $19.6 million of non-GAAP adjustments in the operating profits, some of which, I think, were recurring -- didn't really seem like onetime like severance and inventory charges and marketing costs, et cetera.

So as you think about the guidance for the back half of the year, could you just give us maybe some insight in terms of what exclusions you're going to be excluding from your operating profit guidance?

Yes.

So for this year, we actually -- what we're saying was if we have any similar charges, we would exclude them from the guidance that we provided.

So from last year, and I don't have the documents in front of me, but on the back half of the year, we had a tax reform legislation charge that we took out in the fourth quarter.

We had a severance charge -- severance charges associated with Vision 20/20 that we took out.

We also had some categories that we exited, which were part of our Vision 20/20 that we removed from the back half of last year's earnings.

So again, I don't have the schedule in front of me of the exact dollar figure, but those were the charges that we took out of last year.

We were just really informing if there were similar charges this year, we will remove them to make them apples-to-apples.

Okay.

And so inventory markdowns are excluded then essentially?

Inventory markdowns, no.

We exited a few categories last year that we -- that is part of the inventory charge that we took last year as part of Vision 20/20.

Typical reserves that we take on the inventory are part of our normal earnings.

Yes.

But the revenue was -- so excluded the cost, but the revenue was included in your revenue, I believe, right, from the sell-in inventory?

If we sold some of the inventory that we would have exited, we would have included that as part of the revenue, yes, or if we just destroyed some of that inventory, then we would not have included it, obviously.

I mean, if you're going to exclude the cost of the goods sold, I believe you should also exclude the revenue as part of a non-GAAP adjustment.

I think just to clarify a couple of things.

Just...

(inaudible) of a former accountant, I guess.

As we went through Vision 20/20 last year, we took very discrete actions.

So we had major reductions in our staffing last year that we went through a reorganization.

That's the type of severance that was included, not every piece of severance that we would have and we would not exclude typical severance from this year.

It was just kind of the discrete, onetime reorganizations that we spent time on.

As well as the category exits were very specific exits based upon that plan.

And in most of those cases, it was a write-down of the inventory.

Inventory.

We may not have the sales of those inventories in that period.

Right.

So these were more discrete onetime.

We're not anticipating at this point those major expenses as we look at this year or so.

Got you.

And just in Q3 last year, there was also a charge for strategic consulting, which I believe was you engaged a marketing firm to look at pricing and promotion and [pattern of] performance.

So is that technically marketing expense, those excluded?

No, it was really a full -- we basically brought in an outside consultant as we were resetting Vision 20/20 to help us look through a complete review of the business in terms of how we wanted to put that plan together.

So it was definitely way beyond a marketing scope.

I wouldn't even say that marketing was an area that they spent a lot of time in.

It was more in a lot of the other areas of our business.

But it was really onetime as part of the Vision 20/20 strategy reset, rework.

Okay.

And last question, just on the tariff.

It's about -- I think about 65% of your sales are in China.

You're talking about a very modest kind of impact from a 10% tariff.

Can you just walk us through the assumptions?

I mean, are you assuming that you can take price to offset the rising costs in that $0.05 dilutive impact?

Or how should we sort of think about the bridge there of how we get to $0.05 of an impact to it or [$0.04 to $0.05 of impact]?

So the $0.04 to $0.05 of EPS impact would be if the tariffs went to a 25% rate.

And we're just looking at forward purchases that would happen in the back half of this year.

We wouldn't have any ability to really mitigate those tariffs for this current year.

So if it went to 25% rate, we're not looking at price increases.

That's just the pure additional cost that we would absorb that we would run through the P&L at 25% tariffs on the categories that we purchase through China.

If it was a 10% tariff, we expect it would be roughly be about $0.02 of impact this year.

And part of the reason why you're seeing a modest impact to the earnings this year is due to the fact that it's a short period of time and it's only a portion of our inventory.

If we get to the full tariff impact next year, the impact would be much more significant than what we're just seeing in fourth quarter, obviously, because we would have an annualization of that tariff.

Yes.

And then we're also -- obviously, we're working on ways to mitigate that.

So as we go forward, we're not going to give guidance for next year, focus on working ways to mitigate that absolute number.

At this time, there are no further questions.

I would like to turn it back over to our speakers for any additional or closing remarks.

Well, thank you for joining us today.

We look forward to speaking to you on our third quarter call scheduled for December 12.

At this time, that will conclude today's program.

We do thank you for your participation, and you may now disconnect.