Vera Bradley Inc (VRA) 2019 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Vera Bradley Third Quarter Fiscal 2019 Earnings Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Marc Dely, Chief Administrative Officer.

Please go ahead.

Good morning, and welcome, everyone.

We'd like to thank you for joining us for Vera Bradley's third 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 will now turn it over to Vera Bradley 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.

During the quarter, we continued to successfully execute against our Vision 20/20 strategy.

We've lowered our clearance selling by over 70%, and our full-price business, once again, grew by double digits over last year.

We are pleased with our year-over-year third quarter gross margin rate improvement of 170 basis points.

Third quarter earnings were modestly below our expectations, primarily due to revenues at the low end of our guidance and a gross margin rate that was slightly below our guidance.

Higher-than-expected shipping costs offset some of our margin expansion, which brought our overall margin rate modestly under guidance.

SG&A expenses were in line with expectations.

As we dramatically adjusted the level of clearance on verabradley.com and in our full-line stores, we expected that sales performance this year could be a bit inconsistent.

While softer-than-expected October sales affected third quarter performance, we were pleased to see strong performance over the Black Friday weekend and on Cyber Monday, particularly as we focus more on full-price sell-in and less on clearance.

Customers responded to our simplified and more impactful promotional messaging and our focus on key items over the holiday weekend.

In our factory stores, we have not been as promotional as some of our peers, which has negatively impacted sales.

In the indirect channel, as expected, our department store, third-party liquidation and other key accounts were also affected by lower levels of clearance product.

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

We have made excellent progress over the last 9 months.

As I just noted, we reduced clearance activity on verabradley.com and our full-line stores by over 70%.

We also increased our full-price selling in these channels by approximately 20%.

Product innovation and newness are driving our brand appeal.

We have meaningfully reduced SG&A expenses and cost of sales through diligent management and implementation of Vision 20/20 initiatives.

We have increased our year-over-year cash and investment balances by over $20 million to $131.6 million while repurchasing 11.1 million of common stock.

Our customer count remains down slightly from last year, primarily due to reduced clearance activity, which is what we expected.

In addition, continuing traffic issues in the factory channel are putting some pressure on our customer count.

We are happy, though, that the customer count in our full-line stores and on verabradley.com is exceeding our expectations, and a higher percentage of new customers are continuing to enter the brand through full-price purchasing.

Now I will turn the call over to John to review the third quarter results and outlook for the fourth quarter.

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 are non-GAAP and exclude previously disclosed store impairment, severance, consulting and other charges.

Current year third quarter net sales of $97.7 million were at the low end of our guidance range of $98 million to $103 million.

Prior year third quarter net sales totaled $114.1 million.

Remember that Direct segment revenues reflected the movement of approximately $6 million to second quarter this year from the third quarter last year related to the timing of the promotional events.

For the current year third quarter, we posted net income of $4.2 million or $0.12 per diluted share compared to $8.3 million or $0.23 per diluted share before charges last year.

The promotional event shift I just mentioned equated to a year-over-year third quarter reduction in the PES of approximately $0.07.

Third quarter Direct segment revenues totaled $73.5 million, an 11.7% decrease from $83.2 million in the prior year.

Comparable sales, including e-commerce and the event shift, decreased 16.5% for the quarter, which was partially offset by new store growth.

Excluding the event shift, we estimate comp sales would have declined about 9.5%.

As expected, third quarter comparable sales, particularly those at verabradley.com, were negatively impacted by the previously mentioned reduction in clearance activity.

Full price selling at the company's full-line stores and on verabradley.com increased by double digits in the quarter.

Indirect segment revenues totaled $24.2 million, a decrease of 21.7% from $30.9 million in the prior year third quarter, reflecting a reduction in orders from both specialty accounts and certain key accounts as well as a smaller department store presence.

Third quarter gross profit totaled $57.2 million or 58.5% of net sales compared to a non-GAAP gross profit of $64.8 million or 56.8% of net sales in last year's third quarter.

The year-over-year 170-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, channel mix changes and a reduction in product costs.

Gross margin was modestly below guidance of 59% to 59.2%, primarily due to higher-than-expected inbound shipping costs.

SG&A expense totaled $51.9 million or 53.1% of net sales in the current year third quarter compared to non-GAAP SG&A of $52 million or 45.5% in the prior year third quarter.

SG&A expenses were within the guidance range of $51 million to $53 million.

Operating income totaled $5.3 million or 5.5% of net sales in the current year third quarter compared to non-GAAP operating income of $13 million or 11.4% of net sales in the prior year third quarter.

By segment, direct operating income was $14.3 million or 19.4% of net sales compared to non-GAAP operating income of $17.6 million or 21.2% of net sales in the prior year.

Indirect operating income was $10.1 million or 41.6% of net sales compared to non-GAAP operating income of $12.2 million or 39.6% of net sales in the prior year.

Now let me turn to the balance sheet.

Net capital spending for the third quarter and 9 months totaled $700,000 and $6.6 million, respectively.

We expect to spend about $8 million this year in CapEx, lower than our original estimate of $10 million, principally due to timing.

Cash, cash equivalents and investments at quarter end totaled $131.6 million compared to $108.1 million at the end of last year's third quarter.

We have no debt outstanding at quarter end.

Quarter-end inventory was $96.3 million compared to $100.1 million at the end of last year's third quarter and within our guidance range of $90 million to $100 million.

Subsequent to quarter end, we completed our $50 million share repurchase plan.

And during our most recent board meeting, the board authorized a new $50 million authorization that expires in December 2020.

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

There are 3 things to keep in mind as I review our outlook.

First, 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 estimates would also exclude any potential similar charges, although there are none expected at this time.

Second, the aforementioned fourth quarter and fiscal year guidance includes an approximate 40-basis-point impact to gross margin equating to $0.01 per diluted share from the incremental 10% tariff on specified goods in China that went into effect in September 2018.

And third, the prior year fiscal year contained an extra week.

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

For the fourth quarter, we expect net sales of $114 million to $119 million compared to prior year fourth quarter sales of $132 million.

The decline is largely driven by reduced clearance sales.

We expect Direct segment net sales to be down in the low to mid-teen percentage range compared with prior year, including a comparable sales decrease, including e-commerce, in the low to mid-teen percentage range.

We believe our Indirect net sales will be approximately flat with the prior year's fourth quarter.

We expect fourth quarter gross margin will be between 56% and 56.5% compared to last year's non-GAAP rate of 56.3%.

Factors expected to improve the year-over-year rate, such as improved full-price selling, a higher percentage of made-for-factory products sold within the factory channel and operational savings, are expected to be at least partially offset by increased China tariffs and increased inbound shipping costs.

SG&A expense is expected to range between $53.5 million and $55.5 million compared to last year's non-GAAP SG&A expense of $57.1 million.

Keep in mind that we are now anniversarying the Vision 20/20 SG&A savings reductions that began in the third quarter of last year, so we are not seeing SG&A reductions as significant as we realized through the second quarter of this year.

We expect our fourth quarter diluted EPS to be $0.22 to $0.25.

On a non-GAAP basis, adjusted net income was $11.8 million or $0.33 per diluted share in the prior year fourth quarter.

We expect inventory to be in the $90 million to $100 million range at fiscal year-end compared to $87.8 million at last year's fiscal year end.

As a reminder, the majority of our Vision 20/20 product and pricing initiatives are implemented this year, and we believe these changes will negatively impact year-over-year annual sales by $38 million to $43 million, which is reflected in our annual revenue guidance of $412 million to $417 million.

This compares to sales of $454 .6 million last year.

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

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

Gross margin for fiscal 2019 is expected to increase to a range of 57.1% to 57.3% 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 cost and operating efficiencies.

We expect SG&A expense to total between $210 million to $212 million for the year compared to $221.4 million last year.

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

We have narrowed our full year diluted EPS expectations to range from $0.57 to $0.60.

Before charges, non-GAAP diluted EPS totaled $0.60 last year.

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

Rob?

Thanks, John.

Allow me to make a few comments about product, marketing and our distribution channels.

First, product.

Through our DNA work, we have analyzed our historical pattern performance determining the characteristics of our most successful prints, and we are continually refining and updating this process.

We have implemented tightened guardrails around categories, patterns and pricing, and everything we offer must reflect our signature attributes of comfortable, casual and affordable.

The product development and design teams are charged with designing and bringing to market on-trend products and patterns that fit these criteria and that cater to our traditional but modern customer.

Solids and our signature patterns of florals, paisleys or medallions resonate most with our customers, and our overall pattern and assortment performance is becoming more predictable and consistent as we mix art and science.

We are very focused on our top 10 styles, which represent 30% of our revenues.

Third quarter revenues generated from the top 10 group exceeded both planned and last year.

We have also moved from category exits like jewelry and fragrance to strengthening our core category dominance in franchises like travel and Back to Campus.

New fabrications and styles are adding to this dominance.

As you know, Back to Campus is a key selling period for Vera Bradley, and it was very successful this year with our thoughtfully curated backpack offering and a myriad of coordinating accessories.

We also excluded all of our Back to Campus backpacks and lunch bags from our clearance assortment and our full-line stores and on verabradley.com during the selling period, and we saw a double-digit increase in full-price sales and maintained our solid position as one of the top 3 women's backpack companies in the country.

Our Back to Campus efforts were supported by robust campus activation program, where we visited 11 large universities on key days like Game Day Saturdays or during Homecoming Week and, with the help of our on-campus Vera Bradley brand ambassadors, gave away over 8,000 backpacks, throws and other favorites to students.

On-campus social media helped create a lot of excitement around the events in our brand.

We continue to strengthen our existing licensing relationships.

For example, this fall, we expanded distribution of stationery to Staples and added health care apparel into Mark's Canada, one of the largest health-care apparel retailers in Canadian market.

We will also continue to look for appropriate brand extensions through additional licensing opportunities like our loungewear collection that will be introduced in the spring and our soft bath collection that will debut next fall.

As we discussed last quarter, we collaborated with Disney Theme Park Merchandise to create a limited-edition novelty pattern called Mickey’s Paisley Celebration.

This launched in early September exclusively in our #1 volume Disney Springs full-length store and sold out in just 4 days.

We are back in stock for the holiday season.

There are even more product collaborations on the horizon.

Stay tuned.

Late in the third quarter, we launched customization, where our customers can design their own duffel, triple-zip hipster, tote or shoulder bag by mixing and matching 12 patterns and 3 solids, creating an embroidered personal message inside the bag or adding fun patches.

We have had personalized monogram and in place for some time, but customization takes personalization to a whole new level.

While customization is a new initiative for us, early results are very encouraging.

Customers are very positive about both the experience and the product.

Customization gives our customers a reason to visit verabradley.com and is a great opportunity to learn from them about what they would like to see in product design.

Please visit our website and check out the personalization and customization process.

We have made great strides in dramatically reducing the clearance activity in our full-line stores and especially on our digital flagship verabradley.com.

Moving the majority of our remaining clearance business to our Vera Bradley Online Outlet flash site and transitioning to a more full-price selling model in verabradley.com has been key.

The flash site allows us to sell through our clearance merchandise in a much more discreet manner.

We will continue to monitor its performance and manage the discount rate to optimize revenue.

This reduced level of clearance activity, combined with other efforts in sourcing and distribution, has enabled us to substantially improve gross margin this year.

We have a very experienced global sourcing team, adept at reacting to trends and negotiation.

Like most retailers, China tariffs continue to be a concern for us.

While companies have been given a 2-month reprieve, until March 1, on the increase to 25%, we have been aggressively working to mitigate the potential impact.

We are decreasing our reliance on China and increasing production in countries like Vietnam and Cambodia.

At the end of this year, our production in China will be about 57%, but dropping to about 25% next year.

In the marketing area, we continue to increase brand awareness with our Digital First strategy, with a focus on targeted digital efforts and social media engagement.

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

During the quarter, our Blessings in a Backpack program provided 25,000 at-risk children with the tools they need for a successful school year.

Fun backpack giveaway events were hosted by well-known personalities in several cities, including Sarah Michelle Gellar in L.A.; Olympic gymnast, Shawn Johnson, in Chicago; and country music star, Jason Aldean, in Nashville.

It has been amazing to see the impact this program has had on the communities we serve.

And these events garnered over 500 million media impressions during the third quarter, a record for us.

On the storefront, we now expect to close 10 full-line stores this fiscal year.

We closed 7 stores in the first 9 months, ending the third quarter with 102 full-line locations.

We expect to close approximately 30 additional stores in fiscal 2020 and '21, primarily as leases expire.

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

We are also beginning to experiment with various store formats.

For example, in September, we opened a small pop-up store in Union Station in Washington, D.C. We have been able to cater our assortment to the tourist and commuter population and has been a great way to capture new customer e-mails.

We are also looking -- we also took a struggling full-line store located in the Del Amo Fashion Center in Torrance, California, then customized the assortment to the demographics and customer purchasing trends of the store, with travel and leather 2 huge areas of emphasis.

In the last couple of months, conversion and comps are up, and this happened solely by focusing on the localized assortment and with no incremental marketing investment or store design changes.

We will continue to monitor Del Amo's results, and if successful, we will test the concept in additional stores early next year.

At the end of the third quarter, we operated 57 factory stores, which includes 6 new factory openings this year.

Each of the new locations are in high-traffic tourist locations and, in aggregate, continue to exceed our expectations.

In the indirect side of the business, Amazon is continuing to show strong growth.

We are seeing some recovery in the specialty channel as we just completed our early order period, where retailers placed orders for next spring and summer, and the sales results exceeded our expectations.

We were very pleased that Giftbeat, the premier trade publication serving the gift industry, voted Vera Bradley as the vendor of the year for 2018, an award given to the vendor that contributed the most to their reporting stores' bottom lines.

By executing Vision 20/20, our business and brand continue to become much healthier.

And our customers are responding.

We are creating a solid foundation for future operating performance improvement and the growth of our business.

Our talented teams, strong brand, loyal customers, exceptional balance sheet and Vision 20/20 strategic plan continue to 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 with Baird.

It looks like the full-price selling rate decelerated a little bit in the quarter.

I was hoping you could talk about some of the drivers there, just what you're seeing in terms of traffic versus conversion relative to Q2.

And it seems like October maybe was particularly tough, but things have recovered quarter-to-date.

So just as you hindsight the quarter, any sense of perhaps what drove that air pocket in October?

Absolutely, Mark.

Thanks for the question.

You're absolutely right that in October we definitely saw a softness in the business overall.

So we had a very strong August and September; October slowed down.

The business bounced back as we headed into the holiday season, which was kind of in the guidance that we've laid out.

But if you think about the full-price selling, we were still very happy with the performance overall in third quarter, still up double digits.

Really where the drivers were is during the quarter, back -- our Back to Campus business continued to be very strong.

What happened to us in October is we don't have a big key driver since we don't have a cold-weather business.

But our big drivers are during Back to School, during beach, during gift, and October was a little bit of a lull.

So we did see a slowdown in full-price in October, but overall still very strong full-price selling and much stronger than we had anticipated as we launched Vision 20/20 in the beginning of the year.

So we continue to feel very, very good about how our full price has trended.

That's great.

And then pivoting to holiday and even into fiscal 2019, I mean, if the clearance mix has really been cleaned up relative to what consumers saw last year, product development appears to be in a good spot.

So I mean, do you feel this $412 million to $417 million in revenue is kind of a sustainable base for the business moving forward?

And what do you really see as key drivers to growing the brand off of that level?

Yes, a couple things.

I think, one, obviously, we haven't given guidance yet for next year.

But our expectations are, as we move forward in Vision 20/20, we have laid out that this was the year that we would be reestablishing kind of the foundation, and we would expect to move into modest growth next year and see that continue to increase as we move through the execution of Vision 20/20.

So we still are on that same set of assumptions as we move into next year.

And obviously, we'll clarify that more as we get into next year's guidance.

If we talk about how do we see the brand growing, first of all, we believe that the consistency in the product that we begin to see this year is really key to get the organic customer growth just more solid and continuing to grow.

We believe the franchises that we're dominant in, in Back to School, in travel, in beach, in gifting are going to be the areas that we'll continue to build on.

And then for the brand overall, too, we continue to find these opportunities in new merchandise categories of how we can continue to expand the brand.

As we move into next year, you'll hear a lot about our initiatives, particularly as it relates to how we grow our e-commerce business and return back to a growth status.

We look forward to sharing those with you in the March call.

That's really helpful.

And one last one from me if I could, it sounds like the factory channel does continue to see some pressure.

I'm wondering how much of that you think is structural versus cyclical.

And just in that context, the factory channel is the one area where you have been comfortable opening doors on a net basis.

So just wondering whether there's been any change to your thinking to that strategy just given the continued traffic and promotional pressures you're seeing there.

Great question, Mark.

I think the factory one is the one.

As we went through this year, we had been kind of watching the marketplace a little bit and watching our competitors in terms of how they were handling pricing in the factory channels.

We were hoping that we would see the level of discounting begin to become less as we moved through the year from our peers.

We have not seen that.

And that has definitely had a negative impact, we believe, particularly on our traffic as well as our sales levels.

So that is something that, moving into next year, we're taking another look at and rebalancing what should be the promotional activity.

We still believe we have the power to move the customer and move the sales line if we use the promotion a little bit stronger.

So we'll have more to share with that as we finalize our plans for next year.

But we are watching the channel as a whole.

But we do believe long term that the outlet channel still provides a great opportunity for a base business and opportunity to pick up a new customer and a highly profitable channel for us.

So we haven't really changed our thinking on that.

We'll take our next question from Steve Marotta with CL King & Associates.

Just wanted to ask also regarding next year, and I know you haven't given specific guidance, but with the exception of the store closures that been executed this year and the ones that are expected to next year, are there any other internal initiatives that you would expect to pressure sales?

In other words, this year, obviously, was a big year to reduce the promotional activity and increase full price.

Is there any other additional dynamic that you see in the windshield, again, from an internal initiative standpoint, with the exception of the store closures that would negatively affect top line next year?

The biggest one would be the store closures.

So that's absolutely one of them.

The other one is if you remember as we laid out Vision 20/20 and we talked about reducing clearance activity, we said that we would do it kind of over a 3-year period, with the vast majority of it being this year.

So we still have a little bit of clearance.

We haven't put the exact numbers around, but we're not expecting that to be a highly material amount, maybe about 1% of sales, 1% to 2% of sales next year in terms of still taking a little bit of residual clearance activity out.

So those would be the 2 headwinds.

But we're really feeling that the amount of headwinds is really beginning to dissipate from internal activity and really setting us up with a much solid -- much more solid foundation to grow from.

So again, we're really looking forward to trying to pivot back to a growth well over next year.

Sure.

And then just one follow-up question regarding cadence of patterns to be introduced.

Is there any expected changes next year versus this year?

Or maybe not just patterns but also product categories and how you view freshness versus, again, what was exhibited during the current fiscal year?

Sure, Steve.

A couple of things.

I think, one, from what we'll call core pattern launching, we don't see any major changes to next year.

So we basically have been launching about one pattern per month, which we think is generally the right cadence.

We have seen in the marketplace, though, an opportunity to do what I'll call tomorrow more micro launches, so some opportunity to do some very quick in-and-out type of launches.

So we continue to look at that.

We're seeing interest in results as we go down the collaboration path and what are some really micro collections to create excitement.

So yes, I think you'll see more of that happening next year.

The other thing that you're going to begin to see as we talk about product launches next year, we have focused a lot on pattern.

So if you think about our website experience, our e-mail experience, a lot of newness is about the new pattern.

I think you're going to see us begin to mix that up a little bit and really begin to talk about new product, too.

So it's not just about the pattern, but actually about the product itself, the shape, the function, the purpose, because we're really seeing the customer respond even stronger to what I'll call product introduction as opposed to just pattern introduction.

So that's another way that you'll begin to see a little bit of change next year.

But overall cadence, I would expect it to be very similar to this year.

(Operator Instructions) We'll move on to Oliver Chen with Cowen and Company.

The details were really helpful.

So on an overall basis, when revenues did come in at the lower end of your expectations, which channels did you articulate had the most opportunities?

And as you think about fortification of your assortment, what are your thoughts in terms of what you can do just to try to mitigate volatility in the face of weather as well?

Thanks, Oliver.

I think if you look at the channels that had the most pressure in third quarter, first of all, they -- a lot of it all relates to what we've been going through in terms of clearance reduction.

So first of all, in the indirect channel, as we continue to reduce clearance activity, we've seen some pressure in our indirect channel, because there's some of those businesses that were using clearance as volume drivers.

So we saw a little bit of pressure in the indirect channel around a lack of clearance activity.

And the second one that we talked about is what's been happening in factory.

Just as the industry continues to be very promotional and we have not jumped deep into that game, we saw pressure there.

Those are the 2 areas that I would say we experienced the most pressure in.

As we think about going forward, one, just getting through the anniversarying of this clearance reduction is going to be great to see.

So we're getting close as we come out of this year, we move into next year, we kind of have a nice, clean foundation.

We think that's going to be the #1 thing to help us.

Two, we're going to be taking a look at our promotional activity and factory and make sure that we're taking the right approach there.

From a product standpoint, really what we're going to do is continuing to look month-by-month in how we really build demand around core products.

So we're going to continue to lean in and really build out what we're known for, our Back to School business, our beach business, our travel business, and then really look at October and how we take probably one of the more challenging ones for us and really create some demand there.

So there'll be more that we'll be talking about as we come to you next year.

Okay.

And you've been articulating this prudent plan around the brand and product.

As we link this plan to merchandise margins and our long-term views on merchandise margins, how would you prioritize the key drivers for steady improvement in the merchandise margin line?

I think 2 things.

One, obviously, this China tariff issue is a little bit of an unknown.

So I want to just make sure that I don't forget to mention that.

So that, obviously, could be putting some pressure against that margin line.

Outside of that, what we're doing is a few things: one, continuing to clean up clearance activity, continue to drive full-price selling, which will obviously be a margin enhancer.

We believe long term that we'll continue to outperform in our direct-to-consumer business, which will also be a margin enhancer.

And our sourcing team has really done a very good job of continuing to find ways of squeezing cost out of product cost from both just the product itself, from the design, from the sourcing, from the negotiation standpoint as well as just out of the complete supply chain.

So I expect that we're going to continue to push savings through cost of goods, continue to sell more at full price and continue to move more into direct consumer, that those will be the primary drivers.

Okay.

And Mark asked a helpful question about factory.

Factory's been a multiyear interesting channel with respect to being a tough environment and promotional despite what's a healthy consumer environment in our view.

So what will happen in factory over time?

And what are your expectations around how competition may behave?

It feels like even though we're anniversarying promotional activity, there could be continued pressure there and incoming tourism flow could be a risk factor as well?

Yes, I think couple of things.

I think, one, we look at the factory channel as a solid profitable channel, but not a robust growing channel, one.

Two, we do expect promotional activity to not get lighter.

And so we've been -- I would say, we've been hoping, as we went through the reset this year, it would get lighter later.

I think as we're making our plans for next year, we're going to make the assumption it's not going to get lighter, and we're going to react appropriately to that.

I think, for us, tourism is an interesting one, right, because our tourism business is driven more domestically.

So we do stronger from a domestic tourism business.

Our #1 factory store is in Sevierville.

So for us, as we look at tourism, it's a little bit different than the international markets, and we don't have the same exposure that some of the other brands do to the international tourism.

So that risk is not high for us.

We see the domestic tourism market continuing to be very strong.

And lastly, on your overall pricing architecture across your existing portfolio, how are you feeling in terms of the consumer reception of pricing and the opportunity ahead and as that applies to both like-for-like and as you think about your business mix evolution?

Would love your thoughts on elasticity and what you see ahead.

It's a great question, Oliver.

I think, first of all, we have been pleasantly surprised this year at a few things that we've done that there appears to be a little bit more openness from our consumer to allow the prices to move up as long as there's great value in the product.

So a great example we have of that is within the backpack category.

First of all, we've launched one of the most expensive backpacks we've ever put out in the market, a $160-plus Journey Backpack that did exceptionally well, which when we put that in market, that was a real test for us.

We weren't sure that our consumer would give us that space from a pricing standpoint, but she did.

At the same time, we launched a low-end backpack feeling that were our backpacks starting to get a little bit too high?

And so we did kind of a more simplified version of our Back to Campus backpack, and that was dramatically below our expectations.

So to us, it really showed that our consumer's really valuing what we're putting into the product, and there's probably room to continue to innovate and push on pricing.

And as we look at next year, we do believe there's probably a little bit of opportunity in pricing, both in how we're looking at pricing across all of our product categories.

So we would expect some moderate price increase as we go into next year.

(Operator Instructions) And we have no further questions in the queue.

I will turn the call back over to Robert Wallstrom for any closing remarks.

Well, thank you for joining us today.

We look forward to speaking to you on our year-end earnings call scheduled on March 13.

And once again, ladies and gentlemen, that concludes today's conference.

We appreciate your participation today.