Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley Fourth Quarter and Fiscal Year-End Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call 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. Some of the statements made 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 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 it 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. I am proud of how our organization navigated through the last year. Our extraordinary culture and our loyal customers allowed our 2 lifestyle brands to not only persevere through the crisis, but the changes we made to respond to rapidly changing consumer needs during the pandemic made us stronger as we look to the future. Our brands were able to bring brightness to our customers during a very challenging year. Despite an extremely challenging overall retail environment in a very difficult handbag and accessory market in particular, we delivered some best-in-class operating results. On a non-GAAP basis, our fiscal year operating income was nearly 90% of last year's results, which was a strong performance in light of the unprecedented pandemic related headwinds. This performance was due to the strength of our 2 lifestyle brands and strong execution. Despite significant sales disruption, we had several financial successes during the year. Our e-commerce sales comprise nearly half of our total company revenues for the fiscal year, and our Vera Bradley brand e-commerce sales grew by nearly 50%. We expanded our annual consolidated gross margin rate primarily through product innovation, cotton masks and product collaborations and more full-price selling. We diligently managed our expenses, and we ended the fiscal year with a solid balance sheet with ample cash and no debt. We are in a strong position to drive growth by continuing to invest in our 2 brands and to take advantage of additional acquisition opportunities over time. Let me make a couple of comments on our fourth quarter performance. Our Vera Bradley segment fourth quarter revenue trends were similar to the third quarter, excluding our mass business, which declined…

Thanks, Rob, and good morning. Let me go over a few highlights for the fourth quarter and the full year. As a reminder, financial results have been consolidated to include the Pura Vida acquisition after the July 2019 acquisition date. The numbers I will discuss today are all non-GAAP. For a complete detail of items excluded from the non-GAAP numbers I will discuss and a complete reconciliation of GAAP to non-GAAP numbers, please reference today's press release. Consolidated net revenues totaled $142.4 million for the current year fourth quarter compared to $156.9 million for the prior year fourth quarter. Excluding charges, Vera Bradley Inc. non-GAAP consolidated fourth quarter net income was $10.5 million or $0.31 per diluted share compared to $14.3 million or $0.42 per diluted share last year. Current year fourth quarter, Vera Bradley direct segment revenues totaled $93 million, a 10.2% decrease from $103.6 million in the prior year fourth quarter. Comparable sales decreased 10.6% for the quarter, reflecting a 27.4% decrease in comparable store sales and a 31% increase in e-commerce sales. Store traffic continues to be negatively impacted by the pandemic. We closed 13 full line stores and opened 6 factory outlet stores in the last 12 months. Vera Bradley Indirect segment revenues totaled $15.2 million, a 14.7% decrease from $17.8 million in the prior year fourth quarter, reflecting a reduction in orders, primarily, related to the pandemic and in a number of specialty and department store accounts. Pure Vida segment revenues totaled $34.1 million, a 3.9% decrease from $35.5 million in the prior year fourth quarter. Growth in e-commerce sales were more than offset by the decline in sales to wholesale accounts, which were negatively affected by the pandemic. As Rob noted, we made the strategic decision to reduce discounting during the Black Friday period,…

Thanks, John. Fiscal 2022 promises to be another challenging but exciting year as we enter the next stage of our company's growth journey. Both of our lifestyle brands have enormous growth opportunities ahead, well beyond their core product categories driven by a focus on digital first, innovation and community engagement. With Pura Vida, let me start with our high-growth potential Pura Vida business. We expect Pura Vida to grow by over 20% in revenue and operating profit in fiscal 2022. In order to drive this growth, we are continuing to strengthen the infrastructure of Pura Vida. Our Project Novus ERP integration is scheduled for this fall for Pura Vida. And at that point, our entire VRA enterprise will be on a unified technology platform. This will allow for enhanced capabilities in sourcing customer service, CRM and data analytics among other areas. In addition, we are strengthening key merchandising inventory planning in customer analytic functions of Pura Vida. On the supply chain front, we have a 3-year plan to further our supplier diversification for both stream and nonstream products. Pura Vida continues to innovate at a rapid pace. We continually expand our offerings of traditional signature core bracelets and style packs, and we have continued to add our popular non-stream collections which were at a higher price points than our traditional bracelets. This category expansion and product diversification is working. As I noted earlier, nearly 50% of our e-commerce business is now comprised of non-string jewelry categories, underscoring our brand's broad lifestyle appeal. Our Pura Vida spring launch is off to a strong start and features several fun new jewelry items like metal, semiprecious stone, shells and beads in addition to traditional bracelets, rings, earrings and necklaces are gaining in popularity. Pura Vida's signature charity bracelets continue to be an integral…

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

Sounds like a lot of exciting initiatives underway here. Just the first question with regards to the revenue outlook. Can you just talk a little bit more about how you're thinking about the shape of the year in terms of year-on-year growth versus fiscal 2020 or calendar '19? I guess I'm just trying to think through the core demand recovery versus the impact of lapping some of the mass sales or just any other considerations there. And on that point, specifically, annual outlook sale, should we -- what should we be assuming from a contribution there in the early part of the year?

Sure, Mark. I'll kick it off and Rob, you can add if you need any details. In regards to the annual outlet sale for this year, we have canceled that sale. So it won't be in that number of the $550 million to $575 million. In regards to the shape of kind of the sales as we compare it to fiscal '20 or calendar '19. As we said, we anticipate the back half being stronger this year than the front half, i.e., the first quarter is going to be a little bit more challenged given store traffic that you've likely seen in all those retailers in all the reports. So we think the first quarter is going to be a little bit more challenged, but we think as we move into the summer and move into the fall period, we'll actually see some kind of benefit in regards to kind of people coming back down shopping.

And just a couple of things that we've seen so far in the quarter, which has been encouraging to at least see some of this more positive behavior is vaccines are beginning to roll out. We're seeing a little bit of improvement, particularly, with the older customer coming back. So the first ones to get the vaccine, which was an interesting data point. So we are seeing some positivity. It's not overly material yet, but it's the beginning, which is a good sign. And the other thing that we've seen, particularly with Pura Vida's wholesale business, is nice kind of growth early with the wholesale business and their partner is really expecting a return to a higher level of performance as they enter the summer period, and so we're seeing increased revenue there. So there's some encouraging signs. But overall, we do expect, obviously, for the first half of the year to be more challenged, kind of a -- more of a -- some level of continuation at the end of last year, but the second half of the year to really see a pickup kind of starting with back-to-school and moving on from there.

And then with regards to the earnings outlook, I guess, unpack that a bit. I think the midpoint of the guide implies operating profit that's above fiscal 2020 levels. But if I back out Pura Vida, it would seem to imply the expectations for Vera Bradley operating earnings are still below pre-pandemic levels. Maybe just help us understand some of the puts and takes there. Bigger picture, how you're thinking about the normalized level of operating margin at Vera Bradley with all the shifts in channel mix and the planned marketing investments?

Yes. So that's accurate. If you kind of unpack it, ultimately, the Vera Bradley brand is going to be a little bit more challenged in fiscal '20, and we're getting a benefit for annualization of Pura Vida. Some of the challenges in the Vera Bradley when you compare it to '20, there will be some sales, won't be back to the full level of '20. It will be very close, but it won't be necessarily back to the full level depending on kind of where we hit, margin will be somewhat challenged given all the costs associated with inbound and outbound shipping. And with the port delays, we'll be bringing things in a little bit differently, so that may cost us a little bit more so margin will be challenged. From an SG&A perspective, there'll be some savings associated with kind of 2020 results for some of the permanent savings. But as you can imagine, compared to '21, the fact that we have all of our stores open, we don't have the same benefits that we saw in '21 in regards to some compensation reductions that the organization took. You'll see some kind of challenges against '21 there. So I'm not sure if that answered your question, but some -- it definitely is -- Vera Bradley will probably take till -- will not be back to '20 levels this year.

Yes. I think what we're targeting is the following year to get Vera Bradley back to that 2020 level, but we believe it will at least take us an extra year to get there.

Got it. That's helpful. And I appreciate your willingness to provide a detailed earnings outlook, I know it's tough right now. And then maybe just finally, Rob, again, bigger picture with respect to the new management structure. It would seem to open up some capacity for you to dedicate to the M&A. Maybe just talk about your approach there, what the landscape looks like for brands that fit your profile? Just any sense of the potential size range you would consider from an acquisition standpoint?

Yes, in terms of giving a lot of detail on M&A activity, we usually don't do that, but I can give you a little bit because I think you're right. Part of the reason why we did do the structure is we do believe that there will be opportunity in the future. We think that we've been very happy with the Pura Vida acquisition. We believe that there's real growth in that brand. We think that being able to look at digitally native companies that are kind of in that mid part of their growth cycle and helping them scale get larger and kind of work through that transition and maximize the potential is a real opportunity and so we're also looking for other ones. And obviously, this has been a time where there's a lot of brands that are starting, which is encouraging. But we want to make sure that we're diligent in the process. We want to make sure that we really are looking for the right opportunity at the right time, kind of the right valuation. So we're going to make sure we're very prudent in that approach. But we will be looking, and we'll see what opportunities present themselves.

The next question comes from Oliver Chen of Cowen.

So as we think about inventory, it seems a bit elevated at the end of this quarter, but there was rationale. Why -- how are you planning inventory relative to sales as the year progresses? And also, the potential bounce back on back-to-school as well as travel. How might you assess that as well as planning inventory given the dynamic nature of what we're seeing?

Yes. So I'll handle the inventory part of it. Yes. I think at the end of the year, it was a little bit elevated than what we had guided towards that we had talked towards at the end of the third quarter and the rationale was we pulled some stuff forward in regards to just port delays to make sure we had it for launches was a part of it. Also, when we cut back on the promotionality for the Pura Vida, we still had some inventory associated with that. So as we think about next year, as we've kind of indicated in our guidance, we believe we have an opportunity to shrink inventory year-over-year, call it, in the 5% range, so call that between $5 million and $10 million. So we'll be working through inventory in both brands to make sure we're well positioned to hit the sales targets that we have. We want to make sure as we enter into new categories for the Pura Vida brand that we have the right assortment and the right value from an inventory perspective to make sure that the sales hit, but we will be mindful of taking out -- reducing inventory year-over-year.

And then I think I'm not -- you can clarify the question a little bit around back-to-school to make sure I answer it correctly, if I don't Oliver. But as we look at back-to-school, we're obviously hopeful that we'll see school openings as we get back in the fall. And with a lack of back-to-school purchasing last year, we think there's going to be some pent-up demand. From an inventory standpoint, we feel like we're in pretty good shape. We're hopeful that as back-to-school bounces back too, there's an opportunity to drive even more full-price selling, which has been in the past, we've been on till last couple of years. So we feel like we're set up pretty well for the back half of the year.

And Rob, with discounting at both brands, Pura Vida and Vera Bradley, what's the outlook as you think about merchandise margins versus this year and what's incorporated in your guidance and also the merch margin profile versus 2020?

I can take some of that. So in regards to kind of merchandise margin. As we think about the guidance, we don't anticipate to be significantly different from a discounting perspective. So you can look at kind of merchandise margin for kind of like categories to be fairly consistent with masks being a smaller part of the business next year, this upcoming year versus what it was last year, we're going to see some challenges. Mask was a very high margin category for us. And with that being a smaller part of the business on a go-forward basis, you'll see some pressure if you look at the aggregate merchandise margin. But generally speaking, in total, we expect not to be significantly more promotional than last year.

We had made a lot of progress last year in terms of reducing promotional activity at Pura Vida. And as we're looking at the kind of penetration of retirement to full price sell and we were seeing nice growth in our full-price business last year. So we're really looking to kind of hold on to those gains as we go into the next year and not increasing the discounting activity.

The organizational changes sound quite innovative and congrats to Daren. What are your thoughts on why now is the right time for that? And also what will be some of the parameters in terms of making these changes and the framework you're thinking about in timing and managing both opportunity and risk?

Yes. I think a few things. I think, one, Daren did a very nice job since he's come in of really helping to put more focus on our digital business, our e-commerce business, our analytics, our marketing analytics and really played an instrumental role over the last couple of years. And we just believe that, as we move forward, that's becoming more and more important and is surrounded by a really talented team. And Beatrice, Murdoch and the team that can really support the growth initiatives going forward. And we think that by having Daren really focus in purely on Vera Bradley, it's a singular brand that, that can bring even additional focus to the Vera Bradley brand. I think that there is a lot of opportunity at Pura Vida to continue to expand. So I want to make sure that we have enough support from the corporate team to really support the Pura Vida expansion. Second of all, I do believe that there's opportunity to continue to enhance our brand portfolio. And so making sure that we're spending sufficient time on that. There's also another piece of it. As we look at the corporate platform, what we really want to do with that over time is just really build an efficient support structure. So that as we -- as brands are kind of pop into that, we have the expertise that can really help them grow from a logistics standpoint, from an IT standpoint, from a human resource standpoint, in a legal finance standpoint. And we've found a lot of that has been helpful to Pura Vida, and we think we can provide a lot of help for the next brand that comes from the portfolio.

Rob, on that point, what would you highlight as synergies as an acquirer you might bring to the table? And what's your impression of valuations in the marketplace as well as you think about M&A? And then when you think about M&A, do you have a general framework for lifestyle brands or categories which may be more conducive to your profile?

Yes. I think a couple of things. I think, one, in terms of what we're looking for. I think 1 of your key words, lifestyle, we really in this kind of casual, comfortable, affordable space. Lifestyle brands is really kind of our key target area with the digital-first perspective. We think that all of that is really important. I think valuations in the marketplace, there's a lot of breadth in valuations right now. So -- but we think that 1 of the things that's unique about the opportunity with Vera Bradley as an acquirer, and I'll talk about some of the synergy we bring, but it's also some of the cultural synergy. It's a place where and speaking with Paul and Griff from Pura Vida, they plugged in their brand. It's a good corporate and company culture that's really supporting their growth, supporting their unique ethos and how they approach their business and having that freedom to keep their company culture alive and strong. I think it's really important for these direct-to-consumer brands and having a real commitment to kind of the purpose-driven initiatives that they put in place. I think that makes us more appealing and some from a partner standpoint. In addition to that, I think that there's a lot of things that we've offered Pura Vida and can offer other companies, whether it's just working through scaling as these companies go from early growth to higher growth base, become more complicated. And obviously, we can provide a lot of expertise working through the legal and financial challenges and HR challenges of doing that as well as we've been through, we have a lot of partnerships that we can introduce people to whether it's through our licensing agreements, whether it's through categories. And just a lot of general talent and expertise that really allows these smaller brands with smaller teams to plug into a larger company and take advantage of a built to network. And so we think all of that or some of the advantages we bring to the company that we acquired.

We don't answer that you know, Oliver.

My final question was about the cotton refresh, which sounds like a big opportunity. How is that incorporated in the guidance and timing? And then how might you manage the rollout of that? And you've also had a really good stream of partnerships with different brands. As we anniversary that, what should we know in terms of your Vera Bradley revenue guidance?

Well, a couple of things. The cotton relaunch is happening in second quarter. So that's when we expect that to happen, and we'll have a lot more details coming out on that, but we're really excited by that. And for a few reasons, right? One, we saw really good customer response to our reactive launch, the sustainability initiatives. Consumers were really reacting to bringing in new consumers. So we think that is well resonant in addition to the sustainability aspect of it. It's going be the first time we're launching solid cotton, which we've had a real uptick in our solid business. So we think that's another opportunity, plus a third leg of it is we have some new more updated styling that's going to be part of it. And then we're working on an exciting marketing launch to really cause some buzz. So there'll be more details coming around that, but all that happens in the second quarter. In regards to partnerships, you're right that we've had a nice kind of robust pipeline of partnerships, and those will kind of continue into this year, and we have more on tap. Some more we'll be rolling out this year as we anniversary. So we feel good about anniversarying these partnerships and actually expanding them. We think there's a lot of opportunity. And we think this whole co-live concept of great brands coming together really is bringing in new customers, and so we plan on continuing down that path.

[Operator Instructions] Next question comes from Eric Beder of SCC Research.

Some of my questions have been answered, but I have a few here. Could you talk a little bit last 2 kind of major rollouts you did at your Bradley stores for holiday. And to a lesser extent, but they are still there for February to beach. It looks to have a lot more products this year than last, now much more larger in terms of SKUs and other pieces. And I think it worked. Do you see that as kind of a trend coming much like more focused on kind of these kind of events and being a little bit deeper in them as your customers give you permission to buy more beyond just handbags?

So let me try to answer, make sure I get it right, Eric. I think, one, we definitely do believe that there's an opportunity beyond just the bag category. We saw that in the fourth quarter with the real great success of cozy, some of the apparel that we launched. We think that our customer definitely see this is really kind of a pattern house and likes to buy into the brand across multiple categories. So we do think long term, there's some real opportunity there. We also do find that the customer is responding even stronger to things that are novelty and event-driven. I think with everything that's happened in this last year, people are looking for opportunities to be happy. We saw a huge uptick in Valentines purchasing this year. which I think spoke a lot to customer psyche, and we saw that at Vera Bradley and Pura Vida. It has kind of anything with the hearts and Valentine's type of novelty was selling extremely well. So we do believe that that's going to be important as we continue to go forward.

Okay. Harry Potter, you kept that as a full section for a long time now, almost since July. Is Harry Potter more than just a collaboration. Is it something that we're going to see for multiple periods going forward, for multiple seasons? Because that usually does not happen with your collaborations?

Yes, I think that's a great question. And you're right that we see the Harry Partner partnership is more than just a once or twice, we do have another launch that will be coming out with Harry Potter, so we do see that as a partnership, and we will evaluate that. And we're looking at other character licensing opportunities as we go forward. Because as I mentioned earlier, the customers really responding to novelty, really responding to character license, responding to novelty in our core Vera Bradley brands. But you will see that some of these do go on for a little while. Our collaborations with Crocs has been a few seasons now, our collaboration with Venus has been a couple of years now, and we see Harry Potter more similar to that.

Next question comes from Steven Marotta of CL King & Associates.

Robert, I think you mentioned earlier in the call and if you didn't, if you just clarify, the Southeast is outperforming a bit compared to other regions, correct?

I'm sorry, I didn't hear what you said?

Southeast outperformed than other regions.

Slightly, yes.

Is that accurate?

Yes, yes, slightly, yes.

Great. Is there anything within that might be a looking glass to what will be working 6 to 9 months from now in the balance of the country opens to that extent? Or do you think it's just such a unique point in time that there's nothing really going from it on a product basis?

I think from a product basis, we're definitely -- as you get more customers in the store, obviously, you're learning more in terms of what the customer really wants. But I wouldn't say that the Southeast customer right? In other words, it's really changing in a major way the product that's selling. I mean there's obviously regional differences, but there've been regional differences over time. Obviously, with picking up down there is the idea of beach and all of that. And I think as domestic travel begins to open up, we do definitely expect to see the travel business potentially 1 of the first things hopefully to bounce back, if this vaccine rollout really accelerates strictly as people are expecting it to that we could see a good domestic travel season this summer, and that could be very helpful and then hopefully followed by a real strong bounce back in the back-to-school business that would kind of be the ideal scenario.

The next question comes from Dana Telsey of Telsey Advisory Group.

I could tell you your newest Pura Vida bracelet collaboration is a huge hit from everything I've been hearing, so congratulations on that. As you think about supply chain and incremental freight expenses going through this upcoming fiscal year, how do you see it playing out? And what are you planning for? And then lastly, how do you think about promotions and planning promotions going forward given the elimination of Black Friday, the elimination of the outlet sale? How do you characterize it going forward is how you plan to promote in maybe a more effective manner?

Yes. So I can hit on kind of the supply chain and freight expense. What we're hearing, and I think we're seeing -- you're probably hearing it from a lot of other retailers is the first half of the year is going to be fairly challenged from an inbound freight expense. The ports are fairly congested throughout the world. And we anticipate seeing an uptick in costs just to get a container as well and uptick in just rates, generally speaking in the first half of the year and then that debate a little bit going into the second half of the year, and that's how we've thought about it when we put our plan together. We've also thought about kind of outbound shipping, so costs associated with getting the product to the consumer. We anticipate that that's going to increase year-over-year, call it in high single-digit area. So that's how we built that into our guidance. And in regards to kind of promotionality in for kind of how we've built that in. We don't anticipate, as I said earlier, that we expect a significant reduction or increase in promotionality. We are losing kind of for the second year an event where we had people coming into Fort Wayne to kind of our ability to kind of utilize that to work through some product, but we still believe there's an opportunity to look through product in our factory locations to Rob's point just a few minutes ago. If domestic tourism opens up and is a significant -- if it increases significantly, we're well positioned in certain domestic tourist hotspots where we think we could see some nice sales and the ability to work through product there.

This concludes our Q&A session. I would like to turn the call back over to Rob Wallstrom for any closing remarks. Thank you.

I cannot be prouder of how our team has responded to the challenges we had faced during the last year. We have truly emerged a stronger organization. We have an extraordinary culture to powerful brands with unique growth opportunities, devoted customers, a strong balance sheet, ample liquidity and a robust strategic plan to propel us forward as a purpose-driven, multibrand, high-growth company. As I noted earlier, both of our lifestyle brands have significant growth opportunities ahead well beyond their core product categories, driven by a focus on digital first, innovation and community engagement. And we are excited about exploring potential acquisition opportunities that will strengthen our capabilities and further diversify our revenue streams. We have an exciting future ahead and we look forward to creating value for all of our stakeholders in fiscal '22. We expect to deliver double-digit revenue and operating income growth over both fiscal '21 and fiscal 2020 performance. Thank you for your time and interest in Vera Bradley Inc. We hope you can join us for our fourth -- our first quarter call on June 9. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.