Good morning ladies and gentlemen. Thank you for standing-by. Welcome to the Vera Bradley Fourth Quarter and Fiscal Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the conference over to Mark Dely, Vera Bradley’s 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 earnings call today. Some of the statements made during our 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 that 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 it over to Vera Bradley's CEO, Rob Wallstrom. Rob?

Thanks Rob, and good morning. As a reminder, financial results have been consolidated to include Pura Vida beginning July 17th, 2019 the first full day following the acquisition. Prior period numbers have not been restated. The current year non-GAAP fourth quarter and fiscal year income statement umbers referenced below exclude that previously disclosed Pura Vida, IT and other net charges outlined in today's release. Fourth quarter consolidated net revenues totaled $156.9 million within our $155 million to $162 million guidance range. Excluding Pura Vida, Vera Bradley net revenues totaled $121.4 million, a 2.7% increase over $118.2 million in the prior year fourth quarter. Excluding net charges, consolidated fourth quarter Vera Bradley Incorporated net income totaled $14.3 million or $0.42 per diluted share, an increase of more than 60% from last year’s net income of $8.6 million or $0.25 per share. The current year number included $0.08 attributable to Pura Vida. As Rob noted, our fourth quarter results fell below our guidance of $0.49 to $0.53. Current year fourth quarter, Vera Bradley Direct segment revenues totaled $103.6 million, a 5.7% increase over $98 million since last year. Comparable sales increased 2.4% for the quarter. Vera Bradley indirect segment revenues totaled $17.8 million, an 11.6% decrease from $20.2 million in the prior year fourth quarter. The decline was primarily related to a reduction in orders and in a number of department store accounts. Pura Vida segment revenues totaled $35.5 million. On a non-GAAP basis, excluding the Pura Vida -- Pura Vida inventory step-up amortization, gross margin totaled $87.2 million, or 55.6% of net revenues, compared to $67.1 million, or 56.8% of net revenues, in the prior year fourth quarter. Pura Vida had no impact on the current year fourth quarter non-GAAP gross margin. The non-GAAP gross was below our guidance range of…

Thanks, John. Fiscal 2021 promises to be a challenging but exciting year as we complete the third and final phase of our Vision 2020 journey. We have a strong plan in place, with a robust innovation pipeline, across product, marketing and distribution. On the other hand, there are some internal and external risks; most notably is COVID-19. Nonetheless, we will focus on building upon the progress of the last two years. For both, Vera Bradley and Pura Vida our fiscal 2021 strategic priorities will center around robust growth and sustainable health. Let me start with Vera Bradley. Vera Bradley's growth will be driven by continued product innovation, as well as enhanced branding customer engagement. Our products will remain authentic, and true to our brand, but innovation is becoming more and more critical to our product assortment. We have developed an on-going pipeline of fabric innovation to ensure marketing relevance by offering cotton updates and cotton alternatives both to retain existing customers, and attract new customers to the brand. We will continue to grow our newest offerings of Performance Twill and Re-Active and will launch more fabric innovation over the next 12 to 24 months. We will also continue to bring new styles and differentiated silhouettes to the market to meet all facets of our customer’s lifestyles. Our focus is on building dominance in our key franchise areas of youth campus, travel and everyday. In branded customer engagement has several facets, including marketing initiatives, collaborations VB Cares ESG and store profitability. In the marketing area, we will capitalize on and build upon the investments we made last year and data science, business analytics, and customer data. Additional engagement will be driven by more advanced use of customer data to further refine medium spend and mix on a real time basis. In…

Thank you. [Operator Instructions]. We'll now take our first question from Oliver Chen from Cowen. Please go ahead.

Thank you. Hi, Rob and John. The Indirect and Pura Vida revenues were a little bit softer than we had modeled. I would love your thoughts on how those are trending relative to your expectations and visibility and what happened during the quarter? Also regarding the gross margin, just would love you to elaborate on shipping costs as well as their promotional response and why? Thank you.

Yes. So a couple of thing. I think one, in terms of Pura Vida, we were going through the quarter and the business was exceptionally strong through the Black Friday period, so much so that we had shorten the promotional cadence that we had planned and they had actually shorten that promotion. But as we saw the consumer in December and January we had some outages in terms of inventory that impacted our availability and impacted our sales volume at the back half of the quarter. And then there was just some timing and shipments in wholesale. But overall, we still feel good with the Pura Vida growth rate as we go forward. In terms of Indirect, we continue to see some pressure in the Indirect space, as departments stores continue to get tighter on inventory levels. It was a shortened holiday period. There was a little bit more pressure in the Indirect channel than we had anticipated. It is worth forecasting in this year, we still expect some small contraction in the Indirect channel. On the gross margin line, there were really two primary factors. One, we just saw a lot of customer spend really concentrated on two key periods. One was around the Black Friday timeframe, which performed very strong across both brands. And then very strong in kind of the -- around Christmas period going into January with a rollout performance after Christmas. So we just saw the customer gravitate towards those periods of spend, which happened to be more promotional in nature. Our promotional cadence overall was very similar to last year, but where the customer chose to spend was a little distorted. So that was about half of the gross margin challenge. The other half of it was just due to shipping costs and as shipping costs were going up that was the other half of the gross margin pressure.

Can I just add a little bit on the shipping costs, when you look at both brands, missed a little bit on shipping costs. And I would say from a Pura Vida perspective being a little bit more nearer to the business we use our third quarter estimate -- estimate fourth quarter and obviously it distorted a little bit more to expensive. And then for Vera Bradley, at the end of the day we estimated based on how we had been trending and it was just slightly more impactful than we had thought. The increases, as we think about next year, we thought those increases into our expectation for gross margin.

Thank you. And Coronavirus is something we're all monitoring on a hourly basis. What are your thoughts on what you're seeing with the consumer and how that's may or may not manifest in traffic trends out of -- to a large degree, out of your control. Another concern we have is thinking about the consumer and the possible recession. And how your business will may fare? And what kind of strategies you may have within your control as you look at various scenarios?

Thanks Oliver. Yes. The Coronavirus obviously is the big unknown this year. I think at first as it started to break in China and supply chain, the team reacted very quickly. And just like last year with the China tariffs, I think the team did really well in navigating the supply chain challenges and we've been able to mitigate the vast majority of it so far. And hopefully as we're seeing China stabilized at the supply chain sign will not be a big problem. But we're obviously continuing to watch that particularly as it relates to logistics and logistics timing, because the lack of supply kind of going through the logistics supply chain is disrupting a little bit of that flow. But we think we can manage through that. The real big question is what happens with U.S. consumer demand. And with travel spring break's coming up and all the travel activity, we're just not quite sure how the consumers going to be responding. And that's why to have clarity we're not totally clear on the impact. But we're watching it. We have seen some impact to our travel businesses already in terms of our beach categories, which is really spring break oriented. We have seen some early softness in those businesses. But we will see as consumers make their spring break decisions, will they travel, will they stay home, will they shop locally. We don't know yet. So we are seeing some traffic particularly over the last couple of days. So some impact to the traffic kind of in line with what I've seen on market numbers out there. But we're just watching this close. If we get into as you mentioned a more recessionary environment. And we've had a history of a brand been able to navigate that fairly well due to our price point, we've been one of the brands in the past. We've seen people trade down into. So we would hope that we would repeat that type of performance, but obviously it's something that we're watching very closely. The teams focused on. And we'll make a decisions daily based upon the information that we've given.

From the outlet channel as well as the interplay between digital relative to physical traffic at large. What's your hypothesis for what may happen with customer behavior in the Coronavirus?

Well, we do expect to see more of the impact on our physical channel than our digital channel. So I think that's again a lot of what we've heard out in the market and generally what we're seeing. But again, we're just -- it's going to be time to see how the consumer really respond. Is it merely a shift or does the consumer just taking more cautious approach to spending in the short term. I think that we just have to watch how this develops over the next few months.

Thank you very much. Best regards.

Thank you, Oliver.

We will now take our next question from Mark Altschwager from Baird. Please go ahead.

Good morning. Thanks for taking my question. Just to start out on Vera Bradley comp in Q4, can you speak to traffic versus AUR in your various channels? And then, along those lines, looking at fiscal 2020 in aggregate, the positive 3.4% comp at Vera Bradley. Can you speak to how much of that was driven by some of the tactical price increases that you took to offset tariffs last year? Thank you.

Sure. This is John. Mark, from a traffic perspective in the fourth quarter. Traffic was relatively flat within our store network. So ultimately, we saw some increases to AUR that drove the performance. And as you think about from a full year perspective, our total comp performance, I would say a good portion of that was driven by our price increase. Ultimately, we took close to low single digit price increase between both channels and that likely drove a proportion of the increase. We also saw some improvement in customer count in our overall business as well as online. And we saw some increased ADS on our online business.

We do think as you go into this year when you look at our projected comp performance for the Vera Bradley business, there's really a couple of big drivers in that. One is this customer growth that we've seen this year with the double digit customer growth this year, gives us a much larger customer file going into next year. And as we continue to work through the best way of stimulating that customer, that gives us an opportunity. As well as just our innovation, our innovation specifically around products, our innovation around marketing, and those are really the key drivers as we look at to this next year.

It's really helpful. And maybe just following up there. Bigger picture on the fiscal 2021 guidance. If I'm doing the math correctly, it appears to imply operating income ex Pura Vida that's down slightly year-over-year. I guess, what am I looking at that correctly? And if I am, maybe help me reconcile that outlook with the commentary of focusing on robust growth, sustainable health, and some of the other innovative things that you were just speaking to? So I think you -- I mean, understanding there's a lot of uncertainty today, I think you said COVID-19 is not included in that outlook?

No. So COVID-19 is not included in that outlook. The only thing that's including the outlook is really performance from February. So if we look at just Vera Bradley brand, we don't expect Vera Bradley brand from an operating income perspective to be lower than last year. They might not -- they'll be probably a low single digit increase from operating profit, but ultimately we don't expect the decline.

That's helpful. Thank you and best of luck.

Thanks.

We will now take our next question from Eric Beder from SCC Research. Please go ahead.

Good morning.

Good morning.

Can you to talk a little bit about -- so you rolled out in the last -- basically six months you rolled out Performance Twill and Re-Active. How are you seeing in that in terms of changing your customer base and becoming a broadening the customer base a little bit?

Yes, Eric. Great question. One thing we definitely are seeing with Performance Twill is really a strengthening of kind of that 25 to 40-year old customer base, which has been really encouraging to see a little bit more strength in our urban areas, an area that has not been as strong historically for us. So those are some great early signs. We're also getting good feedback from partners that has attracted a new customer into their store. And with Re-Active a little bit similar, it's not the same type of attraction to different customer, but the customer who is very environmentally focused has been very excited, and reacted very positively to the Re-Active collection. And we think that long term that's really an important platform, as well as just an important beginning for us as we move more and more of our product to environmental friendly type of design, which will happen over the next few years. We feel we're just continue to be able to attract not only a young customer who's very focused on it, but we're also finding that younger customer, we'll follow that 20-year old customer is also influencing her Mom. So we're not only seeing attraction in a young environmentally focused customer, but we're also seeing it in kind of that 40 50-year old customer also is reacting very positively. So, we're having kind of a benefit on both sides.

Are you seeing the same impact with some of your hands-free designs like the sling in the same way that the younger customer initially. And then it is driving customers, older customers to it?

Yes, absolutely. We are seeing that through the silhouette design also. And what we found what's been great about sling introduction is that it's really also become an incremental purchase at the different function. It's something very different to the line, and it's driving incremental purchasing. And as we go forward we'll continue to look for what are those opportunities in the assortment that we're not meeting until those in.

The flash sales, what has been the response to that? Is that something that makes a ton of sense for your strategically? Is that something you're going to continue to expand? How should we think about the flash sales in terms of clearing out products?

Yes. The online outlet sales, what we really are trying to do there is just -- we do not see that as a major growth engine for us by any means. We see it as a liquidation channel. The number one purpose of the online outlet is to keep our other channels more pure and clean and focused on full price business. And it allows us to clear inventory more discretely. But we do not see that as a growth driver as we go forward. We just see it as an important liquidation channel.

Okay. All right guys. Congrats and good luck with 2020.

Thank you, Eric.

[Operator Instructions]. We'll now take the next question from Dana Telsey from Telsey Advisory Group. Please go ahead.

Good morning everyone. As you think about the components of gross margin, merchandise margin. How can you unpack them a little bit for Q4? And what you're thinking about for 2020? And then on the Direct business which has been a bit more challenging. How do you think of the long-term game plan for the Indirect business? Thank you.

Yes. So I'll talk about the margins for Q4 and for full year for next year. So, we saw in the quarter based on how our consumer shop that we saw merchandise margins down year-over-year given the fact that they were more centered around more promotional and clearance periods. So at the end of the day we saw merchandise margins down. And we also saw some -- obviously our shipping costs will brought it back down. So you can think about that's year-over-year and the miss to guidance be -- it was basically being about 50% based on merchandise margins and 50% being on shipping costs. As we think about next year, at this point, we're not seeing -- we're not expecting to see any significant change in our promotional cadence. Obviously, depending on how coronavirus plays out that could change. But at this point we're not expecting to see any differences there. So our merchandise margins, we would expect to be able to be maintained where we saw compared to fiscal 2020.

And then in terms of Indirect. Indirect is a couple things. I think first of all, we're really focusing in on our strong partners and how to distort our business and grow our business with our strong partners. We're seeing that across various elements of the business. But there's been partners like Amazon, who's been a you know a big growth partner for us. We know that we need to begin to reap platform Indirect and find partners that are more in a growth mode as opposed to a consolidation mode, and we're in the process of doing that right now. But we think definitely next year, we still see some contraction in the Indirect channel, but we will continue to focus on new points of distribution.

And then when you think about supply chain given what happened with the disruption in China, where are you on supply chain? And I know you've been diversifying. How would you sum it up in terms of opportunities for supply chain and the status? Thank you.

Yes. From a supply chain perspective, what we believe from our finished goods production, we'll be below 20% from outside of China. And I think everyone -- we should remind everyone, ultimately, a significant portion of our raw material still travels from China into the other countries. But we believe that we've probably diversified outside China as much as we're probably going to. In the near-term we don't believe we can get that below 10%. I would say we have made significant progress over the last three years and using kind of our partners to move into countries where ultimately we have a lower cost from a total FOB because we're not paying duty in some of those countries. So, I don't see any significant changes outside of next year going from 25 to call between the high teens area for production inside China.

Just a thing that I would add is I think that the supply chain, the way that we're viewing in the supply chain is that it's definitely continuing to morph and change and develop. I think the flexibility is one of our strategic assets. I think we have a talented team here and they're able to react quickly. And we've seen them react quickly last year to the China tariffs. We've seen them react quickly to the issues that we've faced early in terms of with coronavirus impact in China. And the team is just continually to stay nimble to reinvest in our most important partners, but continue to keep an eye on the global market and where are the opportunities to continue to maintain flexibility. So it's definitely one of our strategic assets.

Thank you.

Thank you, Dana.

We will now take the next question from Rick Fearon [ph] from Accretive Capital Partners. Please go ahead.

Hey, Rob, hey, John. Thank you for taking the call and nice job navigating through things and assimilating the Pura Vida acquisition. It does look like a wonderful contributor to the company. And it certainly provides diversification with respect to what's going on here at the coronavirus. I'm assuming that as part of your forecasts, you're looking at the Pura Vida side of the business not having -- not been impacted too much by Coronavirus. Is that fair to say?

Yes. We definitely believe that Pura Vida is less exposed to the impact of Coronavirus as compared to the Vera Bradley brand absolutely.

It does sound also like the forecast including what I'm sure you've kind of modeled out as potential impact on Coronavirus. Nevertheless, you're forecasting a profitable year for Pura Vida -- I'm sorry for Vera Bradley on its own?

Yes. If we look at those brands independent we're expecting both brands to deliver profitable earnings next year.

Yes. Excluding the impact of Coronavirus is obviously right now the world's rapidly changing. Its hard to get our hands around what that looks like.

Right. And some of the potential impact of Coronavirus, I'm assuming gets offset by what is a very nicely cash flowing business with Pura Vida that shouldn't have a similar impact. Is that fair to say?

Yes, absolutely. And one of the things that we think really helps us through as the coronavirus environment gets more challenging, we do have a incredibly strong balance sheet and a very strong cash flow position and a lot of resources to get through it. And as you said, Pura Vida is much less exposed. I mean, it gives us some diversification to hedge against that. So those two assets really help us as we get through this period. But we're really focused on the long-term execution of our strategy and we believe that Coronavirus impact is more of a short mid-term as opposed to a long-term impact for the business.

Well, I couldn't agree more with you, Rob. And in fact, I'm imagining the impact is going to be far less than the dire predictions of some out there. And your balance sheet is the cash and cash equivalents, the investments is -- did I read that right? $75 million of cash with no debt?

Yes. At year-end we were $73.8 million with no debt.

Okay. So at $6 per share right now and the share -- the fully diluted share count, what is that, John?

It's call 33.5 million shares.

Okay. So we're looking at sort of a total enterprise value of around $200 million and less the cash and equity value of about $125 million. Do I have those numbers right?

Yes. I believe it does.

So the operating -- because the operating income was $19.5 million last year. And did that -- was that after some of these bonuses and things that went towards Pura Vida. And if you kind of once you have sort of adjust that for that, is there is there a number that is somewhat higher that I mean $19.5 million it is very, very healthy operating income, but it seem like there was even some things that were backed out of that, that related to the Pura Vida acquisition?

Yes. So ultimately there are some non-GAAP adjustments which include some incentive comp associated with Pura Vida acquisition as well as the amortization of some of the purchase accounting that ultimately non-cash events that on a go-forward basis that you can add into your model.

Do you have a rough number on that that I can kind of look to?

In regards to what? Last year…

Yes. Last year. Just to get that $19.5 million of operating income sort of adjusted up to what it would be prior to that non-cash adjustment?

Yes. So we took a non-GAAP charges of 39…

Into operating income.

Operating income excluding the non-GAAP adjustments of $39 million.

So 39 million of operating income. And then in addition to $39 million of operating income is the depreciation. Is that 18 or 19 -- $18.5 million. Is that -- do I have that right?

That sounds about right. Ultimately, the depreciation, amortization would be -- it's going to be a little bit higher given kind of the one-time charges that we'll be amortizing out. I mean, we can -- if we want to call after we go through more detail call, if you'd like to go through some of this off the call, we'll be happy to walk you through.

Yes. Thank you. I appreciate that, John. And I I'm just trying to get it back of the napkin. I mean, it seems like the operating income and the depreciation together you're talking about sort of an adjusted EBITDA around $50 million. And a valuation that the market is ascribing to the business today of $125 million. So like two and a half times cash flow. In 20 years of investing and running accretive capital partners and managing investments in small and micro-cap public companies, I'm not sure I've run across a business that's been discounted by the market. And I'm encouraged to see the retirement of shares that you've been buying back some shares, the treasury stock has increased. And there's been, I guess, to the 10b5-1 plan that is underway in terms of share buybacks?

Yes.

Well, it just -- its such a extraordinary opportunity for shareholders, would be wonderful to see if the company could somehow capitalize on this opportunity where a market is valuing this business at a discount that's probably 60,70, maybe 100. Discount to intrinsic value is, is truly extraordinary. So business like this, you can think of it as like an eight to 10 times cash flow multiple that the business ought to enjoy, like given that it's a -- that you're actually growing the business. You've made a wonderful acquisition. The margins are very healthy. Every things pointing towards a very profitable and positive future. Very short term blip here, which seems to have created or exacerbated a true anomaly in terms of valuation of stock. And there are other ways of going out into the market and buying back stock more aggressively. But I just can't imagine a better investment opportunity for the company than buying back its own stock with $75 million of cash and equivalents on the balance sheet and growing when the market cap itself is $125 million. I mean, we as a company, and I say we, because Accretive Capital Partners is now a very substantial shareholder of the company. There's really just a terrific opportunity here that I think you've seen your stock, it’s a very volatile stock, you've seen it bounce around over the years, but it's at an all time low right now. And it would just be terrific if the board and its management put some serious thought into a very aggressive stock repurchase plan, perhaps something like a tender offer for some stock, Dutch auction tender, modified Dutch auction tender which allows you to go out and buy very large blocks without being constrained by the 10b5-1 and 10b-18 rules. And I like say this just as some food for thought. And a real opportunity, which I think, probably won't be here too long, but it's something that would really benefit shareholders. So anyway, I don't know if you have any thoughts or..

No. I appreciate your perspective. And we definitely have those types of conversations with our board all the time to talk about what would be the best utilization of cash. And understanding that right now, we're at an all time low from a stock perspective, we will continue to have those conversations.

Well, appreciate that. And in Nice job, Rob, I mean, this is -- it's a real difficult retail environment at the mall level and it’s a shift over to e-commerce is impressive that is underway here. I know that there's a larger portion today than there was a year ago through the e-commerce channels. And certainly the benefit of working with the Pura Vida folks who were very successful at e-commerce and utilizing some of those techniques at Vera Bradley is a real opportunity here. But you've got a wonderful 30 plus year old brand, really, truly spectacular management team. We really like what you're doing. You've been very prudent with our capitals. It's a nice strong balance sheet. And there's just such a nice opportunity here that we hope you will give us some serious thought in terms of going out in press and re-buying back stock.

Now, we definitely appreciate all your comments and your confidence and we definitely will consider everything that you've said to us.

As there are no further questions, I'll turn the call back to Ron [ph].

Thank you very much for joining us on today's call. And thank you for following our journey and the progress we've made since we launched Vision 2020 over two years ago. We have an exciting future and are ready to tackle the fiscal -- tackle fiscal 2021 and beyond. We remain confident of our ability to deliver enterprise growth and revenue, profit and shareholder value in the years ahead. Thank you for your time and we hope you can join us for our first quarter call on June 3rd.

That will conclude today's call. Thank you for your participation. You may now disconnect.