Good morning ladies and gentlemen. Thank you for standing-by. Welcome to the Vera Bradley Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only model. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the call over to Mark Dely, Vera Bradley’s Chief Administrative Officer. Please go ahead.

Good morning, and welcome, everyone. We'd like to thank you for joining us for Vera Bradley's quarterly earnings call. Some of the statements made on today's call are prepared remarks and 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 will now turn the call 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. Both of our brands Vera Bradley and Pura Vida had a strong third quarter performance. Vera Bradley comparable sales full-price selling and customer count once again rose in the quarter, and Pura Vida’s sales were at the high end of our expectations. As a result, our consolidated non-GAAP diluted EPS of $0.20 was at the top of our guidance range and nearly 70% higher than last year's third quarter EPS of $0.12. The addition of Pura Vida business to the Vera Bradley, Inc. portfolio has strengthened our position as a unique lifestyle company. We are sharing resources and expertise as we grow the brands together. Pura Vida is a great strategic fit for Vera Bradley with their expertise in social media and other digital marketing strategies, and Pura Vida has already begun to leverage Vera Bradley's infrastructure, partnerships, and back-office support to bolster its growth. As previously discussed in fiscal 2019 the first stage of Vision 2020 was to restore our brand and company health. We have continued to build upon that progress in fiscal 2020. During the first nine months of this year, we once again improved the quality of our sales in our Vera Bradley full-line stores and on verabradley.com by increasing comparable full-price selling in these two channels by approximately 7%. And this is on top of the nearly 20% increase in the first nine months of last year. As we complete year two of our three-year journey, we remained steadfastly focused on growing our customer base, sales, and profitability. And as a reminder, our three key areas of focus for fiscal 2020 are number one, growth. Our plan is to return to positive…

Thanks Rob, and good morning. Financial results have been consolidated to include Pura Vida beginning July 17, 2019, the first full day following the acquisition. Prior period numbers have not been restated. The current-year non-GAAP third-quarter and year-to-date income statement numbers exclude Pura Vida acquisition related charges, including inventory step-up amortization, intangible asset amortization, transaction costs and accretion of the earn-out liability, as well as information technology re-platforming charges, which were outlined in today's release. Third quarter consolidated net revenues totaled a 127.5 million at the higher end of our 122 million to 129 million guidance range. Excluding Pura Vida, Vera Bradley net revenues totaled 102.5 million, a 4.9% increase over 97.7 million in the prior year third quarter. Excluding charges, consolidated third quarter Vera Bradley incorporate net income totaled 6.9 million or $0.20 per diluted share. This included $0.07 attributable to Pura Vida. As Rob noted, our third quarter results were at the high-end of our guidance of $0.16 to $0.20. Last year, we posted net income of 4.2 million or $0.12 per diluted share for the quarter. Current year third quarter Vera Bradley direct segment revenues totaled 78.4 million, a 6.7% increase over 73.5 million in the prior year third quarter. Comparable sales increased 4.7% for the quarter at the high-end of our expectations. We closed 11 full-line stores and opened six factory outlet stores in the last 12 months. Vera Bradley indirect segment revenues totaled 24.1 million, basically flat with 24.2 million in the prior year third quarter. A reduction in orders and in the number of department store doors was offset by the timing of certain revenues that were planned for the second quarter, but realized in the third quarter. Pura Vida segment revenues totaled 25 million at the high-end of our expectations. Excluding inventory step-up…

Thanks, John. Let me take a few minutes to give you an update on both of our brands Vera Bradley and Pura Vida. Let me start with Vera Bradley. As planned, we have returned to positive sales growth this year. Our strong [4.7 third quarter comp] shows we are successfully engaging our current customers, re-engaging lapsed customers, and bringing new customers to Vera Bradley with our compelling and innovative products supported by our targeted marketing initiatives and customer experience efforts. On the product front, we continue to build dominance in our key franchise areas of travel, campus, gifts, and beach, as well as our Top 10 items. We had a good back-to-school selling season in August and September with sales of backpacks and lunch bags higher than last year. We benefited from innovation this season, including our clearly colorful collection, larger school backpacks, smaller fashion backpacks and slings. Backpacks and slings are important components of our hands-free focus, which is continuing to gain momentum. We have brought a lot of innovation and newness to the market this fall. The rise of the athleisure movement has made customers' purchasing decisions increasingly driven by performance. In August, we introduced our first in the series of innovative performance fabrics called Performance 12. Performance 12 was a beautiful solution that is lightweight, durable, and water repellent. Customers love it. And it is especially appealing to both younger and higher income customers. We will continue to innovate and add sustainability elements to our products. Our reactive collection made a fabric from recycled plastic bottles will be introduced in January. And we have enhanced our signature duffle franchise by adding more sizes and shoulder straps. This fall, we introduced our innovative lay flat collection, [versatile pieces], including our duffel, weekender and cosmetic bags that unzip on…

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

Thank you. Good morning and congratulations on a solid quarter. With respect to the comp growth, can you break down traffic and ticket in AUR, I guess more broadly as we think about the low-single digit comp growth this year, how much of that is a result of some of the pricing actions you've taken to offset tariffs? And how do you expect the complexion of the comp to change as we head into 2020?

Well, thank you Mark. From the comp standpoint, what we're seeing is, improvement in traffic, overall traffic is up slightly. We're seeing conversion up slightly. We're seeing ADS up slightly, while we're seeing a little bit of negative pressure again slight is in AUR. So, that from an AUR standpoint we're seeing customer continue to go towards this hands-free movement, smaller items, which is driving down the AUR slightly. As we look forward to next year, what we're planning on is similar type of performance in terms of positive comps across both of our store channels, as well as continuing to lead comps with our e-commerce business is the big driver.

Okay, thank you for that. And with respect to the new customers you're attracting to the brand, what does the average spend look like relative to some of your more mature customers and I'm curious what categories, if any, they are over indexing to?

In terms of the detail, in terms of the new customer, what we are seeing is the new customer is definitely responding to what we're bringing in, in innovation, whether it's new fabrics, whether it's novelty. So, they are definitely coming in with the newness that we're bringing, overall into the brand. Obviously, if they’re joining in, we're going to watch their spend, we kind of need them to anniversary a year to see how their spend goes throughout the holiday season, but we're encouraged by the early signs.

Thank you. And then maybe one last one from me just on the tariff front. I guess if a deal is reached on tariffs in the coming months, I'm wondering if you could frame-up the various scenarios we should be thinking about from an earnings perspective, next year. I'm just wondering how much of a lift would you see the margins and earnings all else equal to the extent that there is a lift would you think about reinvesting some of that in customer acquisition versus letting it fall to the bottom line. Obviously, none of us know how this is going to play out in the short run, but just curious how you're thinking about that in the near term.

Yes. And Mark, this is John. So, from a tariff perspective, right now we're planning for tariff's to be around, but if tariffs were to, excuse me, go away. I think when we think about next year, you won't have an 80-basis point impact, but it probably will have, call it 40 basis point to 50 basis point impact of improvement and I think we will have to think about kind of how we reinvest that right. So, I think we probably would reinvest on the backend customer acquisition.

Thanks for all the detail, and best of luck this holiday.

Thank you.

Thanks Mark.

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

Congrats and thanks. Regarding next year, what are your thoughts for some of the key product drivers or initiatives that will lead to your constructive view of a positive comps as we look at next year? I would also love your updated thoughts on customer acquisition and progress you've made towards new customers and how that will continue to evolve?

Thanks, Oliver. First of all, as we look forward, what we're excited about is the platform of innovation that we have planned across a couple of categories. One of it is, just really around fabric, you've heard with our performance twill, how are customers responding to that. We have the reactive collection that's planned in January, which we think again we'll have similar response from the consumer. I mean, we're continuing to drive that fabric innovation, which we believe will be key and we have more in the development pipeline for even the following year. In addition to that, we believe that the collaborations continue to be an important part of the story, which help partially through revenue, but also through customer acquisition. We think that Harry Potter is going to be a really important collaboration for us next year. As we think about product categories, it's really in the areas where we’ve always had strength and we're just really doubling into. So, the backpack classification continues to be very strong for us. The travel classification continues to be strong. So, those are the two primary areas of focus. As we think about driving our business next year, the other thing that becomes really important is our whole customer piece of the business, in terms of everything that marketing has been doing in terms of data, and using data to improve our marketing effectiveness so, we can leverage our marketing spend to bring more customers in and re-engage more customers who have lapsed, that becomes really important. And then as we think about next year from a channel breakdown, our investments, not only in data and customer acquisition, but just in the digital experience overall, in terms of e-commerce or ERP work being completed, we believe, we'll really keep digital as the fastest growing channel that we have.

Okay. And what's important for us to know as you think about indirect and how that channel should grow or be flattish? Would love your thoughts on the run rate and the latest strategies and what [ending] [ph] you are thinking about the health of that channel?

Yes. The indirect channel, our growth strategy there is about, just trying to bring that more to a sustainable level of performance. We don't see that as a high growth area, with inside of it, there's obviously mix changes in terms of what's doing well and maybe what is getting smaller. So, if you think about what's happening inside that channel, digital, seems like Amazon are growing, seems like department stores are shrinking, which I don't think will probably be a surprise based upon everything that we're seeing in the market. In our specialty channel, it's encouraging to see that our top accounts, our best customers are stabilizing and beginning to show some growth. The one negative pressure we have there continued just kind of that channel in terms of mom and pop ownerships in the number of stores that closed. So, offsetting growth under our best customers with some store reduction with how we're approaching that, but we think overall, we're expecting that channel to be relatively flat as we go forward.

Okay. And on the promotional front, you gave a lot of details around the environment being competitive and you – but you've also managed doing a good job with your own full price selling. How were promotions this year versus last year and what is the outlook for merchandise margins as you see it?

Well, I think promotional year-over-year as we've gone through it in terms of our core promotion, over the Black Friday period was very similar to last year. So, it's not so much that the prices went deeper, it's more, what is the consumer responding to. And so, what we're seeing or is being very discerning in terms of pricing and very driven towards the promotional period. So, we're trying to manage that out, but we're very committed to our core strategy of reducing retirement and we're not moving off of that at all. We're still planning to take $2 million out of this quarter. So, we feel that we definitely are on track, but we are seeing more discernment from the customer in this quarter in terms of she’s more price sensitive that feels like then she was in the previous quarter.

And Rob, what do you think about the best strategy going forward to optimize that? And how do you anticipate your thoughts around promotions this year versus last year and into next year?

We think really the key is becoming more and more driven towards individual customer promotions and really how do we kind of leverage and really promote appropriately to each customer differently or the building up of the data, practice that we have the analytics, the data scientists, the database in house and really been able to target promotions is going to be critical to kind of navigating through this.

Okay. And the traffic was really helpful. That it was slightly positive. Do you expect traffic to be volatile? Will that be a risk factor? It's been an industry factor in many cases. Thanks.

Yes, we definitely – it's been an interesting holiday season because I think with the condensed calendar and how the customer shopping, it's been a little bit erratic kind of up and down. So, we really have to kind of get through the whole season and see how all balances out. So, we are watching that. But overall, we've been encouraged with everything that we've been doing from a product and marketing standpoint that we've seen our traffic become more stable, where if you look over the last few years traffic was definitely a significant negative drain for us, we're seeing it become more stable. We're not seeing it turn into robust growth, but we're seeing it become more stable and we're hoping to see that as we go forward.

Okay. And our last question is about your digital roadmap. What are your thoughts on what your customers may want in terms of the buy online pickup in store and mobile functionality and where you're headed with the priorities?

I would answer a few ways. So, first of all from our ERP standpoint, there's a lot of things that were priority in that, but as we did the ERP and kind of re-platforming of e-commerce of really making a seamless, unified commerce experience is critically important and it's one of the driver’s underneath that. And what we are seeing from the customers, we are, we currently do buy online and pickup in store, we think that that's an area that we continue to grow. We think that the digital experience too, is about how do we use the data and the individual experience to make the digital experience individualized, and how can we really show the customer was most important to her as opposed to just giving her generic messages. So, it's really focusing on each consumer and given a very customized experienced long-term, and that's obviously a long-term roadmap and we'll start with some wins and then build them as we go forward through next year and the following years.

Thank you. Best regards. Happy holidays.

Thank you, Oliver. You too.

[Operator Instructions] We will now take our next question from Eric Beder with SCC Research. Please go ahead.

Good morning.

Good morning.

Good morning.

So, a little bit of Pura Vida. I know you've been running some tests of the product in the Vera Bradley stores, what is the future for that? And is there a potential down the road, maybe to be a stand-alone Pura Vida store time-line?

Hi, Eric. Couple of responses. First of all, we have done a few tests with Pura Vida and the Vera Bradley store, we did our backpack collaboration, we did the Breast Cancer Foundation bracelet, and we think there is an opportunity to do a little bit of cross promotion. We are working on continuing to expand the Pura Vida plus Vera Bradley Charity bracelet program. We think that's a perfect partnership for both brands, both brands have this great history of giving back and we're seeing our customers get very excited by that and the ability to be engaged. So, I would expect to see that continue to grow as we go into next year. In terms of Pura Vida in standalone stores, we are definitely working with the Pura Vida team to understand really going forward. The best kind of channel mix. So, we are evaluating all of those things and we'll have more to talk about next year.

Great. I mean, you look at the tariff situation. What is your – I think you brought up in the last conference call, for [your industry], what was the percentage you believe you're going to have from China this year and how should we be thinking about that going forward?

Eric, this is John. So, we said we'd roughly call it mid-20s by the end of this year and we expect to get down to call it mid-teens. So, 15% 16%.

And is that only Vera Bradley's of the entire company because I know Pura Vida lower, should lower that even more. Right?

Yes, so that's specific is just specific to the Vera Bradley brand. So, if you look at all purchase associated with the total company, which I don't have that in front of me, but that would lower the total percentage.

Okay. I know you have the impact, a last question, is the impact on the accruals from the buyer for Pura Vida, are those going to continue and when do you expect to make a cash payment on the Pura Vida buyout?

So, I think you’re talking about earn-out liability, the accretion to that. Yes. We expect to see some accretion actually in the fourth quarter. So, the total pay-out would be about $22.5 million in the timing of pay-out would probably be first quarter of next year.

Okay. Good luck, guys and a good holiday season.

Thanks.

Thank you, Eric.

We'll now take our next question from Steve Marotta with CL King. Please go ahead.

Good morning, Rob, and John. Rob, you mentioned Black Friday weekend, the promotions started earlier during the week. Can you quantify a little bit, maybe Monday through Cyber Monday versus last year? Can you quantify a little bit of the performance on a company-wide basis during that period of time?

Yes, in terms of Black Friday promotion. What we saw is a couple of different things. One, large retail industry. I think we've seen Black Friday start to become almost a month-to-month, and probably as you think about the Best Buys and everybody else out there, but specifically within our world with close competitors, what we saw is everybody really begin to move to the week in prior, so that we can prior to Thanksgiving is really when they started kind of Black Friday promotions. We did in more moderated version of our Black Friday promotion that we can before and then really kind of stepped it up as we moved into the Black Friday period. So, if you take that entire period from the weekend prior through kind of Cyber Monday what we were seeing is performance across channel is very similar to what we're guiding with for the quarter, kind of in-line with that low growth rate, but definitely a lot of movement in terms of where the volume is showing up by day.

Okay. That's very helpful. Also, could you please remind me of the split of Pura Vida between direct and indirect? And if you could also comment on the integration where you are from savings and synergies standpoint, from a costing standpoint. I know that there is more benefits obviously coming down the roads on Pura Vida sharing their social media capabilities, but I mean, just on a income statement standpoint, how would your – operational standpoint, how integrated and when do you think that will be complete? Thank you.

So, from an Indirect to Direct perspective, we think about from a Pura Vida, they're roughly about 30% wholesale right now, so that it is 70% direct. We don't anticipate that changing much and may fluctuate depending per quarter that's roughly about the rate we expect. And in regards to the synergies, we've made some progress in regards to some of the back office. I think our finance, HR, some of the corporate functions, we've taken on some of that responsibility. There will be more significant response, we've taken on current call first half of next year, but as you stated the work, there’s not a significant cost savings both into this plan, there’s not going to be a significant P&L impact from the savings. I think it was when you bring both brands together and you look at kind of what we can do for each other from a help drive sales, help drive performance for each brand, I think that's really where you'll see the savings. Let's see if the synergy is exceeding.

Yes, I think just to reiterate what John was saying, you know the biggest benefit we see is sales growth across Pura Vida, as well as bring it into Vera Bradley and then I will call cost avoidance for Pura Vida. You know they continue to scale the importance of adding in more infrastructure has become an important time. And we can do that in a way that's very low cost by leveraging that we already have at Vera Bradley, and it can help them avoid cost as they continue to scale the business. And so, you don't see it as a quick line in the P&L, but it's going to allow them to continue to drive that approximately 20% EBITDA that they are delivering. We think that the synergy between the two companies will help support them, but you have to remember that they are a very, very lean organization. They have got 30 plus employees in their organization. So, there's not a lot of areas, take a lot of expense out because the number one is really investment in marketing.

Very helpful, thank you.

[Operator Instructions] We will now take our next question from Dana Telsey with Telsey. Please go ahead.

Good morning, everyone. As you think about the new collaborations you've done on product is the newness and fabrics, how much of that do you see driving the business lately and impacting AUR? And what are you seeing with the reception to that product in the Indirect channel and how it's helping. So, what you're seeing in the Direct channel? And lastly on the Indirect channel, how do you see that customer base there? Is it continuing to be fine-tuned? Thank you.

Thanks Dana. From a co-lab standpoint, I would say year one of the expansion in the co-lab, we were very focused on being prudent in how we did it. We focused on our direct channels, a lot of what we were doing was more exclusive to our direct channels and so we've seen more of the benefit come through our full-line and e-commerce business. As we're moving into year two of the strategy, and we have a better baseline understanding of how the consumers responding to various collaborations, we believe there’s an opportunity to bring some of our indirect partners into that and we're very excited by that, I believe our indirect partners are very excited by that. So, you'll see that begin to expand as we move into year two of that. It's been really important to get new customers in the brand and also keep our current customers excited. A lot of our customers are very passionate and very loyal, have a big class of the Vera Bradley and they're looking for stuff that's new and unique and things like collaborations and fabric innovations, get them coming back. And we've really seen very nice results in terms of large customers returning to the brand as we've been bringing these new – this new innovation. So, we think that's really critical to what we do going forward. As you think about Indirect, kind of what we spoke to earlier, we definitely are continuing to see that next rebalance. We believe as we continue to go forward, more that Indirect business will become e-commerce to digitally focus unless a bit will be in the department store channel, that's one area. As we think about the specialty channel, again, we're very encouraged to see our best customers in our top accounts begin to see Vera Bradley growing again and we're seeing a renewed enthusiasm and excitement around the brand, as we've been working together and really a strong level of partnership and continuing to strengthen that partnership we've seen nice results with top accounts. The one headwind we continue to have is just the economic pressure that some of the mom and pops are feeling. And so that's the piece that we're navigating through with what's the best way to handle and offset some of that, but I'll call macroeconomic pressure. It’s less about our brand, and just more about their distribution channel.

Thank you.

Thanks, Dana.

Thank you.

It appears we have no further questions at this time, I'd like to turn the call back to CEO, Rob Wallstrom. Please go ahead.

Well, thank you very much for joining us on today's call, and thank you for following our journey and the progress we have made since we launched Vision 2022 two years ago. We remain confident about the future and our ability to deliver enterprise growth in revenue, profit, and shareholder value. Thank you for your time and happy holidays.

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