Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley First Quarter Fiscal 2017 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. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Stacy Knapper, Vera Bradley's Senior Vice President and General Counsel. Please go ahead.

Thank you. Good morning and welcome everyone. We would like to thank you for joining us for Vera Bradley's first 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 30, 2016 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, Chief Financial Officer; and Sue Fuller, Chief Merchandising Officer. Our year-over-year improvement in diluted EPS was primarily related to our 220 basis point gross profit expansion largely driven by sourcing and operational efficiencies and increased sales penetration of higher-margin made-for-outlet products. Our overall promotional levels remain controlled. Our first-quarter diluted EPS was at the high end of our guidance primarily due to diligent expense management and a lower than planned tax rate. We achieved this EPS despite revenues at the low end of our guidance range. We were disappointed in our comp sales performance which was a reflection of weaker traffic in a more challenging retail environment. We're now in the third year of our multiyear turnaround and our team is committed to executing our long-term strategic plan focusing on the core areas of product distribution and marketing as we create beautiful solutions for our daymaker customer. We are encouraged by our progress to return the business to sustainable growth. As a reminder, our three main objectives for fiscal 2017 are to: complete our brand transformation; drive core growth through optimizing our existing product portfolio and by strengthening our distribution channels; and begin to explore additional licensing and international growth opportunities. Our exciting new brand positioning will be launched in September and we believe this will lay the foundation for comparable sales growth in the second half of this year as we introduce our fall products assortment with our new logo; launch our comprehensive fall creative campaign; open our SoHo flagship store; begin to update key full-line stores incorporating our new logo and modern visual package; and launch our new digital flagship. We remain very excited about the future. I will now ask Kevin to give us a brief update on our first-quarter results and our outlook for the second quarter and full fiscal year. Kevin?

Thanks, Rob, and good morning. Let me go over a few highlights for the quarter. As a reminder, prior year income statement numbers exclude charges outlined in the release related to our manufacturing facility closing, severance and restructuring costs and an income tax adjustment. Current year first-quarter net revenues totaled $105.2 million, a 4% increase over $101.1 million last year and at the lower end of our guidance of $105 million to $109 million. Net income totaled $2.4 million or $0.06 per diluted share compared to $0.1 million or $0.00 per share last year. As Rob noted, our EPS was at the high end of our guidance range of $0.04 to $0.06. In our direct segment, revenues totaled $72.9 million, a 3.6% increase from $70.4 million in the prior year first quarter. This revenue number reflects a comparable sales decline including e-commerce of 6.7% for the quarter, which was more than offset by new store growth. First-quarter comparable sales were negatively impacted by year-over-year declines in store and e-commerce traffic. E-commerce sales were also negatively impacted by lower levels of promotional activity. In fact, we removed 29 hyper promotional days from verabradley.com in the first quarter. Indirect segment revenues increased 5.1% to $32.2 million from $30.7 million in the prior year primarily due to higher than expected sales to certain non-department store key accounts and the timing of a product launch in the specialty channel moving from the second quarter last year to the first quarter this year which positively impacted current year first-quarter revenues. These gains were partially offset by lower orders from the company's specialty retail accounts. At quarter-end, the number of specialty accounts remained essentially flat at around $2,600. Gross profit for the quarter totaled $59.7 million or 56.7% of net revenues compared to $55.1 million or…

Thanks Kevin. As a reminder, our three main objectives in the product area are; number one, delivering innovation newness and diversification of fabrication; number two, segmenting our offerings by channel; and number three, enhancing our growth profit percentage, which Kevin has already discussed. We are still focused on majoring in the majors and optimizing our existing product portfolio. We have identified five key businesses where we can win by offering beautiful solutions to our Daymaker aspirational customers. As a reminder, these five businesses are; fashion bags and accessories, travel, campus, beauty and wellness, and health. In each of these five categories fabrication pattern and style innovation and newness are critical in order to stay relevant. We certainly want to maintain our market leadership position and market share in cotton, but will continue to innovate our heritage offering supporting our new brand positioning. Cotton remains the largest and most important piece of our business and our design team is working hard to reinvigorate and modernize our cotton assortment with new patterns, styles, silhouettes hardware and functionality. We will have new ideas to share in the next several months. Customers have responded positively to our newer non-cotton fabrications like microfiber, Sycamore leather, Streeterville and lighten up and we are continuing looking to cast, learn, and readjust our assortments. For example, this summer we will be adding a distinctive more casual leather collection called Gallatin and discontinuing our more traditional Wildwood leather collection, which we believe was not differentiated enough in the marketplace. As we focus on offering newness and providing beautiful solutions for our Daymaker brand extension will be critical. In addition to our Collegiate, fragrance, jewelry and eyewear collection we believe there are several other licensing and strategic partnership opportunities for brand expansion for us going forward. This spring Stephanie Lawrence joined our team is Vice President of licensing and she is busy working on licensing ideas and partnerships in various areas first focusing on home. Stephanie has more than 30 years of experience in the consumer products industry and has spent much of her career focused specifically on licensing. We are thrilled to have her on board leading this very important initiative. As a side note, our Collegiate Collection currently represents 17 Colleges and Universities. By back to campus this summer, we will offer Collegiate in 75 schools. We are excited about this opportunity to bring new customers to our brand. Rob?

Thanks Sue. Let me take a minute to update you on distribution. As of quarter-end, we had a store base of 111 full-line and 41 factory stores. During the quarter traffic remained very weak in many of the malls that housed our stores, especially our full-line stores. We are working with our store teams to drive traffic and sales through enhancing our sell and service culture nurturing more community outreach and building more localized assortments. Over time, we believe ample opportunities remain for both full-line and factory growth, but as you might recall we have slowed our new store growth this year. We will open a total of four new full-line stores with each of these being a very unique property. All of these locations will feature our new store design logo and digital package. In the first quarter, we opened a full-line store in Woodfield Mall in Metro Chicago, which has been a good market for us and relocated our Park Meadows store in Metro Denver to a higher traffic location within the mall. In May, we opened our Disney Springs full-line store in Orlando, which features a mixture of our core assortment with our Disney theme Vera Bradley offerings. In August, we will open a store in the International Market Place in Honolulu and probably most exciting in September we will open a flagship store in SoHo. This modern showcase location will embody innovative design elements will feature exclusive patterns limited edition items and unique store experiences. And we will be supported by a myriad of marketing initiatives and special events. In addition this fall, we will fully renovated our Jefferson Pointe Store in our hometown of Fort Wayne. In September and October, we will also refresh 16 of our higher traffic, higher volume full-line stores with our…

Thank you. [Operator Instructions] And we’ll take our first question from Oliver Chen with Cowen and Company.

Great job on margins and inventories. On the inventory front, what are your thoughts for the back half in terms of how you are planning inventories relative to the trends? I know there is a lot of traffic concerns, but you also have the newness coming. So I'm just curious about optionality and how you are thinking about conservatism versus upside?

Good question, Oliver. We did pull down our purchases slightly in the back half of the year along with pulling down our revenue guidance by about $5 million. We did pull down our purchases a little bit. To think about the back half of the year, we still feel like that $100 million to $110 million probably make sense in the back half of the year in terms of a total balance for inventory, but we feel really good about inventory as we exited this quarter. I think the supply chain team and the planning team has just done a wonderful job negotiating better pricing for the inventory and ordering the right quantities, and obviously we were long on inventory, it’s in the new fabrications that are really working for us.

Okay. And Rob, the traffic situation is definitely industry and also specific but was it more than you expected in terms of the traffic impact on the volatility that you are seeing? What do you think is happening and if you could brief us on the dynamics between your direct to consumer outlet versus full-price business and why the outlet business seems more promotional?

Absolutely, Oliver. So for last quarter what we saw from a traffic standpoint is we did see a slower traffic coming in the first quarter than what we experienced in fourth-quarter which did catch us by surprise. We did not expect that and the slippage on comparable store sales. If you look at the traffic, we don't necessarily break it down completely between the two. But if you pulled apart the pieces, we did see more slowdown in terms of how our outlook performance was. So we had not seen the slowdown that you had heard in the industry last year. We saw a little bit of that slowdown in first quarter which was the primary driver, but generally we saw a little bit lighter traffic flow across the board.

Okay. And just lastly Sue on the product front and also regarding how we will look at the stores, how do you anticipate consumers in terms of the consumer experience and also making sure you showcase your product and bring in the newness in a harmonized way that is experiential and clear, how do you expect that to happen in September and what should we watch for just because I know it’s important to be curated and you also have a lot of newness coming in the store just to make the shopping experience kind of seamless and make sense for the customer in the context of the changes?

That's a great question. So one of the things that we have done is we’ve been introducing new product as it's not a complete departure from where we are at. We make sure that we look at the line holistically to make sure that it flows both from a print and pattern perspective as well as from a color perspective. So we think that will create a lot of synergies. Secondly, in our own stores, the way that we are curating the assortment is by the collection based merchandising so it's clear to the customer when she walks in that this is a new collection and we’ve merchandised that together highlighting what I would say is key item-based as well within those collections. And then last but not least we have strong synergy between obviously the merchandising in the visual merchandising team and we've made sure that we've highlighted both in the windows through the signage as well as our front end forward tables what we call zone one to make sure that the consumer is aware that the newness is existing.

I think the only thing that I would add on that Oliver too that I think the design team has really done a nice job for fall making sure that all the collections in terms of the different fabrications really harmonized and work together from a coloration standpoint which I think is more unity in the fabrication as a whole than we've seen in the past which I think is going to help us. And the other thing we are really pushing visually as Sue was talking about to really maximize key item presentation in our store and really have a clear communication to the consumer both from a key item standpoint as well as a newness standpoint. So making sure that they invite the Gallatin launch, which is a new – I won’t say fabrication because it's leather but new style in leather or much more casual line really gets highlighted, and clean focus. So, we definitely are working on both the visual as well as the cohesiveness of how the design groups are putting the collection together.

Thanks for those details, great.

Thanks, Oliver.

We’ll go next to Mark Altschwager with Robert W. Baird.

Good morning. Thanks for taking the question. I just wanted to start out asking about new customer acquisition, as you look at the comp performance, what are you seeing with frequency of visits from or frequency of visits in the change in spend from your existing customers versus contribution from your customers to Vera Bradley?

Yeah. Thanks, Mark. If you break down in terms of consumer behavior, what we're seeing with the selling metrics across all three channels is generally an improvement in ADS. So the average dollar sale was definitely improving. We've seen conversion generally improving across the channels. We had a slight softening in our full-line store in first quarter, but generally we have seen conversion continue to increase. As you look at the retained customer and the new customer, we are continuing to see the overall customer file in terms of our active customer file for the total company continue to go up, the strongest driver in that has been the growth of our factory business but we are seeing total growth and total customer households in both retained and new customers. And what we are seeing, continuing to see nice strength in the new customer is in the targeted age demographics that we’ve been going after. So we're continuing to see the best growth in the new customer segment really approaching what we’re targeting in this daymaker category.

That's helpful. Thank you. And then, Rob I wanted to follow-up on distribution. It’s been a lot of focus on the department store channel, just given the rough start to the year for those retailers. So I guess the question is, are you feeling any destocking pressure from the department stores in terms of like-for-like doors or is the market share capture been more than enough to offset that? And then, separately on distribution just any update to your progress on adding the higher-end boutiques and apparel boutiques to your mix? Thank you.

Yes. So, a couple of things, one in department stores, what we are seeing for us is obviously a little bit different than some of our competitive set and we’re not as mature in the department store space as they are. So we are seeing continued growth and new opportunities in department store whether it's in our core segments and categories or whether it's in some of these new brand extensions that we’ve been talking about. But we have seen a little bit of pressure and you say true like-for-like performance. So there's a little bit, but we are able to more than offset that as we continue to grow and expand. And then, in terms of adding new distribution, obviously that’s something that we are continuing to look at in the specialty store. We have been adding a few new apparel and accessories stores to the mix and I would still say that we are early in that growth.

Thank you very much and best of luck.

Thanks, Mark.

We’ll go next to Bill Dezellem with Tieton Capital Management.

Thank you. A couple of questions. First of all, would you bring us up to speed relative to May and how you would characterize the overall retail environment relative to what you experienced in Q1 and if there were any changes?

Generally, the May performance is really reflected in our guidance as we talk about second quarter and we haven't seen a material difference.

Yeah. Bill as it related to Q1, February was probably our best month and then really March, April and May have been much of the same for the most part.

That's helpful. And then the additional severance this quarter, would you help us understand where that's coming from?

Yeah, that's one of our executives we put out in 8-K I think just a couple of weeks ago and it's Roddy Mann, who is leading up the sales force. So he left us actually today or yesterday was his last day and we've also hired Mary Beth who’ll be leading the wholesale side of our business and then we have Melissa leading the direct side and both of those individuals will be reporting to Rob directly.

And basically just for your knowledge too is that was something that Roddy and I had worked out that he basically spent the last year helping get our sales organization ready for this transition and we feel really good about the team we have in place.

Thank you. And then MFO, what percentage of factory was that in Q1, Q4 and Q1 last year?

Gosh, it’s Q1 of this year it's in the 70’s, the low 70% range and it's really very similar to Q4. And then, if you look at Q1 of last year, it was probably in the 40% range. We started the year 25% worked our way up to 70%. So it’s probably in the 40% range in Q1 of last year.

That's helpful. And would it be fair to assume that your MFO balance is right where you wanted and so we shouldn't expect dramatic changes going forward?

That is correct. We'll still get a little bit of a benefit in our gross margin in Q2 and then post Q2 we’re really at that percentage we foresee being at for the foreseeable future, Bill. So not a lot of benefit going forward after Q2.

Excellent, thank you both.

Great. Thank you, Bill.

Thank you, Bill.

We’ll go next to Steve Marotta with CL King and Associates.

Good morning everybody. Thank you for taking my question. The question pertains specifically to store comps in the back half of the year, if you alluded to this earlier I missed it. I understand that you expect comps to turn positive, does that include brick and mortar comps as well?

Yeah. We just stated at this point that the total comp is what we are expecting to turn positive at some point in the back half of the year. We're obviously expecting improvement across the board as you look at our full price stores as well, but what we've stated is the total comp we expect to be positive as we exit the year.

Okay. So it's possible that brick and mortar is flattish, but the e-com significantly better given the launch of the flagship website that would bring it over the mark nicely?

That's correct. That could be one way to get there.

Okay. One other question pertains to the product launch shipments that were pulled into first quarter from second quarter. Can you quantify roughly the size of that?

Yeah. It was about $2.5 million. So, that's the amount it was related to a pattern launch we did in May last year. I think it was Sierra was the pattern name, but we actually pulled that into Q1 of this year and that was around $2.5 million on the specialty side of our business, which was the significant movement from Q2 to Q1 this year

Great, thank you very much.

Great, thank you.

[Operator Instructions] We’ll go next to Dana Telsey with Telsey Advisory Group.

Hi, good morning everyone. You had nice improvement in the operating margins for both direct and indirect. What are the levers for each and how do you see the opportunity going forward?

It still feel like on the direct side of the business, it's getting comps going and to be able to leverage our SG&A expenses obviously we've been very proud of the gross margin improvement we've seen this year and last year. But really on the direct side, it's really being able to leverage the SG&A expenses by getting the sales up. On the indirect side, probably there I feel like we are in a good place. I do feel like there's a huge improvement looking forward. I think we are right around 39% in the quarter and I feel like that was a pretty good percentage and what we stated over the long-term is we really don't see that number probably going up very significantly. I think there will continue to be pressure on the indirect side as we continue to expand in the department stores just with regards to chargebacks and returns and things like that that we need to manage very closely which we are. So I feel the opportunity to leverage from an operating income percentage perspective is really on the direct side of the business. And then beyond that we can leverage a little bit of our corporate expenses as well looking forward.

Thank you.

And with no further questions in the queue, I would like to turn the conference back over to Mr. Rob Wallstrom for any additional or closing remarks.

As we continue with our business turnaround, we believe we have a clear direction and roadmap to assure our brand is more modern and relevant to the daymaker. We remain energized and excited about the future of Vera Bradley and thank you for joining us today and for your interest, time and questions, and we look forward to speaking with you on our second quarter call on August 31.

Again, that does conclude today's presentation. We thank you for your participation.