Vera Bradley, Inc. (VRA) on Q1 2022 Results - Earnings Call Transcript
Operator: Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley first quarter conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today’s conference call is being recorded. I would now like to turn the call over to Mark Dely, Vera Bradley’s Chief Administrative Officer. Please go ahead.
Mark Dely: Good morning and welcome everyone. We’d like to thank you for joining us for Vera Bradley’s earnings call.
Robert Wallstrom: 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 pleased with our first quarter performance. We outperformed our revenue and earnings expectations. Consumer confidence, traffic and spending grew as vaccines became more widely available, government stimulus funds were distributed, and customers began returning to work, social events and travel. Ecommerce showed continued strength even with our stores full reopened. We experienced solid revenue performance on both a one-year and two-year comparison. Our first quarter consolidated net revenues increased 57% over prior year. On a two-year comparison, Pura Vida’s revenues grew over 40% versus the first quarter of fiscal 2020, and Vera Bradley comp sales were flat with fiscal 2020 first quarter results. As a reminder, Pura Vida’s first quarter revenue from fiscal 2020 was not in our consolidated revenue for that time period. We reduced our promotional levels, expanded our consolidated gross margin rate, and prudently managed our expenses. Our balance sheet remains strong with ample cash and no debt. Fiscal 2022 is off to a solid start as we enter the next stage of our company’s growth journey. Both of our lifestyle brands, Vera Bradley and Pura Vida, have growth opportunities ahead well beyond our core product categories, driven by a focus on digital first, innovation, and customer engagement. Before I turn the call over to John to discuss the financial results, I would like to highlight the appointment of Nancy Twine, founder and CEO of Briogeo Hair Care, to the Vera Bradley Inc. board of directors. In 2014, Nancy departed her position as VP at Goldman Sachs to officially launch Briogeo, a diverse line of carefully crafted clean hair care products. Today, Briogeo retails in over 3,000 prestige beauty stores globally, is one of the fastest growth hair care brads at Sephora, and is one of the largest independent Black-owned prestige beauty brands in the U.S. Nancy’s appointment, along with last year’s appointments of Kristina Cashman and Carrie Tharp, brings our female board representation to 60%. We are one of the elite 6% of public companies listed on the Russell 3000 Index with a gender-balanced board, as well as one of the just a few public companies with a female majority board.
John Enwright: Thanks Rob, and good morning. Let me go over a few highlights for the first quarter. The numbers I will discuss today are all non-GAAP. For complete detailed items excluded from the non-GAAP numbers I will discuss and the complete reconciliation of GAAP to non-GAAP numbers, please reference today’s press release. Consolidated net revenues totaled $109.1 million for the current year first quarter, an increase of 57.5% over $69.3 million in the prior year first quarter. Prior year revenues were adversely affected by COVID-19. Excluding charges, on a non-GAAP basis our consolidated first quarter net loss totaled $1.7 million or $0.05 per diluted share compared to a net loss of $10.2 million or $0.31 per diluted share last year. Current year first quarter Vera Bradley direct segment revenues totaled $66.7 million, and 81.2% increase over $36.8 million in the prior year. Since our stores were temporarily closed for approximately half of the prior year first quarter, a comparable store sales calculation related to the prior year is not relevant. For a better apples-to-apples comparison, comparable sales were flat to the first quarter of fiscal 2020. Vera Bradley indirect segment revenues totaled $15.3 million, a 35.9% increase over $11.2 million in the prior year first quarter. Pura Vida segment revenues totaled $27.1 million, a 27.7% increase over $21.2 million in the prior year first quarter. First quarter consolidated gross profit totaled $59.2 million or 54.2% of net revenues compared to $35.5 million or 51.2% of net revenues last year on a non-GAAP basis. The year-over-year improvement was driven by a shift in channel mix and more full price selling. On a non-GAAP basis, consolidated SG&A expense totaled $60.1 million or 55.1% of net revenues for the current quarter compared to $51.6 million or 74.5% of net revenues for the prior year first quarter. Prior year SG&A expenses and leverage were materially affected by COVID-19. On a non-GAAP basis, our first quarter consolidated operating loss totaled $1.2 million or 1.1% of net revenues compared to $16.1 million or 23.2% of net revenues in the prior year. Let me talk about our outlook for the fiscal year.
Robert Wallstrom: Thanks John. As a reminder for fiscal 2022, the four key growth drivers for our company are: one, driving our digital first strategy by evolving the digital distribution of our products and further refining and utilizing digital experiences to serve our customers. This will be supported by continuously refining our technology, developing business process and technology platforms to improve agility, database decision making, customer centricity, and speed to market. Number two, enhancing our product innovation pipeline, collaborations and category expansions to attract new customers and increase the share of wallet with existing customers. Number there, building our community through marketing and by creating an impactful positive brand movement that not only changes lives but deepens our customers’ brand loyalty. Number four, evolving our distribution channels by focusing in future growth opportunities and addressing the drastically changing retail environment in the consumer marketplace. Let me start with our Pura Vida business. We are off to a good start with total Pura Vida first quarter revenues up 28% over last year and up 44% over fiscal 2020. We look forward to a healthy summer and back-to-school season this year. In order to drive Pura Vida’s growth, we are continuing to expand our lifestyle offerings and to strengthen our infrastructure. We are in the midst of our Project Novus ERP integration at Pura Vida, which is schedule for completion this fall. At that point, our entire enterprise will be on a unifying technology platform and this will allow for enhanced capabilities in sourcing, customer service, CRM, and data analytics, among other areas. We have also strengthened key merchandising, inventory planning, and customer analytic functions at Pura Vida. Pura Vida continues to innovate on the product front a rapid pace. We are constantly adding new designs and elements to our jewelry collections and we have diversified well beyond our core traditional spring bracelets. Now about 50% of our ecommerce business is made up of non-spring jewelry categories which really underscores our brand’s broad lifestyle appeal.
Operator: Our first question today will come from Mark Altschwager with Baird.
Sarah Goldberg: Great, thank you. Good morning, this is Sarah Goldberg on for Mark. Thanks for taking our questions. It sounds like there’s a lot of exciting initiatives underway here, and definitely a strong start to the year. With regards to the revenue outlook, can you talk a little bit more about how you’re thinking about the shape of the year? Then the first quarter came in nicely ahead of expectations and we’re just trying to frame that within the magnitude of the guidance raise.
John Enwright: Yes, thanks Sarah. As you think about the revenue as we look out for the remainder of the year, it’s going to be fairly consistent to our historical averages when you think about the balance of the summer months and then the winter months being consistent with what we’ve done in the past. But we think we have an opportunity, as I spoke to in regards to our back-to-school season, which kind of crosses over between Q2 and Q3, we think there might be some pent-up demand there, as well as the travel season, we think there’s some opportunity there. As we look into the holiday season, we think ultimately there could be some benefit there as everyone gets back out and shops in the stores.
Sarah Goldberg: Great, and then secondly, you mentioned--you talked about M&A opportunities. I was hoping you could give us an update on what the acquisition pipeline looks like today.
Robert Wallstrom: Absolutely. In terms of real specific conversations on M&A, obviously we don’t comment too detailed, but we are actively in the market talking to people and looking at different opportunities, but we want to make sure that we are very prudent and really find the appropriate one over time. That’s probably the best update I can give you right now.
Sarah Goldberg: Perfect, thanks so much.
Operator: Our next question comes from Eric Beder with SCC Research.
Eric Beder: Good morning. Congratulations on a good start to the year.
Robert Wallstrom: Thank you.
John Enwright: Thanks Eric.
Eric Beder: Last year, you had--Pura Vida had some production issues and other pieces. Where is that right now, and do you have the flexibility now with Pura Vida to be even more aggressive in terms of some of the products, in terms of the production flows?
Robert Wallstrom: Yes, so last year--so currently we don’t have any production issues associated with the Pura Vida organization. Last year, it really impacted our second and into our third quarter. We have the flexibility now that we are able to go to--we’ve found different sources for the spring bracelet manufacturing that if we need to, we can go to those different sources, so definitely in a better place this year than we were last year.
Eric Beder: Great, and in terms of the Vera Bradley stores, last year you rolled out ReActive, this year you’re rolling out the recycled cotton. The push seems to be to a little bit younger customer, and obviously back-to-school flows into that also. How do you see--are you seeing the younger customer coming to Vera for a wider selection, and is that who’s being attracted here by the environmentally friendly products?
Robert Wallstrom: Absolutely. As we’ve been moving down the sustainability channel, we definitely have seen a younger customer being attracted by that, as well as all of the other activities that we kind of do through VB Cares. We have seen our core customers age in terms of kind of the fastest growing group, the one we’re targeting is really in that 25 to 35 year range, which is a significant change from the past, and I think it really underscores between all the collaborations, the sustainability, the new approach to marketing, the focus on social media advertising, influencers, all of that has made us more relevant with that millennial group.
Eric Beder: And let me just squeeze in one last question here - performance twill, what are you seeing with that? Are there any thoughts maybe to changing the cadence and rolling that out a little bit more than you roll out now?
Robert Wallstrom: In terms of performance twill overall, it’s definitely been a nice, solid performer for us. It’s definitely one of the categories that we see growing in the years ahead. We really think it fits a unique part of our customers’ lifestyle, right - it gives them the opportunity to wear Vera Bradley in new areas. It’s a little bit cleaner, it’s a little bit dressier than what our normal product is, so we’re getting a lot of good response with people being able to bring that more into the work environment, more out to dinner, and I think it expands our brand to a new customer. We think there’s real opportunity there.
Eric Beder: Great. Good luck for the rest of the year.
Robert Wallstrom: Thanks Eric.
Operator: Thank you. Our next question will come from Oliver Chen with Cowen.
Oliver Chen: Thank you very much. On your comments on traffic and store traffic, what are you seeing in full price-slash-malls relative to outlet, and how do you see this evolving relative to 2019? Do you expect a fair degree of volatility or for it to continue to improve over time?
John Enwright: Yes, so traffic is still down at a greater extent in mall traffic versus outlet traffic, and we do anticipate this year it’s going to be volatile. We would hope as vaccines continue to roll out, as people get out and get more comfortable going to malls, we would hope to see an improvement in the factory traffic first and then ultimately the mall traffic.
Oliver Chen: Okay, and on your comments on port congestion as well as the labor market, what’s within your control and what risk factors might there be as you plan inventory in this dynamic environment?
John Enwright: Yes, so what’s within our control is really looking at our future launches and making a determination on what we may need to air freight in, versus ship in. As you know, with many other retailers, ultimately there’s a lot of congestion at the ports, there’s a lot of container shortages, so we’re looking at our future launches and determining what is the appropriate level to air in versus what’s the appropriate level to allow to just ship in and look through that basis.
Robert Wallstrom: I think the other too that--Oliver, the only thing I was going to say too is that in addition to kind of managing the best we can, we’ve really tried to look at the whole design process start to finish in when orders are getting placed, because part of what’s happened is that we do not think that the port congestion is only for a few months. It feels like it’s going to be here for a while, so we’re really trying to look at the complete supply chain from design all the way through and give ourselves a little bit more space, because things are just going to take more time in this environment and be less reliable.
Oliver Chen: Rob, on that topic regarding pricing and inflation, it’s a major industry and sector driver right now. How do you see your pricing leverage and/or average unit retails in the Vera Bradley brand evolving, whether that be mix or like-for-like?
Robert Wallstrom: Yes, I think that’s something that we definitely are evaluating and looking at in terms of we want to be careful, because we think that we have an important position from a pricing standpoint, so there might be some opportunity in pricing but we want to make sure that we don’t raise prices too fast. But we definitely are watching the environment. I think at Pura Vida, we’re also taking a look at the pricing environment and what the opportunities might be on that side of the business, but we definitely are kind of watching these inflationary pressures for sure.
Oliver Chen: Okay, and on the digital road map, you gave a lot of great innovation factors. What would you say is lower hanging fruit, and/or will impact the financial modeling most substantially in the priority list?
Robert Wallstrom: I think on the digital side, there’s probably a couple key pieces. One, the data analytics and the targeted marketing, customer journey reactivation, really owning our customer data particularly at the Vera Bradley brand, having first party data I think becomes super critical not only today but as we’re moving through the iOS updates, the pending Google updates, and we think that will be really critical to continuing to grow our direct own digital. And now, we’re working with Pura Vida to move them quicker along that paradigm because they haven’t been as focused on first party data, so that’s part of the marketing push right now.
Oliver Chen: Okay, and final two questions. On Pura Vida, if you had a view of the non-jewelry revenue percentage over time, is there any way for us to dimensionalize what could happen to that over time given that it’s a powerful lifestyle brand? If you could elaborate on thredUP, why that partnership made sense, why now, and what are some of the key synergies you expect that from deal. Thank you.
Robert Wallstrom: With Pura Vida with the launch of apparel and backpacks, we’re seeing some really nice early results. Obviously those collections are limited, but we’re learning a lot about the customer, what she’s responding to, sizing, and we definitely think that really building up Pura Vida from a lifestyle brand over multi years just provides some real significant opportunity, because I think that Pura Vida can become much more balanced instead of just so heavy on the jewelry category. I think there’s significant opportunity long term as we build out those categories. In terms of thredUP, there were really a few reasons why we did the thredUP partnership. One is really continuing, as the customer continues to be more focused on environmental, it give us an opportunity to lean into this upcycle environment. Two, the ability for customers to kind of clean out their closet, because we definitely know a lot of our loyalists have a lot of Vera Bradley product, so hopefully they can open up some space, use those gift cards to repurchase again and buy into the newer Vera Bradley product. We think that provides another opportunity for stimulation of future revenue. But you know, it’s a new program for us. We just launched it, we’ve been pleased with the early results, and we’ll just see how it scales over time.
Oliver Chen: Thanks Rob, and on the sustainability front, what should investors focus on and what will you measure as important, and from another angle, what do you think customers care about the most as you think about a new generation of customers that care about this topic and mission and purpose a lot?
Robert Wallstrom: Yes, I think a couple different ways to answer that. One is just under the environmental side. We started down the environmental path really by focusing on what we felt would have the biggest impact, which was fabrications, and we felt, one, that that could have the biggest impact short term on the environment, being a good corporate citizen, but second of all, it was a way to really position Vera Bradley more in the forefront of what’s going on out there addressing the environmental needs, and we’re seeing a younger customer respond to that, so I would encourage everybody to kind of watch as we continue to move more fabrications to the sustainable platform becomes really important. But we’re not stopping there, right? We have a team focused on how do we continue to address environmental issues - water scarcity, supply chain, zero emissions, so expect more details coming out over the next year as we continue to lay out our plans there. But simultaneously, I think as important, if maybe not even more important to our customer base is the social impact. As we’re looking how important the charity bracelet program is to Pura Vida, the impact of the charity on the apparel business at Pura Vida, everything that Vera Bradley has done over the years from the foundation to Blessings in a Backpack, we really think that this younger customer really expects brands that they want to be part of, and brands part of the community to have a very strong social as well as environmental positioning, so that’s how we’re looking at this. But our whole purpose ESG program is critically important to us, and we’re going to continue to invest time and resources to build that out and really become an industry leader in this category of purpose.
Oliver Chen: Thank you, and best regards.
Robert Wallstrom: Thanks Oliver.
Operator: Thank you. Once again, if you would like to signal with questions, please press star, one on your touchtone telephone. Again that is star, one if you would like to ask questions. Our next question comes from Steve Marotta with CL King & Associates.
Steve Marotta: Good morning Rob and John. I have a follow-up on two topics that we’ve already touched on. The first is from a sourcing standpoint, can you remind us where you are geographically, maybe as a percent of the total, and as a follow-up there, are there opportunities maybe to shift some of that production to non-port related geographies, like Mexico or Central America?
John Enwright: The majority of our product is out of Southeast Asia for the Vera Bradley brand - call it 15% is out of China, the remainder is out of whether it’s Myanmar, Cambodia, Indonesia. Those are the main countries that we’re out of, and right now we’re looking for opportunities, other opportunities where we could source our product, but in the near term it will likely be out of Southeast Asia.
Robert Wallstrom: And then Pura Vida is the opposite, right - the majority of it is in Central America, so we don’t have the same port issues with Pura Vida that we’re having with Vera Bradley. Also with Pura Vida, even stuff that’s coming out of other parts of the world, since a lot of it is jewelry product, it’s easier to air in and kind of get around the port issue.
Steve Marotta: Great, that’s very helpful. As far as acquisitions go, can you talk a little bit about the availability currently versus, say, two years ago? Would you say that there are more or fewer, and maybe also comment on multiples being asked higher or lower? I could see they’re maybe being higher given that they’re two years away from, say, ’19, but on the other hand maybe lower because they might have been a little financially distressed coming out of the pandemic. Obviously not looking for specifics, but if you could maybe just talk about availability and current valuations.
Robert Wallstrom: What I would say is obviously valuations are tricky, right - every company is different, the environment is very different based upon each individual one, so that’s hard to comment because there’s a pretty wide range out there. What I would say, though, that we’ve seen is maybe more interest in direct-to-consumer companies coming out earlier than in the past, so there is more companies that are in earlier stages that are coming to market that maybe we saw two years ago. That’s probably the biggest difference that I would see right now. There’s still definitely opportunities that are sitting out there, it’s just really making sure they’re the right fit for our company.
John Enwright: Yes, I would only add that I think versus two years ago, when we were looking for our first acquisition, I think there’s more activity or more inbound activity with us now that we’ve completed our first acquisition, so I think if you’re just looking apples-to-apples for Vera Bradley, there’s probably a little bit more activity--
Robert Wallstrom: Or deal flow, yes.
Steve Marotta: That’s super helpful, thank you.
Robert Wallstrom: Thanks Steve.
Operator: Our next question comes from Dana Telsey with Telsey Advisory Group.
Dana Telsey: Hi, good morning everyone. Last year, masks were an important part of revenue and you mentioned that in the second quarter, they contributed over 10% of Vera Bradley sales, around 300 basis points in gross margin. How do you frame it for the rest of the year, or was the second quarter the most impactful?
John Enwright: Yes, so as you think about last year, the second quarter was the most impactful and it was still impactful for the third quarter, and then it kind of--it went down into the fourth quarter. But definitely from a percentage of total and percentage of gross margin, it definitely was the most impactful quarter.
Dana Telsey: Got it, and then as stores are reopening, what are you seeing happening to your online sales, and from the customers that you picked up from online, how are you keeping them within the network?
Robert Wallstrom: Well, I think a couple things. I think one, what we’re seeing is as stores have opened, that the early read on ecommerce was a lot of holding of that ecommerce volume, which was great to see. As we’re looking at our business, whether it’s about masks, whether it’s about ecommerce, we are definitely very focused on the two-year stack because obviously there’s a lot of peaks and valleys as you look at last year and what happened. But we’re really kind of looking at it on a two-year stacked basis and we expect to have really strong ecommerce growth. Our customer engagement is still strong across all of the channels, but it is exciting to begin to see some movement back to stores because we do think that having that omnichannel environment, that holistic ecosystem is really important long term for just brand loyalty, so it’s going to be fun to watch the summer months as customers continue to travel and back to school. I think that what we saw industry-wide in first quarter was this really strong pop in apparel as everybody got out of their house and got prepared, and they hadn’t bought spring clothes last year, a nice pop in apparel. We’re hoping as we get into the summer months that we could see travel even begin to accelerate more and back to school accelerate. Those will be key times for not only the Vera Bradley brand but also the Pura Vida brand.
Dana Telsey: Got it. Then just as you think about the operating margins of the direct business and the indirect business, what do you see as the cadence of indirect or direct and the factors behind it for each of the operating profits of those channels?
John Enwright: As I think about some of the headwinds we have, it’s really going to be associated with the logistics side of the business and making sure we have the appropriate product to sell, and there will be some headwinds associated with just getting product here that we may not have in years past. But as you think about it, I think we have opportunity in the second quarter, as Rob just indicated in regards to the hope associated with the travel and the back-to-school season. As we kind of come up on those months, we think there’s opportunity there to drive sales, which will get leverage and drive operating performance there from a Vera Bradley perspective, but also in Pura Vida. Pura Vida does a nice business from a back to school, from a customized bracelet perspective, so we think there’s opportunity there.
Dana Telsey: Thank you.
Operator: Thank you. That does conclude the question and answer session. I’ll now turn the conference back over to Rob Wallstrom for closing remarks.
Robert Wallstrom: Thank you. Our forward-looking strategy is to be a purpose drive, multi-lifestyle brand, high growth company. We have an extraordinary culture, an exceptional team, loyal customers, and a vision for the future. Our strong cash position, debt-free balance sheet, and ability to generate free cash flow will allow us to continue to invest in our two powerful brands and to seek out appropriate acquisitions of other comfortable, affordable, purpose driven, digitally native brands similar to our successful Pura Vida acquisition over time. We have an exciting future ahead and we look forward to creating value for all of our stakeholders. In fiscal 2022, we expect to deliver double-digit revenue and operating income growth over both fiscal 2021 and fiscal 2020 performance. Thank you for your time and interest in Vera Bradley Inc. We hope you can join us for our second quarter call on September 1.
Operator: Thank you. That does conclude today’s conference. We do thank you for your participation. Have an excellent day.
