Good day, and welcome to the Vera Bradley First Quarter Fiscal 2020 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.

Good morning, and welcome, everyone. We'd like to thank you for joining us for Vera Bradley's first 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 2, 2019, 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 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; and Daren Hull, our Chief Customer Officer are also joining me today. Daren is joining us as we review our progress in marketing and will be available to answer questions at the conclusion of the call. We are very pleased with our 5.2% first quarter comparable sales increase and that revenues were once again at the high end of our guidance, indicating that our customers are responding to both our innovative product and targeted customer engagement efforts. The first stage of Vision 20/20 was to restore brand and Company health, and we continue to build upon the progress we made in fiscal 2019. We once again improved the quality of sales in our full-line stores and on verabradley.com by increasing first quarter comparable full-price selling in these two channels by approximately 20%. In addition, we are removing another $3 million to $4 million of clearance sales from the second quarter of this year. Moving into year two of our three-year journey, we are focused on expanding our customer base and increasing sales and profitability. As a reminder, our key areas of focus for fiscal 2020 are: Number one, Growth. Our goal is to return to positive comparable sales growth this year, and we were off to a good start in the first quarter. This improvement is being driven by compelling, innovative product combined with targeted marketing and engaging customer experiences. Number two, Operational Excellence. Later this year, we will begin a two-year process of re-platforming our enterprise resource planning and other key information systems to become more streamlined, nimble, and efficient in our technology and business processes. And number three, Ownership. We will continue to reinforce our culture as an ownership-based model, where every associate can drive significant value creation to their individual and team efforts. Now, I turn the call over to John to review the first quarter results and our outlook for the second quarter and full year. John?

Thanks, Rob, and good morning. Let me go over a few highlights for the quarter. First quarter net revenues increased 5.1% to $91 million from $86.6 million last year. For the first quarter, we posted a net loss of $2.4 million or $0.07 per diluted share, in line with our guidance range of a net loss of $0.06 to $0.08 per share. The prior year first quarter net loss totaled $1.4 million or $0.04 per share. First quarter Direct segment revenues totaled $71.1 million, an 8.6% increase over $65.5 million last year. As Rob noted, comparable sales including e-commerce increased 5.2% for the quarter. This was our best performance in quite some time. Indirect segment revenues decreased 5.7% to $19.9 million from $21.1 million in the prior year first quarter, reflecting a reduction in orders and the number of specialty accounts. Gross profit for the quarter totaled $50.5 million or 55.5% of net revenues compared to $48.6 million or 56.1% in the prior year first quarter. As expected, improvement in full-price selling and sourcing and operational efficiencies were more than offset by the impact of Chinese tariffs, causing a year-over-year 60 basis point gross margin decline. First quarter gross margin was within our guidance range of 55.2% to 55.7%. SG&A expense totaled $54.3 million or 59.7% of net revenues compared to $50.7 million or 58.6% of net revenues in the prior year first quarter. SG&A expenses were higher than the prior year, primarily due to expenses related to new factory store opening, consulting fees, the timing of certain marketing expenses planned for the second quarter, and variable expenses to drive revenues. First quarter SG&A expenses were above the guidance range of $52.5 million to $53.5 million, primarily due to consulting fees, the timing of certain marketing expenses, and variable expenses…

Thanks, John. As I mentioned at the beginning of our call, our key areas of focus this year are on Growth, Operational Excellence and Ownership. And let me give you an update on each. We are off to a great start in returning to positive sales growth this year. We are engaging our current customers and bringing new customers to the brand with our compelling and innovative product, supported by our marketing and customer experiences. On the product front, we continue to build dominance in our key franchise areas like Travel, Campus, Beach and Gifts, as well as our top 10 items. Our pattern performance is more consistent. Our products are authentic and true to our brand, but innovation is becoming more important to our product assortment, including styles that offer new functionality and fabric innovations. While cotton is the most important piece of our business, we will continue to add lightweight, high performance fabrics to the mix. We have tested our new performance Twill Collection in several stores and the results have been great. The full collection will be introduced in August. Our special limited capsule collection, centered around seasonal periods or novelty add excitement and a sense of urgency for our customers to shop. Offering limited-edition collections and collaboration with unique partners increases our brand exposure and provides momentum to our growth. We announced several high profile product collaborations in the last three months. The New Hope Girls limited-edition mini collection launched in March and a collection sold out online in a matter of hours. New Hope Girls is a non-profit organization that provides jobs for vulnerable women and refuge and education for girls in the Dominican Republic. Building off the success of last fall's Disney collaboration, we once again partnered with DISNEY Theme Park Merchandise to create…

Thank you. [Operator Instructions] We'll take our first question from Mark Altschwager with Baird. Please go ahead.

Hey, guys. Thanks for taking my question. It's Connor on for Mark. Nice start to the year and progression on your 20/20 plan. My first question is can you discuss the trends in your full-price stores versus your outlets? I believe the outlet channel has been fairly promotional as of late? Does your updated margin guidance reflect anything different in terms of embedded promotional activity for the year?

First of all, in terms of breaking down the performance, what I can say is in terms of our full-price stores right now and our full-price e-commerce business are outpacing our factory business, so they are definitely leading it. As we look at gross margin, it really is the impact of the Chinese tariffs that's working through our margin numbers. It does not reflect increased promotional pressure in terms of the impact on margin.

And then Connor, for the full-year performance, we have embedded into that number the expected promotional cadence for the remainder of the year.

Great. Thanks. And then I guess just one more. You had a really strong cash balance. How should investors think about the priorities for cash at this point, and what do you need to see through the year to take a more aggressive action with your cash balance?

Yes. So, I think we've spoken about this in the past. Last year, we were fairly conservative with kind of the use of cash getting through the first year of Vision 20/20. We're now having kind of strategic conversations internally and with our Board on kind of the best uses of cash going forward. So as we continue to progress through this year, we will speak to that a little bit later in the year, but right now we're currently still spending towards our share repurchase plan, and we spent $3 million to repurchase shares this year. So I think more to come on kind of what the uses of cash would be because we're currently having strategic conversations.

Thanks. Best of luck to you.

Thanks.

We'll take our next question from Oliver Chen with Cowen and Company. Please go ahead.

Hi, this is Jonna on for Oliver today. Thanks for taking our question. I'm just curious about how your full-price selling performed this year versus last year? And have you seen a lot of your deep value customers migrating back to your full-line channel? And just another question, if you could provide any color on your retail partners performance this quarter just given highly promotional environment, that would be great. Thank you.

Yes. First of all, in terms of our full-price performance, we continue to see significant improvements in full-price performance, up about 20% for the first quarter. So, we're continuing to see real strength there. And we are beginning to see our reactivation of our customers continue to really outpace our overall customer growth. So, we are seeing customers reengaging with the brand this year.

Got it. And just the retail partners, any color that you can provide, what they saw this quarter, that will be helpful?

When you say retail partners, are you speaking specifically to our Indirect partners or are you speaking to kind of…?

Yes. Indirect partners.

Yes. I think in terms of our Indirect partners overall, we are hearing a lot particularly in the specialty channel about the strength of sell-throughs and Vera Bradley performing well in their stores, so that has been very encouraging to hear from them. So, we are beginning to see some strength in the Vera Bradley performance in that channel.

Got it. Thank you so much.

[Operator Instructions] We will take our next question from Steven Marotta with C.L. King & Associates. Please go ahead.

Good morning, Rob, John, and Daren. Rob, can you just remind us where the year started from a China exposure standpoint. You mentioned wanting to be 25% at year-end. Where did the year begin?

So, last year, we ended – Steve, this is John. So, last year we ended at 57%, it was where we were from a China perspective, so we expect to take that down to 25%.

That's pretty fast. Congratulations on that. And can you talk about any insight that you're gleaning from the new customer profiles that are opting in right now? Do they have, to the best that you can tell, an increased buying intent, either average ticket or frequency, can you talk a little bit about them versus the existing customer list?

Hi, this is Daren. I'd look at it two different ways. I think, one, we're focused on adding new customers that add some diversity to our current customer mix, and we're still working through the formula of how to get them to buy with the same loyalty and frequency of our existing customer base. Rob alluded to it a moment ago. We're seeing very strong reactivation in Q1. We're seeing a lot of much stronger frequency than what we saw obviously in Q1 last year. So, we're encouraged by what we're picking up, but we're still working through the mix of both our products and the new customers that we're bringing into the fold.

Great. And John, could you just please review the tariff differential again? You mentioned that there were 60 basis points to 80 basis points of impact in the current year, which – again I'm sorry that the message got garbled. I actually didn't understand it. That was – what was expected? Can you talk about what is now expected?

Yes. So we previously communicated based on the Chinese tariffs at 10% sort of – for List 3 that I would have about a 60 basis point to 80 basis point impact with List 3 moving to 25%, based on timing of receipts. We only anticipate that being an additional 10 basis point impact or $0.01 impact to the current year, which we've embedded in our 2020 expectations. Now if List 4 comes to pass, ultimately, we have not embedded anything associated with that, but we expect that to be immaterial this year. In regards to List 3, what might have got a little bit garbled as we were just talking about the real impact of 25% moves to next year has probably roughly a $0.03 impact next year. Just based on when we expect to take those receipts and how we will account for them. So that will be more about 2021 impact when List 3 goes to 25% versus 2020.

Would you like to comment, what do you think of next fiscal year China penetration will be?

Our goal is based on – if List 4 goes 25%, our goal is to bring that number down. I think the intent would be to bring it down in the teens. I don't know where in the teens we'd end up, but I think that would be our intent.

Very helpful. Thank you.

Thanks, Steve.

And at this time, there are no further questions.

So, thank you for joining us today. We are pleased with the progress we have made since we launched Vision 20/20 and are especially glad to see momentum in the first quarter as we focus on growth this year. We look forward to speaking with you on our second quarter earnings call scheduled for Wednesday, September 4.

This concludes today's call. Thank you for your participation. You may now disconnect.