Good day and welcome to the Vera Bradley Second Quarter Fiscal 2019 Earnings Conference Call. Today's conference is being recorded. At this time I'd 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 Form 10-K for the fiscal year ended February 3, 2018 filed with the SEC for 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 obligations to update any information discussed on the call. I will now turn over the call 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. We are very pleased that our second quarter results exceeded both expectations and last year's performance primarily driven by a higher than expected gross margin rate related to reduced clearance, improved full price selling, and freight and shipping efficiencies as well as better than expected SG&A expense management. And revenues were in line with our guidance. At this time last year we initiated Vision 20/20, our plan to strengthen our brand and financial health by drastically reducing clearance revenues and realigning our expense structure in order to create a solid foundation for future growth. Recall that as we continue to implement Vision 20/20 we are routinely monitoring and reporting on four key elements. Progress on restoring full price selling, delivering our SG&A and cost to sales reductions, cash flow generation, and maintaining our customer base. We have made tremendous progress against our initiatives over the last year and especially during the last six months. So far this year, we have reduced clearance activity in our full-line stores and on verabradley.com by over 70% and increased full-price selling in these channels by over 20%. We are continuing to drive brand desirability through product innovation and targeted marketing while achieving meaningful expense reductions through diligent expense management and implementation of our Vision 20/20 initiatives. We increased our year-over-year cash and investment balances by over $40 million to nearly $145 million. Our customer count is down slightly from last year which is to be expected due to reduced clearance levels combined with some persistent traffic issues in factory channel. The good news is that the customer count in our full-line stores and on Verabradley.com exceeded our expectations and a higher percentage of new customers are entering the brand through full price purchasing. Now I will turn the call over to John to review the second quarter financial performance. 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 exclude previously disclosed strategic plain consulting fees, severance charges, and net lease termination charges. Current year second quarter net sales of 113.6 million were in line with our guidance range of 111 million to 116 million. Prior year second quarter net sales totaled 112.4 million. As previously disclosed direct segment revenues reflect 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 second quarter we posted net income of 9.3 million or $0.26 per diluted share compared to 4.6 million or $0.13 per diluted share before charges. The promotional event shift I just mentioned equates to incremental income of approximately $0.07 per diluted share in the current year second quarter. The current year second quarter direct segment revenues totaled 91 million, 1.9% increase from 89.3 million in the prior year. Comparable sales including e-commerce increased 4.9% for the quarter which was more than offset by new store growth. As expected second quarter comparable sales particularly those of verabradley.com were negatively impacted by our reduced clearance activity. Excluding the promotional shift, we estimate comparable sales would have declined by approximately 10% in the quarter. Indirect segment revenues totaled 22.6 million, a decrease of just 2% from 23.1 million in the prior year second quarter. Gross profit for the quarter totaled 65.7 million or 57.9% of sales compared to 63.3 million or 56.3% of sales in the prior year. The year-over-year 160 basis point improvement primarily related to reduced clearance activity and increased full price selling on verabradley.com and in the company's full-line…

Thanks John. Before I make a few comments about product, marketing, and our distribution channels let me tell you about an important new role we have created at Vera Bradley. The first stage of Vision 20/20 has been to restore brand and company health and I'm excited by the progress we've made so far this year. Now we are beginning to move to the second stage of Vision 20/20 where we will focus on growth for the next year and beyond. Over the last few years retail has been going through a very disruptive cycle and the industry has changed forever. Technology has revolutionized retail, the e-commerce channel has become the primary growth engine, marketing has transformed to a digital first strategy, the physical store has moved from a place of purchase to a place of brand experience and artificial intelligence is becoming the core engine to drive change faster than previously imagined. And in this new world we all know that new skills and new leadership were essential. Therefore earlier this year we began the search for a candidate to fill the newly created role of Chief Customer Officer with responsibility for all sales channels and marketing. Our vision is for the Chief Customer Officer to lead through this exciting new area of retail and improve customer engagement and acquisition with a scientific and technology based approach. After a thorough search in which I had the privilege of meeting many talented executives, one candidate stood out due to his broad background, proven successful track record, and highly analytical approach. Daren Hull joined Vera Bradley as our new Chief Customer Officer last month and has hit the ground running. Daren comes to us with a broad background in customer experience, customer insights, customer analytics, marketing, social media, and merchandising technology,…

[Operator Instructions]. We'll take our first question from Mark Altschwager from Baird.

Great, good morning. Thanks for taking the question and great job with the continued progress on Vision 20/20. Really nice acceleration and full price selling I think over 30% growth this quarter versus high single-digits in Q1, is there a way to break down how much of that was due to the calendar shift and then from a comp perspective if it's possible to back out the clearance reduction headwinds and the calendar noise, what's your best estimate as a go forward run rate of that full price business today?

Thanks for the questions Mark. So I guess a couple of answers for you, first of all when we look at what happened with the full price acceleration in second quarter more of it was really due to additional actions that we took to further reduce clearance activity. So as our business has been picking up some momentum we've been using that opportunity to further reduce clearance activity. So specifically what does that me, during the back to school period we decided to take all of our clearance backpacks and lunch bags out of verabradley.com and out of our stores and focus solely on our full price assortment. That decision alone had a major impact on our full price selling and we believe that that type of decision is something that we can continue to look at as we go forward especially in the fourth quarter. So it's less about the calendar shift and just more about the decisions that we're making. Additionally the patterns that we're launching are getting stronger and so what we saw in second quarter is the launch of water bouquet was a great example of really a pattern that took off and we're very excited to see the strength there. But as our pattern and our merchandise assortment becomes stronger and stronger we're seeing that also as a driver to our full price business. In terms of looking forward and trying to project what full price will look like once we get all the clearance activity out, a couple of things I would say, first of all we are excited about the growth that we're seeing in full price. We think that that's a very good sign as we go forward. One of the tricks in trying to project forward is really calculating the demand transfer that's moving from the clearance purchases last year to the full price this year. So it's still a little bit of a bit of analysis we're going through but what we're really expecting as we've talked about as we move into next year that we would begin to see growth again. So that's kind of all we can really say on that point at this point.

That's really helpful and it sounds like outlet stores may be a bit softer than planned and correct me if I'm wrong there but just any color on what's happening with outlets? And then I think your store growth plans still call for expansion within the outlet channel, any change to how you're thinking about that opportunity over the next couple of years especially given some of the initiatives with the outlet flash sales?

Yeah, no a great question, so a couple of things; one, we are seeing in the outlet area that yes, we're tracking slightly below where we wanted to. We've seen traffic to be a little bit slower than we expected but again we've made a strategic decision in our factory business that a lot of our peer set has moved to almost a 70% off the majority of the time type of pricing model. We have actually been more in the 50% to 60% range so we do believe that that is suppressing our factory business a little bit. It is something that we're continuing to monitor. But as we were really restoring the brand health we felt that getting more promotional in our factory stores could be working against us there. So that's something we're continuing to monitor. We know that it's something that we could address in the future. We want factory to grow faster but we still feel very confident in our long term growth strategy for factory. We have 57 locations right now, we really see moderate growth year-over-year, and nothing's really changed that. As we think about the online flash sale business we still want to keep that under control. It's still a relatively very small business for us and we want to be very cautious about it, we want to make sure it's very discrete because we don't want that business to grow too large. But we will continue to use it as a discrete opportunity to look at it with some old inventory.

Thanks and maybe one last one for me if I may but on the SG&A front it sounds like you're having some nice success with the cost savings initiatives, but the guide for the year on SG&A I think is slightly higher at the low-end so just wondering if there's areas where perhaps you're reinvesting a bit more or seeing some cost inflation versus your initial plans? Thanks.

Hey Mark this is John. No, we are not really seeing any cost inflation as far as our initial plan as we look out for the remainder of the back half of the year. We are seeing some investments that we may want to make so that's why we brought out the low end of the guidance. We still expect it to fall within that $201 million to $215 million.

Great, best of luck for the back half.

Thanks Mark.

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

Hi, thank you. Regarding the channels and the progress you made, which channels would you say you have the most opportunity and relative to the other channels in terms of the path forward and could you speak to your thoughts on achievability and visibility towards consistently positive comps and what you're looking at, it sounds like there's a lot of encouraging data points, I would love your thoughts on what you're focused on and how that road map may look to get positive comps more consistently? Thank you.

Thanks Oliver. In terms of channels I would say that the number one area as we go forward that we're really looking to move to a growth channel for us is our e-commerce business. To watch the flip in our e-commerce business has been very dramatic in terms of if you look year-over-year that we were well over 70% of our business on clearance second quarter last year on verabradley.com. And that it's flipped to 70 and just about 70% full price business. So we've seen a dramatic shift there and we expect that that dramatic shift will really set us up to being in good position as we move into next year and really return our e-commerce business to grow, so that's one. The second thing that we are beginning to see in our indirect business in totality is we're beginning to see the actions that we took to stop all the discounting on our product in verabradley.com beginning to stabilize our indirect channel. So that's been very encouraging to see, we've been getting a lot of positive feedback from our in direct partners that margins for them are improving, the sales trends are improving, and so we're just beginning to see the early signs in our wholesale business which is encouraging to see.

Okay and on the pattern and balancing the art and science and also thinking about innovation but managing risk at the same time, how are you feeling now with more time to process the DNA that you're comfortable with in terms the customer response to patterns and also your innovation process?

You know I think Beatrice and the team along with Kevin have really done a nice job of really getting very customer focused. We believe the DNA work as it is coming to market is bearing fruit. We're seeing positive results so one of our newest patterns have done incredibly well, it has been the charcoal medallion pattern. So we feel really good about the progress we're making on DNA especially around print. Additionally the team has been working on a lot of innovation within styles and we've seen a lot of the new things that we've brought from to market really rise to top sellers, things like our journey backpack is a great example. I mean there's a lot of innovation that will be coming out over the next year particularly around the travel category. So we feel really good about that. Additionally the consumer has really been responding to new fabrications so as we've been bringing new fabrications into the market it's created interest and we think that's another area that you will continue to see innovation from us.

Okay, lastly inventory has been impressive, what do you think will happen to inventory on a longer term basis and the context of inventory and supply chain, what are some thoughts around speed and how much of your inventory is on speedier programs or is that an opportunity that you're looking at? Thank you.

So with regards to overall inventory I would expect to see continued improvement over the course of this year especially [ph] by year-end. But then as we move into out years I wouldn't expect to see the improvement that we've demonstrated this year. I think by the time we exit this fiscal year we will probably be in a right place for overall inventory value and we would expect inventory products to grow at the rate of sales on a go forward basis. In regards to speed of inventory I think there is that definitely opportunity for us in fast tracking patterns, fast tracking some inventory to get it to market quicker. So I think we certainly have opportunity there and we are certainly looking at things we can do internally to improve that.

I think just to add a little bit more color around the supply chain and what we're doing there is, we have two different things going on; one, we're really looking at the whole timeframe from concept to delivery and looking at different ways of collapsing that down somewhat. One area that we have working against us as we diversify the supply chain and move more of our manufacturing out of China into other parts of Asia that's adding some time. So that's moving against us a little bit but we're working on ways of making that up. The second thing that we're doing which I think is what John was talking to is really beginning to move our supply chain to two timelines. One is kind of the core product of standard operating timeline that we work on but second of all is really moving up and developing a fast track program for new innovation, new ideas, and how to bring that to market quickly. Team has made a lot of progress around that, so a lot of our fast track merchandise and get to market and probably a third of the time that our core product can. So that's an area. As well as just chasing assortment so to make sure that we can order a little bit thinner, chase best sellers. We've been moving to a lot more of a reorder business over this last year than we have been doing previously and that's encouraging to see and that will help our inventory stay a little bit tighter as we move forward as opposed to our historical inventory level.

Okay, best regards.

Thank you.

Moving on we will take our next question from Dana Telsey from Telsey Advisory Group.

Good morning and congratulations on the progress. As we mentioned a higher percentage of new customers that are coming into the brand for full price purchasing, who are those customers, how do they differ from the core, and with the exit of eBay how much in revenues would you say eBay was for the year, how do you look to replace that, is it full price and would you see it happening and just an update on the department store channel? Thank you.

Thanks Dana, let me go ahead and jump into few of those questions, if I forget one please feel free to re-ask. But first of all in terms of the full price customer come in and what has been encouraging to see is we've been looking at this new customer enter into the brand particularly as we look at verabradley.com and our full line store. That she's really been being driven by some of the new pattern work, the new innovation, the new fabrics so it's encouraging to see. From the demographic standpoint it's still a very broad customer base. So, we've always really attracted a very broad consumer, we're continuing to see a very broad consumer coming in. One thing we had been encouraged by is we're continuing to see outsized growth and some of our more -- or should I say targeted ethnic communities which is great to see so we are beginning to broaden out the base of the brand from an ethnicity standpoint which is encouraging. But from an age it's still been pretty broad and an income that's still been pretty broad. In terms of the department store business, what I think we've been seeing in department stores is we've been seeing that our department store business improving, margins improving, sell--throughs improving. So it's encouraging to see it moving in a more positive direction. We think that the department store business is better than it has been. And so we're encouraged by what we're seeing there.

And with regards to eBay, eBay was a small part of our business, less than 1% of our overall business and we expect to recapture some of that business through our online outlet.

Thank you very much. [Operator Instructions].

Okay, well thank you everyone for joining us today. We look…

Actually there is another question, my apologies. We'll take our next question from Kevin Foll from Gratia Capital.

Hi, thanks for the question. Just a question about the guidance for the back half of the year, can you just bridge out what GAAP and non-GAAP adjustments you're going to exclude from the guidance in the back half of the year? As we look at last year I think there was about $19.6 million of non-GAAP adjustments in the operating profits some of which I think were recurrent, didn't really seem like one time like severance and inventory charges and marketing costs, etc. So as you think about the guidance for the back half of the year could you just give us maybe some insight into what exclusions are going to be excluding from your operating profit guidance?

Well, so for this year we actually -- what we are saying was if we have any similar charges we would exclude them from the guidance that we provided. So from last year and I don't have the documents in front of me but on the back half year we had tax reform legislation charge that we took out in the fourth quarter. We had a severance charges associated with Vision 20/20 that we took out. We also had some categories that we exited which were part of our Vision 20/20 that we removed from the back half of last year's earnings. So again I don't have the schedule in front of me of the exact dollar figure but those are the charges that we took out last year, we were just really informing if there similar charges this year we would move them to make them apples-to-apples.

Okay, so if inventory markdowns are excluded then essentially?

Inventory markdowns, no we exited the few categories last year that is part of the inventory charge that we took last year, part of Vision 20/20. Typical reserves that we take on inventory are part of our normal earnings.

But the revenue was in -- you excluded the cost but the revenue was including your revenue I believe, right, from selling the inventory?

If we sold some of the inventory that we would have exited we would have included that as part of the revenue, yes. Or if we just destroyed some of that inventory then we would not include it obviously.

If you are going to exclude the cost of goods sold I believe you should also exclude the revenue as part of the non-GAAP adjustment?

Okay. I think just to clarify a couple of things… [Multiple Speakers]

As we went through Vision 20/20 last year we took very discrete actions. So we had major reductions in our staffing last year that we went through a reorganization that's the type of severance that was included. Not every piece of severance that we would have and we would not exclude typical severance from this year. It was just kind of a discrete one time reorganizations that we spent time on. As well the category exits were very specific exits based upon that plan. And in most of those cases it was a write down of the inventory.

And we had not had the sales of those inventories in that period.

Right, so these were more discrete one time. We're not anticipating at this point those major expenses as we look at this year. So...

Got you and just in Q3 last year, there was also a charge for strategic consulting which I believe was you engaged a marketing firm to look at pricing and promotion and plan of performance. So is that technically marketing expense, those excluded?

No, it was really a full, we basically brought in an outside consultant as we were resetting Vision 20/20 to help us look through a complete review of the business in terms of how we wanted to put that plan together. So it was it was definitely way beyond a marketing scope. I wouldn't even say that marketing was an area that they spent a lot of time in, it was more in a lot of the other areas of our business. But it was really one time part of the Vision 20/20 strategy reset, rework.

And last question just on the tariff, I think about 65% of your sales are in China, you're talking about a very modest kind of impact from a 10% tariff. Can you just walk us through the assumptions, I mean are you assuming that you can tick price to offset the rising costs in that $0.05 dilutive impact or how do you sort of think about the bridge there of how we get to $0.05 of the impact…?

So, the $0.04 to $0.05 of EPS impact would be if the tariff went to a 25% rate and we're just looking at forward purchases that would happen in the back half of this year. We wouldn’t have any ability to really mitigate those tariffs for this current year. So up until 25% rate we're now looking at price increases that's just a pure additional cost that we would absorb that would run through the P&L at 25% tariffs on the categories that we purchased through China. If it was a 10% tariff we expect it to be roughly be about $0.02 of impact this year.

And part of the reason why you're seeing a modest impact to the earnings this year is due to the fact that it's a short period of time and it's only a portion of our inventory. If we get to the full tariff impact next year the impact would be much more significant than what we just see in fourth quarter obviously because we would have a annualization of that tariff.

And we're also working -- obviously we're working on ways to mitigate that. So as we go forward we're not going to give guidance for it and next year focus on working ways to mitigate that absolute number.

Okay, thank you.

At this time there are no further questions. I would like to turn back over to our speakers for any additional or closing remarks.

Well, thank you for joining us today. We look forward to speaking to you on our third quarter call scheduled for December 12th.

And at this time that will conclude today's program. We do thank you for your participation and you may now disconnect.