Good day, and welcome to the Vera Bradley Second Quarter Fiscal 2020 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Mark Dely, Chief Administrative Officer. Please go ahead, sir.

Good morning, and welcome, everyone. We'd like to thank you for joining us for Vera Bradley's second quarter call. Some of the statements made on today's call during our prepared remarks and in response to your questions may constitute forward-looking statements made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect. Please refer to today's press release and the company's most recent Form 10-K, 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. We undertake no obligation to update any information discussed on the call. I'll 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. Vera Bradley's comparable sales, full price selling and customer count were all up again in the quarter. However, the overall retail environment and the handbag market in particular remain challenging. We have been most affected in the indirect channel as our partners continue to feel the pressure of this difficult retail environment, and therefore, our total indirect sales fell slightly below our expectations. Additionally, gross margins continue to be pressured by increasing tariffs and higher international and domestic shipping costs. As you might recall, the first stage of Vision 2020 was to restore the brand and company health and we continue to build upon the progress we have made so far. During the first half of this year, we once again improved quality of sales in our full-line stores and verabradley.com by increasing comparable full price selling in these two channels by approximately 10%. This is on top of a 20-plus percentage increase in the first-six months of last year. This is year two of our three year journey, and we are keenly focused on expanding our customer base and increasing both sales and profitability. As a reminder, our key areas of focus for fiscal 2020 are number one growth. Our goal for the Vera Bradley brand is to return to positive sales growth this year, and we are off to a solid start in the first half, with comparable sales up 3.3%, in line with our expectations and despite a challenging North American handbag market. This improvement is being driven by compelling, innovative product supported by targeted marketing and customer engagement. Customer count is also up year-over-year. Number two, operational excellence. We are investing in technology,…

Thanks, Rob and good morning. Let me go over a few highlights for the quarter. The financial performance for the current year second quarter and six months, I will discuss, our non-GAAP and exclude Pura Vida acquisition related expenses, including transaction costs, inventory step-up amortization, and intangible asset amortization, as well as expenses related to the re-platforming of information technology systems outlined in today's release. The performance includes results for Pura Vida for the stub period, which is July 17 through the end of the quarter. Second quarter consolidated net revenues totaled $119.8 million for the current year second quarter, which included $5.4 million of net revenues from Pura Vida. Excluding Pura Vida, Vera Bradley net revenues totaled $114.4 million, a 0.7% increase over the $113.6 million in the prior year second quarter. Excluding charges consolidated second quarter net income attributable to Vera Bradley Incorporated totaled $8.7 million or $0.25 per diluted share, which included approximately $0.01 of accretion attributable to Pura Vida. For the prior year second quarter, we posted net income of $9.3 million or $0.26 per diluted share. Current year second quarter Vera Bradley Direct segment revenues totaled $94.4 million, a 3.7% increase over $91 million in the prior year second quarter. Comparable sales increased 2.1% for the quarter. As expected, comparable sales were negatively impacted by the year-over-year reduction of approximately $3 million of clearance sales from the quarter, primarily affecting e-commerce sales. Indirect segment revenues decreased 11.4% to $20 million from $22.6 million in the prior year, reflecting a reduction in orders and in the number of specialty and department store accounts as well as inbound shipping delays. Excluding the inventory step-up amortization, gross profit totaled $68.4 million or 57.1% of net revenues, compared to $65.7 million, or 57.9% in the prior year second quarter.…

Thanks John. We are off to a solid start in returning to positive sales growth this year, with our year-to-date 3.3% comparable sales increase. We are engaging our current customers and bringing new customers to Vera Bradley with our compelling and innovative product, supported by our marketing efforts and customer experience initiatives. On the product line, we continue to build dominance in our key franchise areas like travel, campus, beach and gifts, as well as our top 10 items. Our back to school selling period is underway and the sales of the backpacks and lunch bags are exceeding last year. Newness for the season includes our clearly colorful collection, larger school backpacks and smaller fashion backpacks and slings. We have a lot of innovation and newness to showcase this fall. Last month we launched Performance Twill. The rise of the athleisure movement has made customers' purchasing decisions increasingly driven by performance. Performance Twill is a lightweight, durable, water-repellent and our newest definition of a beautiful solution. This is our first launch in a series of innovative performance fabrics. Also in August, we enhanced our Signature duffel franchise by adding more sizes and shoulder straps, and our innovative lay flat duffel will debut in November. We will offer two small capsule collections this fall. Our fun and playful cats meow capsule collection will launch this month. And pretty posies pink, our pink capsule for breast cancer awareness month will debut in October. Our special limited time capsule collection centered around seasonal periods or novelty add excitement and a sense of urgency for our customers to shop. We will continue to innovate and add sustainability elements to our products. Our reactive collection made of recycled plastic bottles is our sustainable update to lighten up and will be introduced in 2020. Offering limited…

[Operator Instructions] And our first question, we'll hear from Mark Altschwager with Baird.

Rob, these collaborations have been really interesting. I'm curious, if you could talk a little bit more about what you've been learning so far. Specifically, is there anything particularly surprising with respect to the profile of the customer that you're attracting to the brand? And does she look like you're the core customer or do you think you're expanding the tent a bit?

No, we are absolutely very excited by these collaborations. I think one thing that has been probably extra exciting is the fact that all of these collaborations, the results that we've seen across the various channel, whether it's Starbucks, whether it's through Gillette, Venus and Target, whether it's through Crocs, the consumer response has just been kind of overwhelming both in those channels as well as in our own channel. So we're -- it really, I think, just points to the vibrancy of the brand and how strong the brand is. We are also seeing as we look at the customer file, we are attracting a new customer to the brand. And you're really seeing it show up in our brand awareness, right? Our brand awareness -- our aided brand awareness scores keep going up year-after-year. And so we're really excited about what this means for the brand as we go forward.

And then, a lot of these product and marketing initiatives have really been focused on the full-price business and you're clearly seeing some nice success there. Curious how the strategies are touching the factory business and what's giving you the confidence in the sustainability and growth in the factory channel?

We definitely are focusing the collaborations on our full-price business, part of our strategy and Vision 20/20 was really to get strong growth for our full-price channel and kind of move from the strong clearance focus. So our collaborations are definitely focused on full price. But I do believe that as brand awareness goes up, the brand becomes stronger that, that also plays to demand in factory channel as customers are out shopping the factory channel. And we've been very pleased with how our factory stores have been performing in the first half of the year. We've taken a very focused approach in that channel, 95% of the product is made exclusively for it. Very focused on key items, key fabrications and really making sure that we're managing the promotional environment very tightly and that strategy is paying off for us right now in factory. And you're seeing us, as we're continuing to expand our top stores that we believe we still have more growth opportunity in factory.

And then switching gears for a moment to Pura Vida. It looks like the new outlook incorporates about $60 million to $65 million in revenue for the back half. I mean, that's about equal to the full year revenue in calendar '18 you discussed back in June. So I'm wondering, as we update our models, is there any further detail you can provide and how you're thinking about the annualized contribution from Pura Vida and the growth trajectory you're anticipating over the next couple of years?

This is John. So yes, the back half a year we anticipated it actually to be about $65 million to $70 million, which would basically be 100% of what happened in prior year. The way we're thinking about it, and ultimately, we're not giving guidance for next year. But we do anticipate significant growth year-over-year this year and we'd expect nice growth over the coming next two to three years associated with the brand. So on average, you can think about the brand growing close to 50% this year and we do expect to be a little bit less than I mean, kind of the out years.

Next, we'll move to Oliver Chen with Cowen and Company.

Regarding the indirect channel, what are you seeing in this channel and what are your thoughts about the distribution footprint and what you expect going forward as it can be a challenging channel that forecast and the inventory management is a little bit different? Thank you.

When you look at our indirect channel, there's obviously a lot of different pieces. So the biggest chunk of that is our indirect specialty channel. So let me talk about that first. First of all, what they're feeling is a little bit of the same pressure I think that we're seeing in department stores, just the general retail environment has been challenging for them. But we're actually encouraged by what we're seeing and what we're hearing from them, that they're giving us very positive feedback in terms of the Vera Bradley performance in their channel, that they're seeing much improvement in terms of full-price sell through, profitability. So there's definitely a lot of positivity particularly with our best accounts. And we're just working through the challenges that, that channels facing. But overall, we're feeling that, that's an important part of not only our past but our future, so our partnership with the specialty channel, we think continues to be important, but there obviously is a lot of change that goes on there with all the smaller stores, new ones coming in every year, some going out and so it just takes a lot of focus from our team to make sure that we focus in on that channel. So that's one. The second piece of it is the department store world. The department store world, I think as we've all seen it's been under pressure. I think handbags in particular has been under pressure and the department store world quite often seems to follow a trend. So we're looking at that and making sure that we're just very focused in there. Our strategy behind department store selling was always about new customer pickup and new customer acquisition. And so as we're looking at that, we think we are going to continue to fine-tune the store counts. In other word might be tightening up that store count to make sure that we're focusing on the most appropriate stores and the stores that can really bring an additional new customer to the brand. So that would be the second piece. And then the third piece, I think becomes the rest of the channel. Our Amazon business is performing very well. We're excited about what's happening in the e-commerce side of the wholesale world. So we're going to continue to expand in that area. And then lastly, the smaller piece of our business but in liquidation, that there's definitely a lot of liquidation and product having the market today. And so there's definitely some pressure on that side of the business in terms of availability of liquidation. But for us, that's okay, because we've been pulling down our clearance, we've been focusing less on it, but there is some pressure in that side of the business also.

Yes, we think about what's happening in the industry would love your thoughts on traffic and traffic trends and volatility across full price versus outlet, as well as the thoughts on liquidation. It's been very promotional in the marketplace. What are your expectations for how your merchandise margins may trend?

From a traffic perspective, we're seeing from a full price perspective it’s being a little bit softer than kind of our factory business. But ultimately, we anticipated that when we put together our forecasts in our plan, the traffic's been down roughly about 4% year-over-year. If we think about kind of our merchandize margins as we move forward, I don't anticipate significant changes from the first half of the year in regards to how promotional we're going to be in the back half of the year. So I would think as we've built into our forward-looking guidance for the third quarter and then for the year, we've taken consideration to how we look at our promotional activity, as well as some of the input costs and any shipping costs associated with that. So I think we've kind of we feel more comfortable, ultimately with our margin coming through the second quarter. And the impact as Rob mentioned in kind of his remarks in for GSP, the benefit will see kind of in the back half of the year, most significantly in the fourth quarter for the GSP for margins.

I think the only thing I would add to what John saying is we talked about our marketing team and our data science team and becoming more and more analytical. One of the areas that we're definitely placing a lot of that analytical focus is in the promotional effectiveness. How do we really fine tune the promotional activity? How do we take the targeted approach, whether it's by category or customer geography store, so we're becoming much more micro-focused in our promotional activity, which we think will help us move through this period of promotional activity.

On Pura Vida, there is a huge opportunity to really leverage their digital expertise as well as their young customer base. What should we monitor in terms of how you'll embrace that across your organization at large?

Yes, Oliver, you're definitely pointing to one of the areas what we think that there's real synergy. So our teams are working together to really learn from what Pura Vida has done, really focusing on how do we improve the effectiveness, particularly with our younger customer. And so a lot of what Pura Vida has done has really done a great job of engaging that youth customer, which is always has been such an important part of our brand. So if you think about what is the focus, I would say there's really three key areas. One is on social media, they've done a great job this year of basically doubling their Instagram following and we think that there's a lot to learn from them on the social media side. The second is moving our marketing to much more of a user generated content/influencer generated content experience. So you're going to see more authenticity, coming through our media over the next 12 months. And then I think, lastly, and also importantly is just looking at website and the different capabilities, the different tools they're using, that they're being more forward and being on the Shopify platform that they're taking advantage of a lot more of the innovation that's happening in the e-commerce world. And we're expecting to leverage a lot of those learnings particularly as we move through our technology program and join them on the Shopify Plus platform.

And lastly regarding products, you made some great updates to some of your Classic silhouettes. How was the customer response then? And what are your thoughts on balancing changes to your core versus layering and newness and managing risk as well as innovation?

Great question, Oliver and so a couple of things, I think one we are continuing to see strengthen our core and are really our hero products in terms of things like our campus backpacks and doubles and things that were traditionally known for. And one way that we're driving innovation through just those core items is using fabrication, so that we can keep those products even feeling fresh. But you're right, that there definitely is this balance between bringing newness to the market, as well as keeping our heritage going. And as we look at newness, we are trying new silhouettes. A great example of a big success was we brought in our sling backpack during second quarter, which we had never had a sling in our line, it far exceeded our expectations and that really reinforced our belief that our customers becoming more and more what I call silhouette focused and functional focused as opposed to just pattern focused. So I think that becomes really critical. The other thing that you're seeing us do is, as we talked about November with our Duffel franchise bringing in the Lay Flat technology, it's a great way of really updating something that is so iconic for us. But I will tell you that this new Lay Flat design is great, I feel our customers are absolutely going to be loved but personally am a big fan of using it all the time. And the other one that we talked about is Performance 12. And what's interesting with our Performance 12 launch, we put it out in marketing in August and then with the launch this week, we're focusing even more on, on the website. Not only is it a great new fabrication, but we are really trying to balance both heritage items which we’re going to see, as well as new design. So for example, in our Performance 12 not only was our campus backpack, one of our best sellers. But the other thing was we designed to do work that we really listened to some innovation and that the customer was asking for and that's been another surprise winner. So our customer wants us to balance both heritage and innovation.

[Operator Instructions] Next we'll move to Steve Marotta with CLK Associates.

Good morning, Rob and John. As far as Pura Vida goes, can you talk a little bit about?

Steve, we can’t really hear you. Can you speak up more?

So is it little bit better?

It’s little bit better.

Maybe just better.

Can you talk a little bit about Pura Vida’s accretion from an earnings standpoint and any sort of seasonality that's associated with that acquisition. In other words, it's adding $0.20 this year, is there a first half loss that might be incorporated as we think about our next year numbers?

Steve, this is John. So you say first year loss that we should think about, I just want to make sure I heard the question, right.

In the first half?

So the answer to that question is no. Ultimately, they have some seasonality in their businesses, it’s fairly similar to our seasonality where they do have a nice summer business close to kind of our back-to-school business, as well as the holiday season business. So as you pointed out, we expect accretion close to about $0.20 in the back half of this year. And as you kind of model it out for next year, and will give obviously more guidance in a few months in regards to what we expect for next year. But I wouldn't anticipate any kind of reduction in the first half of the year from EPS obviously, it was just going to be, we anticipate accretion in the first half.

I think one way to think about it is that the profitability and the way their business model works into a low overhead business. And a lot of it’s marketing and sales with the flow through relative to the sales is not super different season over season. So I think you're going to see a little bit smoother earnings flow than maybe you see in some retail businesses because there's not a big fixed cost base that you're leveraging out in fourth quarter. So we'll obviously give more guidance next year, but it's definitely a very healthy business and very accretive.

And just reiterating your China exposure. You mentioned it was 54% last year, 25% that you spoke about, that's a run rate at the end of the year, correct. That's not the blended rate for the entire year?

Now, that's actually the blended rate of the total purchases that we had made out of China this year when we’re roughly about 25% or a little bit less than that. And we anticipate that we're going to move that down a little bit next year.

Okay, that's very good. And were there any incremental tariffs associated with this September 1st upping to that 5% to 25% to 30%?

Yes, there's incremental tariffs associated with kind of the September 1st for List 4. So we had product that was being excluded from tariffs when it was List 3. So now all the products that we purchase out of China will have tariffs as of December 15, once they implement the incremental tariffs associated with the broken up List 4 between September 1st and December 15. So by the end of the year, if there are no changes, we will have incremental tariffs for 100% of our purchases out of China.

And at this time, that will conclude the question-and-answer session, I would like to turn the call back over to Rob Wallstrom for any additional or closing remarks.

Thank you very much for joining us on today's call. We are very pleased with the progress we have made since we launched Vision 2020. Although the current North American handbag market is challenging, we are steadfastly focused on the future and on delivering growth in revenue, profit and shareholder value. Don't forget to sign up for our Investor and Analysts Day in our SoHo store on Thursday, October 3. Griffin Thall and Paul Goodman, Pura Vida’s Founders will be there along with members of the Vera Bradley management team, including Beatrice Mac Cabe, our Chief Creative Officer and Daren Hull, our Chief Customer Officer. So if you are interested contact Julia Bentley, our Vice President of Investor Relations at jbentley@verabradley.com. Thank you for your time.

And that will conclude today's call. We thank you for your participation.