Good day, ladies and gentlemen, and 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 Mark 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'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. During the quarter, we continued to successfully execute against our Vision 20/20 strategy, we 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 focused more on full-price selling 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 four 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 excellent progress over the last nine months. As I just noted, we reduced clearance activity on verabradley.com and in 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, the direct segment revenues reflected the movement of approximately 6 million to the second quarter this year from the third quarter of last year related to the timing of 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 diluted EPS 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 of verabradley.com, were negatively impacted by the previously mentioned reduction in clearance activity. Full-price selling in the company’s full-line stores and on verabradley.com increased by double digits 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…

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 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 plan 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 in 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 in a myriad of coordinating accessories. We also excluded all of our back-to-campus backpacks and lunch bags from our clearance assortment in 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 three women’s backpack companies in the country. Our back-to-campus efforts were supported by our robust campus activation program where we visited 11 large universities on key days…

Thank you. [Operator Instructions]. We’ll take our first question from Mark Altschwager with Baird.

Great. Good morning. Thanks for taking my question. 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 is 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, our back-to-campus business continued to be very strong. What’s happened to us in October is we don’t have a big key driver since we don’t have a cold weather business. 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 is trending.

That’s great. And then pivoting to holiday and even into fiscal 2019, 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 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 of 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 had 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 merchandize 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 for me, if I could, but 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? 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 move 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 level. 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, an opportunity to pick up a new customer and a highly profitable channel for us. So we haven’t really changed our thinking on that.

Thanks for all the detail and best of luck.

Thank you, Mark.

We’ll take our next question from Steve Marotta with C.L. King & Associates.

Good morning, Robert and John. 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 have 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 from an internal initiative standpoint with the exception of those 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 three-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 two 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 more solid foundation to grow from. So again, we’re really looking forward to trying to pivot back to a growth level 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 poor 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 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 interesting results as we go down the collaboration path and what are some really micro collections to create excitement. So 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 Web site experience or email 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 next 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.

Very helpful. Thank you.

Thanks, Steve.

[Operator Instructions]. We’ll move onto Oliver Chen with Cowen and Company.

Hi. Thank you very much. The details are 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? Thank you.

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 the clearance reduction. So first of all in the indirect channel, as we continue to reduce clearance activity, we’ve seen some pressure on 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 two 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 number one 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 lead 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 months for us and really create some demand there. So there will 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 merchandize margins and our long-term views on merchandize margins, how would you prioritize the key drivers for steady improvement in the merchandize margin line?

I think two 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 a 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. Thanks. And Mark asked a helpful question about factory. Factory has 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 coming towards inflow could be a risk factor as well.

Yes, I think a 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 I would say we’d be hoping as we went through the reset this year it would get lighter. 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 number one 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.

Thank you. 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?

That’s a great question, Oliver. I think, first of all, we have been pleasantly surprised this year in 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 launched one of the most expensive backpacks we’ve ever put out in the market of $160 plus Journey Backpack that did exceptional 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 our backpacks are starting to go 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 shows that our consumer is really valuing what we’re putting into the product and there’s probably room to continue to innovate and push on pushing. 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.

Thank you. Best regards. Happy holidays.

Thanks, Oliver.

[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 13th.

And once again, ladies and gentlemen, that concludes today’s conference. We appreciate your participation today.