Please standby. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley Q2 2016 Earnings 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 conference over to Stacy Knapper, Vera Bradley’s Senior Vice President and General Counsel. Please go ahead.

Good morning, and welcome, everyone. We would like to thank you for joining us for Vera Bradley's second quarter earnings 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 January 31, 2015, 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 the call over to Vera Bradley's Chief Executive Officer, Rob Wallstrom.

Thank you, Stacy. Good morning, everyone, and thank you for joining us on today’s call. With me today are Kevin Sierks, EVP, Chief Financial Officer; and Sue Fuller, EVP, Chief Merchandising Officer. We are pleased that better than expected revenue, gross margin rate performance and diligent expense management drove second quarter EPS of $0.15, above our guidance of $0.10 to $0.13. Our comparable sales trend began to improve towards the end of the quarter, which we believe is reflective of our new product offerings, improved in-store execution and our initial marketing efforts. Our better than planned revenues were generated in spite of reduced promotional activity. As you know, we remained committed to our long-term strategic plan, which is designed to drive traffic and bring new customers to Vera Bradley. We will continue to innovate and modernize our products, increase exposure to our brand and offerings by prudently growing our distribution points, and drive brand and product awareness through our elevated marketing efforts. Sue and I will update you on our progress against these elements of our strategic plan later in the call. We still have a lot of work to do and know it will take more time to return the business to solid growth, but I believe we are starting to gain traction on our key initiatives. Specifically, customers are beginning to respond to our new offerings. In the aggregates, SKU productivity is higher on these products, and UPT and conversion are improving. For the first time in a long time our second quarter direct comp sales trends were better than our traffic trends. We see indication that awareness of and affinity for our brand are increasing, and we are beginning to see new customers come into our brand and customer retention improve. Made-for-outlet is working. Our expanded MFO…

Thanks, Rob, and good morning. Let me go over a few highlights for the quarter. Net revenues totaled $120.7 million for the current year second quarter, a 1.5% increase over $119 million last year and above our guidance of $116 million to $120 million. Net income from continuing operations totaled $5.7 million or $0.15 per diluted share, compared to $7.9 million or $0.19 per diluted share last year, and as Rob noted, above our $0.10 to $0.13 guidance. In our Direct segment, total revenues of $83.8 million increased by 7.7% from last year. This revenue number reflects a 15% comp sales decline, more than offset by sales from new store growth. Indirect segment revenues fell 10.3% to $36.9, primarily due to lower average order size from our specialty retail accounts and a modest reduction in the number of accounts, partially offset by the timing of our summer product launch, which shifted approximately $3.7 million of revenues into the second quarter. Gross profit for the quarter totaled $66.6 million or 55.1% of net revenues, compared to $63.4 million or 53.3% of net revenues in the prior year second quarter. The year-over-year gross margin rate improvement primarily related to increased sales of higher margin MFO product in the company's factory outlet stores, leverage of overhead costs due to fall 2014 cost reduction at the company since closed domestic manufacturing facility, lower levels of liquidation sales and reduced promotional activity. The gross margin rate exceeded guidance of 54.5% to 55%, primarily due to reduced promotional activity. SG&A expense totaled $57.4 million or 47.5% of net revenues in the current year second quarter, compared to $50.7 million or 42.6% of net revenues in the prior year second quarter. As expected, SG&A dollars increased over the prior year, primarily due to strategic investments in new…

Thanks Kevin. In the product area, we have made progress in our three main goals of delivering innovation, newness and diversification, product segmentation by channel and enhancing our gross margin rates. We know we have to continually evolve to stay relevant. In July, we launched two new fabrications, our Wildwood leather and preppy poly collection. In addition, we introduced new microfiber colors and new styles and colors in our Sycamore leather collection including several items featuring calf hair. Existing customers are responding to the newness and our data shows we are beginning to attract new customers to the brand. We know that our continued product evolution is critical to attract customers that have lapsed or have never shopped with us. In the aggregate, SKU productivity of our new products is higher than our traditional quilted cotton product. At the end of August, we introduced our final new fabrication for the year, our printed Streeterville Poly Twill collection. We conducted a limited test with Streeterville online and in select stores in July and were very pleased with the customer response. Having said that, our cotton performance is continuing to decline faster than our overall business trend and unfortunately, the introduction of newness and innovation is not yet enough to offset the decline of our core cotton business at this point in time. Although as Rob noted, our quarter-over-quarter sales trends did improve in the second quarter. We now offer seven fabrication, quilted cotton, solid microfiber, leather in Sycamore and Wildwood, faux leather, Lighten Up, preppy poly and Streeterville. At the end of the second quarter, approximately 65% of the applicable SKUs in our full-line business are cotton, which includes our small print and approximately 35% are in the new fabrications, compared to just 20% at the end of the first quarter.…

Thanks Stu. Our distribution strategy is the second component of our long-term strategic plan. We opened six full-line stores during the quarter and are opening another four in the third quarter, which will bring the total full-line openings for the year to 15. We opened three factory stores in second quarter and will open three more in the third quarter, bringing the year-to-date total to 11. At the end of the second quarter, we had 107 full-line stores and 37 factory outlet stores, which is in line with the 3 to 1 ratio we have talked about in the past. And customers continued to offer positive feedback about our new full-line store designs. In our factory stores, our MFO product transition is well ahead of plan. Currently, over 60% of our product is factory exclusive and we expect that number to exceed 70% in the fourth quarter. We have added several new solid microfiber styles to our MFO collection and we will continue to maximize depth and colors and patterns in the best-selling factory styles like beach and travel. We are also focused on refining pricing the promotional calendar and the in-store visual presentation to better convey our value message to the consumer. E-commerce remains a vital part of our distribution strategy as we build our digital flagship. Vera Bradley.com will convey our brand and product story and ultimately generate more full-price selling. And to that end, we have four main focus areas: strategically paring back our hyper promotional activity, which began in January of this year, improving our website features such as dramatically enhancing our search capabilities, which we completed in the second quarter, the redesign of our website which is underway and will be complete early next year and converting our website to a new platform, which will…

[Operator Instructions] We will take our first question from Ed Yruma from KeyBanc.

Hi. This is Jessica Schmidt on for Ed. Thanks for taking my questions. First, can you talk a bit on about the mix of off-price at retail? And I guess just a little more color on the composition of your comp this quarter?

Yes. As it relates to the comp, we saw a little improvement in the factory stores than we did in the full-price stores. We love for that to be kind of the opposite and to be leading with full-price, but right now what we’ve seen is a pickup in factory stores. We think the reason for that is, because the assortment is really where we want it to be. If you think about the MFO percentage being almost at 70% now, we feel like we’ve really got a really nice assortment in the outlet stores for the customer. And it took us about a year to year and half to get to that point. So we’ve seen an improvement there. As you saw probably in the press release, the web was down a little over 14%. We attribute that mostly to traffic and mostly due to the reduced promotions. Obviously, people are migrating to the web. But given the reduction in promotions, which were significant for us about 20 less days during the quarter, it was pretty significant, 20% less during the quarter. It was pretty significant for us. So that’s really the makeup of the comp.

And I guess just as a follow-up. If you could provide more color on some of the softness that you saw at specialty retail partners, specifically the ones who just placed smaller orders. I mean, was that focused on the core product, or was that on some of the new merchandise?

Yes. You know what we’ve seen is they have been really attracted to the new product. And so everything we’re hearing from them has been very positive as it relates to the new product, and that’s really where they have been investing their dollars. Also, there is a little disparity in the specialty channel right now. There is a lot of our big retailers that are seeing some really good success, but there is some small retailers that aren’t seeing that success as of yet. But I can say they are all very positive about the new product and that’s where they are investing their dollars.

Great. Thank you.

Thanks, Jessica.

Moving on, we will take our next question from Oliver Chen, Cowen and Company.

Hi. Thanks, guys. Regarding the product mix, the 60-35, where did you say cotton would trend over time in terms of your long-term ideas there? And did you have a way for us to dimensionalize how that -- the new product, how much it outperformed versus the 60% being cotton, just curious on those topics?

So in terms of the product mix, what we have said overtime is that cotton represent 30% to 40% of the business over time. Again, that was according to the long range plan that we’ve given. We do expect to exit this year in terms of SKUs at 50% being cotton and then 50% being made up of the other material that we have been introducing. And then again to just talk about the new product, in the aggregate, again, we are seeing our SKU productivity outperform cotton. We are proud of it. And I would say in terms of microfiber, which we have mentioned before, as well as we are continuing to get traction on our leather. And then I think what’s really encouraging to us is some of the newer printed fabrications are also continuing to gain traction as well.

Okay. And the design and product changes in the organization sound interesting. When will that impact your ability to really transform what’s in store and test read and react and get to timing even closer to consumer demand?

I think of couple things. One, we are very excited about the change. We do have a lot of talent on the team. What we thought this was -- what this will really allow us to do is to continue to move forward on the new design and the innovation. As you’ve seen from us in this last year, we’ve been moving very quickly. And we felt that really integrating the two departments, putting it all underneath Sue, really just allowed for that decision making to happen quicker. And so in terms of the impact, I think that you would begin to see the impact of that change beginning mid part of next year. So lot of that interaction though between the two teams has been occurring, but we will begin to see more and more of that happening over the next year.

Okay. And Rob and Sue just the final question. When we do think about the new products and what all the positive momentum you’re making there, how do we overlay that with how you feel about the new products within each channel, specifically the outlet, the specialty retail as you’re dealing with? Are they all sort of seeing the 60-35 split, as well I’m just curious about how to interpret the overall comments into the channels?

Yes. With our distribution channel, obviously as we look at our indirect side, there are so many different types of accounts from our department store accounts through our key accounts like QVC and Disney down to our gift channel. And even within the gift channel, there is a wide variety in terms of accounts. Some of them are more high end and have a vendor metrics that would have other brands in there, like in men’s Tommy Bahama or Eileen Fisher or some of the other large national brands. So where we’re seeing an elevated product assortment, where they have other brands that are elevated, yes they are responding to the newness very well. So whether that’s in -- Macy’s has been moving forward with the newness with us well, some of our larger specialty gift channels have been moving quicker in the newness and they are seeing the biggest results. In terms of our smaller gift channels, they still are more focused on the core cotton and microfiber business and not evolving quite as quickly and with time we continue to look at way to refining their assortment. But we do expect that overtime the new more elevated product that we have in-store between leather and Streeterville and some of these new fabrications are really targeted towards our better point to distribution. And we really do want to work on how to have a separate assortment for our smaller, specialty gift channel and that’s why we’ve been doing things like the faux leather rollout, which is a more moderate price point than our faux leather rollout. So we’re going to continue to refine that gift assortment as we go forward.

Thank you. Best regards.

Thank you.

We will now take our next question from Mark Altschwager from Robert W. Baird.

Good morning and congrats on the progress. I was hoping you could just talk about the intra-quarter trend a bit more and your marketing really started to ramp in July and you said, you saw an improving trend towards the end of the quarter? So any more detail there? Did you see traffic improved later in the quarter or was that some improvement mostly UPT and conversion?

We actually saw which was encouraging. We saw improvements in traffic across the channels. We saw improvement in conversion overall across the channels, average dollar sales. So kind of we saw all of the metrics improving over the prior trend, which was really encouraging. And it definitely was back loaded towards July as opposed to the first half of the quarter, which again is encouraging because that’s when marketing started coming out, that’s when the product innovation started to change more and so its been encouraging to watch.

Okay. Great. And just following up on that and one of the earlier questions, I mean, it sounds like a lot of the improvement was concentrated in factory, whereas I think much of the new assortment and the new marketing is geared towards the full-line stores and that the new customer acquisition? So just trying to reconcile that a bit and understand kind of where you're getting the confidence that the marketing efforts are gaining traction?

Yeah. It’s a great question. And the way I would put color around that, yes, factory was outpacing our full-line business, but factory generally has been outpacing our business. And so we did see improvement across all of the channels, it is just that the factory performance was the strongest. But we did see significant improvement from prior trend also in our full-line business.

Great. And one more quick one, I know it’s early, but just any learning’s from the new initiatives with Amazon?

With the Amazon relationship, we’re still learning together. We have a lot of work as we've opened up that the relationship of really focusing the business on full price. And so we do believe it's an opportunity to put our product in front of the new customer, which we’re excited about. But we are very focused with them on how we continue to improve the brand positioning and the full price positioning of the brand.

Great. Thank you and best of luck.

Thank you.

Thanks, Mark.

[Operator Instructions] We’ll take our next question from Steve Marotta from CL King & Associates.

Good morning, everybody. You mentioned I believe from a guidance standpoint the comps are expected to decline in the low double-digit range for the third quarter? Can you talk about an expectation of either acceleration or deceleration in comp trends over the balance of the quarter?

Obviously for Q2, Steve, we had down mid-to high teens and so you can see we got a little more confidence in Q3 and that’s because of what we saw really as we exited Q2 and then even into August. So July was a pretty good month for us, trended anyway and August continued that. And you can see that as going from down mid to high teens in Q2 to down mid to high single digit to low teens in Q3. So we also expect that trend to continue into Q4. Remember, Q4 was our worst comp quarter last year. So we feel like, one, the comps are little bit easier but also we think it gives us a little more time to get the new product into new customer hands as well as what the marketing take hold. So we do expect improvement in Q3 and a little more improvement in Q4.

Okay. That’s helpful. And the new store format, can you remind us how many are currently in place? How those are trending versus the older store format? And if you can give any sort of indication on your thoughts for the next fiscal year and how many units maybe opened and if they’re going to all be in the new format?

Currently, we have 11 stores in the new format. They are all new stores. So we have not taken the new design and renovated any of our existing base yet. What we are finding from consumers in terms of customers coming in and the feedback that we’re getting from consumers is they’re excited about the new store design, whether that's a new customer or an existing customer, they feel it allows them to see the product in a fresh way, so that’s been all encouraging. In terms of that when we look at the productivity of those stores versus the old design, we have not seen a hugely significant lift in the sales per square foot. So we’re continuing to kind of refine. So we’re excited about where we’ve started but at this point, we don't have a renovation plan for existing stores.

And then what about number of stores expected to open next year?

Next year, we expect to open less than 10 stores and that includes both factory and full price. And obviously, those full price stores, we still expect those to be under the new concept.

Now we announce the slowing of our store opening based upon our slow comps that we had this year. And so we want to make sure that the comps are positive before we return to a more aggressive real estate expansion.

That’s great. Just want to make sure that was still in place. And lastly, how many promotional days did you have or how many backup? How many fewer promotional days you expect in the back half of this year compared to the back half of last year?

I would expect relatively similar. So we’re down about 15% to 20% in the first half of this year. The only difference we probably see in the back half of this year, which is a very small month for us is January. We started to pull down our promotions pretty significantly in January but given January such a small month not a huge impact. So I would still expect something around that 15% plus in the back half.

That’s helpful. Thank you.

We will now take our next question from Dana Telsey from Telsey Advisory Group.

Good morning, everyone. As you think about the new product versus the cotton product, given the more favorable reception to the new product, how are you thinking about the cadence of adjusting the assortment and the impact on pricing and margin? Thank you.

So as we’re thinking about the new product, we do see it continuing to evolve over time. Like we have said, we plan to exit this year with about 50% of our SKUs in cotton and 50% of our SKUs in the new fabrications. I can tell you that we’re continuing to read those new fabrications weekly. And we’re quickly adjusting the supply chain to make sure that according to each channel fragmentation that we are fulfilling those customer needs. The good news is, is that we are seeing traction across the different fabrications. So, we are seeing in leather, in microfiber, in the new fabric such as lighten-up as well as in the Poly 12 fabrications and we are seeing a different read by channel. And so we will continue to adjust accordingly. As we think about margin overtime and continuing to make sure that we are fulfilling the consumers’ needs tied to the product needs, we do expect to pick up those margin overtime.

Thank you.

Thanks, Dana.

Moving on, we will take a follow-up from Oliver Chen, Cowen and Company.

Thanks guys for getting me in again. Rob, I just wanted to ask you. It sounds like IM Campaign is in track and this is nice consistency compared to some product campaigns you had. I just wanted to talk to you about that and where you see that going next and your happiness with the consumer response and new customers coming on board. And then also on the online channel, what inning do you feel like you’re in because I know it’s been a longer term story in terms of being comfortable with the assortment and the pricing architecture versus the other channels?

Okay. Oliver, a couple things, one in terms of IM Campaign, I think we are excited about what we are seeing and what the IM campaign really did was begin to change how we advertise and how we present the brand and going from what I call a really nostalgic look to something that’s more current, forward, modern. And this whole idea of beginning to introduce more storytelling into how we market and those are really kind of the key elements. And we do believe as we go forward that that will continue to evolve and kind of blossom and we are trying to find ways of really building up this whole idea of relatable moments and storytelling through all of our different media, whether that’s through our blogging, through blogs, through PR, through video and really developing that. So, we are excited that we believe that IM has kind of put us on this new path that we believe will continue to involve and really engaged the consumers more as we are getting learnings. Your second question regarding online is, I would say we are probably in about the third inning. What we’ve been able to do is really pullback on a lot of hyper promotional activity. I think that we feel that we've made significant progress there. We’re very excited about how the consumers responded to our new search navigation. That's really been above given the expectations that we have that is very encouraging but we still have a lot of work. We are still working on the site redesign. We are working on the platform. Both of those will come out next year. And we believe that as we are really moving our e-commerce site to this digital flagship, really enhancing the branding experience, it’s something that we’re putting a lot more focus on and particularly since Theresa’s joined us. She's really getting her hand involved as we are kind of re-platforming and figuring out how we really move from just what we are calling e-commerce focused to really a digital flagship focus, which is really building up that consumer engagement and a lot more storytelling. So, we're very excited about what the future holds, but I would say that we are in the very early innings.

Okay. And just lastly, we've been in the stores and you've done a great job showing us some of the product and how you’re thinking about the presentation side. Just can you update us on -- with full pricing outlet, how do you feel about the stores experience and what’s ahead, especially as you assort into a newer type of product and look to newer customers?

Yes. We definitely are going to continue first in our full-line stores. As you’ve seen with the new store openings that we have has continued to kind of modernize our environment. So we continue to go down that path. And even as we’re bringing in new fixturing and new visuals and window displays, we’re continuing to roll a little bit more modern aesthetic through all of our stores. So we continue to see that expanding. We want to build upon our very strong customer relationships. But as we look at all of our customer service scores from our outside providers and what they are benchmarking, we traditionally have stayed way up in the very top of the engagement scores with our customers. The one area we’re continuing to work on, and as you can imagine with all of the new product introductions we have, is continuing to build up the product knowledge and selling our associates. And what has been so exciting for us is we really were working on that selling environment in our Dallas stores with some of the projects we put in down there. We saw significant improvements in the customer metrics in Dallas and we’ve begun to roll that out across the country. And we’re beginning to see that lift replicated. So we definitely see more focus on selling and more focus on kind of product knowledge as we’re going forward in our full-line stores. Our factory stores right now, we feel good about where we are in terms of really focusing first and foremost on the merchandise assortments and the pricing. And we will continue to evolve that, but store environment will not go under as dramatic of an update as you’ve seen in our full-line stores.

Okay. Great. Congrats. And good luck.

Thank you.

Moving on, we will take a follow-up from Steve Marotta from CL King & Associates.

Good morning, again. Thank you for taking the follow-up. Kevin, one quick question regarding the share repurchases. I just want to make sure that I heard correctly, there is roughly $13 million of the $40 million that was completed in the second quarter, but that the balance of the entire share repurchase program was exhausted since the second quarter close and the 2.8 million shares were repurchased. Is that all accurate?

Yes. That’s all accurate. So there is about $6.5 million here in Q3 to complete the program.

$6.5 million is the balance today?

In dollars, that's right. In dollars, there are $6.5 million spent in Q3 to repurchase shares. So that’s the total of the $40 million.

Okay. Thank you.

Thanks.

And at this time, it appears there are no further questions. I’d like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you. As I reflect back on the first six months of the year, I am very proud of what our team has accomplished. It will take time for these efforts to fully pay off, but I believe we are seeing some green shoots from all of our efforts. I'm very appreciative of our team; they are nimble, collaborative and executing well. And I continue to believe we are taking the right steps to attract new customers to our brand and for the long-term growth of the business. Thank you for joining us today and for your interest, time and questions. And we look forward to speaking to you on our third quarter call in December.

Thank you. That will conclude today’s conference. We thank you everyone for their participation.