Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. 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 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 today's call. I will now turn it over to Vera Bradley's CEO, Rob Wallstrom. Rob?

Thank you, Mark. Good morning, and thank you for joining us on today's call. John Enwright, our CFO, also joins me today. We posted consolidated year-over-year third quarter revenue increase of 7.9% and a 5.7% increase over the pre-pandemic levels of fiscal 2020. Vera Bradley brand revenues have continued to gain momentum quarter after quarter as customers have responded to product innovation and collaborations supported by data-driven targeted marketing. Third quarter Vera Bradley brand comparable sales rose nearly 8% over last year and nearly 6% over fiscal 2020. Pura Vida sales returned to double-digit growth in the quarter, up 11.7% over last year. Pura Vida's e-commerce revenues were still suppressed by the Apple iOS 14.5 update put in place earlier this year that lessen the effectiveness of Facebook and Instagram advertising. These 2 platforms have been the primary marketing vehicles to drive Pura Vida sales and shifting the marketing platform is underway. On the other hand, our Pura Vida first store in San Diego continue to run well ahead of expectations, and we expect to open 3 to 5 additional stores next year. Pura Vida's future growth will be expanded by balancing growth online and in physical distribution channels. Like much of the industry, we continue to experience supply chain challenges and significantly increased freight cost that put meaningful pressure on gross margins in the quarter. We estimate these incremental freight expenses including air freighting product negatively impacted diluted EPS by approximately $0.05 for the quarter and $0.10 for the 9 months. We have begun to take strategic retail price increases across both our brands to mitigate some of these inflationary and supply chain pressures. Those price increases began in this year's fourth quarter and will continue over the next few quarters. In addition, more specific to Vera Bradley, the…

Thanks, Rob, and good morning. Let me go over a few highlights for the third quarter. The numbers I will discuss today are all non-GAAP. For a complete detailed items excluded from the non-GAAP numbers as well as a reconciliation of GAAP to non-GAAP numbers, please reference today's press release. Consolidated net revenues totaled $134.7 million for the current year third quarter an increase of 7.9% over $124.8 million in the prior year and a 5.7% increase over $127.5 million in the pre-pandemic third quarter of fiscal 2020. For the current year third quarter, total company consolidated net income was $6.2 million or $0.18 per diluted share compared to $10.2 million or $0.30 per diluted share in the prior year. Current year third quarter Vera Bradley Direct segment revenues totaled $86.6 million, a 10.8% increase over $78.2 million last year. Comparable sales increased 7.8% over the prior year and 5.6% over fiscal 2020. We permanently closed 9 full-line stores and opened 6 factory outlet stores in the last 12 months. Vera Bradley Indirect segment revenues totaled $20.9 million, a 6.4% decrease from $22.3 million in the prior year third quarter, reflecting a reduction in orders primarily related to a lower volume of mask sales and a reduction in sales to certain key accounts, partially offset by a rebound in specialty account orders in other product categories that were negatively impacted by COVID-19 in the prior year. Pura Vida segment revenues totaled $27.2 million, an 11.7% increase over $24.3 million in the prior year, driven by an increase in wholesale account sales. Third quarter gross profit totaled $72.3 million or 53.6% of net revenues compared to $73.8 million or 59.1% of net revenues in the prior year. Last year, we expanded our gross margin by approximately 230 basis points through sales…

Thanks, John. Let's begin with an update on the Vera Bradley brand. Vera Bradley demonstrated solid third quarter comp growth over fiscal 2021 and 2020 and has experienced 3 quarters of sequential improvement in comp sales growth despite supply chain disruptions. With domestic traveling continue to strengthen, the travel category remained robust, exceeding both last year and fiscal 2020 levels. As expected, the back-to-school season was elongated this year and lasted well into the third quarter. With the second and third quarters combined, back-to-school revenues were up substantially over last year as expected and nearly flat with fiscal 2020 levels, so we were pleased with our back-to-school performance. Customers are responding to our continual pipeline of product and fabric innovation. We saw year-over-year growth in cotton, Performance Twill and ReActive and continued traction in our factory Ultralight collection. We remain very optimistic about recycled cotton and look forward to offering new solid color seasonally. We're constantly researching and innovating to bring our customers more eco-friendly options, and we remain committed to updating 100% of our fabrics to more sustainable alternatives by 2025. We expanded our apparel collection, adding graphic tees, proper jackets and vest, leggings and a larger selection of pajamas to our already popular Cozy Collection of sleepwear and robes. We had another exciting quarter for product collaborations, including Harry Potter and Disney. Our Disney Bonjour Belle capsule was wildly successful with Beauty and the Beast fans everywhere. For the holidays, we are ready to go with a wide selection of giftables at all price points, ranging from key chains to duffels to robes to our popular throws. And in November, we introduced our first-ever collaboration with the beloved Peanuts brand on a Snoopy-Themed Holiday Collection, featuring 3 limited edition patterns, including a line of Cozy Sleepwear for the…

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

So it looks like you're continuing to make some nice progress with marketing efforts at Vera. Can you give us just a little bit more detail on the customer file growth? I guess any learnings regarding the engagement of newer customers, curious when there are any particular categories or fabrications that are really outperforming with newer customers.

Yes. I think in terms of our new customer count, one thing that's really driving it is, one, all of the new collaborations we're doing. The partnerships with new brands is bringing new customers in, which has been exciting to see. We've also been seeing that our customer is getting younger, which we think is also a positive inside that customer file. So overall, we've been very pleased with the progress we've been making on the Vera Bradley side. And the other thing I think that we mentioned earlier, but just to reiterate, is not only younger, but the customer is also becoming more diverse as we've been diversifying our marketing efforts, which again is great to see and really builds towards the long-term health of the customer file.

That's great. And then on gross margin, so a lot of near-term pressures and cross-currents, as you outlined. As we think about next year, just any perspective on what gross margin could look like into '22, calendar '22, I guess, how you're thinking about ongoing supply chain costs versus ramping benefits from the price increases. Obviously, understanding that GSP is a swing factor here, but how should we be thinking about those other cross currents over the next few quarters?

Yes. Thanks, Mark. This is John. I think as we look at planning for next year, we're taking into consideration all the supply chain costs you're expecting freight to be similar to this year. In some cases, you could see some acceleration in the first half of the year compared to the first half of the year last year. And then it to normalize into call the back half of the year. We do believe the freight expense is going to be with us for at least another 12 months. To the point of GSP, that is a swing factor if approved. Obviously, that will have a significant benefit to margin next year. But those are the reasons we took some price increases within the fourth quarter and looking for additional price increases to offset it. So we'll come out with a plan and some guidance in our March release. But ultimately, we do think there's going to be continued cost pressure on the freight side. There's also, we believe, going to be some inflationary cost pressure on the product side as well, given some price increases that the vendors within Asia are looking for. So we're working with them to ensure we're paying appropriately, but we think there will be some inflationary pressures, too.

I think the way that I would add on that, Mark, is as we said, trying to balance out all of the inflationary pressures on price with pricing increases. As John talked about, we started taking price increases. We started first with Pura Vida, and they started out with some increases in the beginning in July. As we've been monitoring that, we've seen overall good customer acceptance of that. We started doing some limited price increases in Vera Bradley and have seen similar reaction. So we have a program set out over the next few months to continue that process. That will be a key lever we need to pull to help improve the gross margin pressure as we move forward.

We move next to Oliver Chen with Cowen.

Regarding pricing, what's happening now versus the strategy going forward? And how are you thinking about what makes sense in the portfolio? And on the inventory front, it sounded like there was more Pura Vida inventory. How is the Vera Bradley inventory level relative to the freshness and what you're seeing with demand? And also, as you work through the Pura Vida inventory, what are the key strategies you're undertaking to do that?

So maybe I'll address the pricing one and then I'll let John talk about the inventory one. But from a pricing standpoint, what we're trying to do within both brands is make sure that we are very thoughtful and targeted in our price increases. So we're going through and looking at each item. In both brands, there's a high level of continuative product. So it makes the price changing a little more challenging because we needed to change prices on existing and future inventory. But we basically have been rolling that out over the next 6 months. And again, like I said, we're going to take a very focused approach to how we price those items, right? It's very much by item with a lot of research behind it. So I think that's the first thing we're looking at. And then we're continuing to look at how do we continue to evaluate promotional activity going into the next year? And I think that's the other thing that we're spending some more time on. As many of you might remember, a few years ago, we took a lot of the clearance business out of Vera Bradley and really have been running a very clean business. So we didn't have as many -- as much opportunity to reduce that activity this year. But we are beginning to look at, particularly in the factory channel, what are the opportunities to look at the promotional activity and improve margins.

And in regards to inventory year-over-year, I think it's a tale of kind of 2 brands, right? So if you think about the Pura Vida brand, we certainly are higher than we want to be right now and higher than we were last year. And we're putting forth some efforts for -- to sell some of that inventory through some of the Vera Bradley stores to give another distribution point to sell. We're looking at opportunities with other partners from a wholesale perspective to sell some of the inventory. And we have created certain deals during the quarter to move through some of that inventory, and we'll think about doing that through next year as well. But we want to make sure we don't devalue the brand by doing that too often through the Pura Vida website. So we'll take a fairly consistent approach of how we've done it in the past with the Vera Bradley brand when we were "a little bit over inventory" and take our time to work through it because some of the product really doesn't become obsolete, so we have the ability to sell over time. The Vera Bradley product, I think we're in a position where year-over-year, definitely not an increase in inventory. I would say over time, we'll probably call it last 3 months, we're out of stock of some stuff that we were -- we thought we'd be in a better place through the holiday just because containers are stuck in certain locations, so there was an anticipation. We flew and air freighted things in that we wanted definitely here, but there was expectation for other product categories in those styles to be here that have just been hung up. We expect to get those in soon, but ultimately, as the supply chain continues to be a little bit challenging, things are taking a little bit longer than we initially anticipated to get product here.

Okay. That's very helpful. And on the delayed renewal of GSP, what was -- any context you have on why that might have happened relative to your prior expectations? I know there's a lot of uncontrollable variables there. Would love any color.

Yes. So I think -- I'm sorry, I didn't hear the last part.

The relevant countries that, that applied to would be helpful as well.

Got you. Yes. So the relevant countries that it applied to from our supply chain is Cambodia, Indonesia and Myanmar, as we procured from this year. During the full year, right, there was every indication that the Congress is going to work on renewing this. And we were much more hopeful at the beginning of the year became a little less throughout the year that it was going to get past, but still believed everything we're hearing, and I think we're still hearing that it's going to get passed in some from. Just the house has a different perspective than the Senate does on kind of what they want to put into the bill. So with everything that happens in Congress, it's just things take a little bit longer than you anticipate. So at the end of -- when we released third quarter guidance or full year guidance at the end of the second quarter, we still anticipate it to happen this year, given the fact that it's December and still hasn't happened, our expectations have changed and don't anticipate happening this year, and we hope it will happen early part of next year. But right now, we're not planning for it to happen. We're assuming it's not going to happen, so we're making decisions based on that.

Okay. And IDFA has been a difficult situation for a lot of people across the industry. And what are your thoughts on where you are with that and the strategies you're undertaking. What are the main strategies within your control? And what do you see happening with the marketing spend as well as effectiveness that we should know about?

Yes. I think we missed the beginning, but let me make sure I have it right all over. I think it was about the iOS update and what's going on with digital cost. And I think in terms of our strategy against it is making sure that we really are continuing to diversify our marketing platform becomes the key word, right? So if you think about some of the things that Vera Bradley has done, as they've been doing things like Connected TV and other avenues, also looking at things like direct mail, I think one thing that I'm seeing happen in retail, and I think it's both in the marketing arena and in the distribution arena, that this mixture of digital and maybe what we would consider more traditional methods is going to be the key to success as we go forward, right? This -- the digital space is changing, costs are going up. So you have to balance the digital spend, become much more targeted, have a lot more data, a lot more first-party data but balance that with some more traditional outreach opportunities, how do you get customers excited through other avenues, whether that is something like a direct mail or Connected TV, events. We've been very successful in Pura Vida with doing events in stores and getting crowds in that new store. And so we think all of that becomes part of the new platform as well as just using stores as a major customer acquisition opportunity. So again, more complicated, more balanced, need to make sure you have the data and science behind it. But I think what's exciting for us is that we can kind of keep cross-leveraging our skills between our brands, right? Vera Bradley has a long history of more traditional, and they've been building out a really strong digital platform, and we can use some of those lessons that Vera Bradley has learned to share with Pura Vida and really strengthen them.

Okay. And on the traffic front, physical store traffic, what are you seeing by channel outlet relative to full price? And how do you think these levels will manifest versus '19 levels?

Yes. So from a traffic perspective in the third quarter, we saw traffic was stronger in the factory outlet channel than it was in the full-line channel, which is fairly consistent with how it had been performing all year, that is slightly better from a traffic perspective in the factory channel. I think over the longer term, we still anticipate the factory channel continue to strengthen into next year and ultimately, traffic to come back there at a greater extent than in the full line channel.

But I do think what's important to know, Oliver, is we've tracked the performance of both our full line and factory quarter after quarter, both of them have continued to get stronger quarter after quarter. The traffic continues to increase, which has been great to see. So there's just been a slight improvement as we've looked at traffic factory versus full line. So I think both of them are really on a very similar trajectory pattern, and we expect going forward, probably similar performance from a traffic standpoint out of both. The real key continues to be increased conversion, though across both channels. So even though traffic is down a little bit over the pre-pandemic levels, conversion has really strengthened, which I think is encouraging to see.

[Operator Instructions]. We'll go next to Eric Beder at SCC Research.

Could you talk a little bit about collaborations and kind of how -- A, how they fit in, which is -- what is the better kind of -- which one works better as opposed to which one doesn't? You've done that for 2 to 3 years, some of them are multiple levels. How should we be thinking about what is a good versus what is a bad collaboration? Or what is a not-as-good collaboration?

Eric, I think maybe the best way to answer that is a couple of things. It's one, when you do your first collaboration, there's always an opportunity for kind of outsized growth more pent-up demand. So some of our largest results have been first-time collaboration. The second piece that becomes very important across both brands is how well that licensing partner collaborates with you. So for example, Hello Kitty was very successful at Pura Vida and we had support from Sanrio to push out to their customer base, what we were doing. So we got some outsized performance in that in Pura Vida. So it's just we do a lot of research in both brands. We ask customers what are their favorite licensing characters. And so we're continuing to look for things that are fresh. So what you'll see is we'll have some franchises like Disney and Harry Potter that are massive franchises. But then we're going to go ahead and drop in a lot of freshness. You're going to see a lot of newness in those licensing partners. So it's a combination of those 2 things becomes important. And again, really looking at it as a way to expand the customer portfolio. It's been very exciting to see even like with Harry Potter, how many new customers came into Vera Bradley and moved over to Vera Bradley customers as we've managed that. So -- and again, don't only think about the licensing partners but think about other brands that we collaborate with to, right, whether it's Crocs and Vera Bradley or some other brands that we've done things with, with Pura Vida.

The only thing I would add to that, I think also what we've learned is we need to be authentic to the brand. So if you think about the Pura Vida brand, we released some packs with Charli D'Amelio, and we released some packs Madison Bailey. Madison Bailey really has a little bit more of the ethos of the Pura Vida brand and that performed better than the Charli D'Amelio pack did for us in regards to sales. So I think we have to think about that, and we are thinking about that when we think about who we also collaborate with as an influencer.

On the Canadian expansion, how should we be thinking about that? I'm assuming you must already have had some customers in Canada. And does that eventually either sell maybe the stores or something franchise down the way?

I think right now, what I would say, Eric, is that we're continuing to test in growth. We do -- Canada, as you would imagine, is our #1 international country for the Vera Bradley brand. So we thought it was really important to begin to learn in Canada, begin to control the experience for our customer in Canada directly. So we're getting learnings. And as we build on that learnings, we'll decide how big that market can be. But we're going to watch that, and we're going to continue to test not only at Vera Bradley, but at Pura Vida. Pura Vida, we do have international presence in Europe, and we're continuing to look for international opportunities. So we think it will be an important part of the brand expansion, and we'll just see how those grow over time. But I think the other place we look at for international expansion to kind of begin to plant the seeds is through travel expansion. I think what you see happening in LAX with Vera Bradley. I think there's a unique opportunity. We've been able to work with as we've come out of the pandemic, with more minority-owned businesses in terms of whether it's female-owned businesses or local businesses. And we think that, that really provides a new way to reach out and not only connect with our current customer, but get a lot of new eyeballs on the brand and a lot of international travelers coming through some place like LAX that we haven't had before. So we do think that the travel expansion opportunity is a unique customer acquisition opportunity.

We'll go next to Steve Marotta of CL King & Associates.

Rob and John, I want to go back to the recent price increases as well as ones are expected for next year. You talked a little bit specifically about magnitude on average across the product line? And also if you expect these price increases to fully offset the costing headwinds that you are either experiencing or expecting or it's a best guess at the moment to offset them all. If you can talk about how you feel about the size of the price increases and what they are expected to offset?

Yes. So the price increase, obviously vary depending on the style and category. But I would say the price increases in total, you could think about that in low single-digit overall. Increases, low to mid-single-digits kind of overall increases as you think about each brand. That's what we're anticipating pushing through over time. Now whether or not that all gets pushed through the full year, we're working through all those details. And as we think about being able to offset -- the intent is to try to offset as much as possible, but we're still working through the plan for next year. And ultimately, we're seeing continued pressure on rates associated with shipping. We're out to contract in bids for some rates. So we're -- it's really a very fluid process right now to be transparent. So we're working through it right now, what is the best estimate for price increases and does that fully offset? I can't say with a 100% certainty yet.

Yes. I do think, the only thing I would add to what John was saying is that when you look at total portfolio price increases, right? so if we've targeted increases and you look at the entire portfolio -- John is right, that's in the kind of the low single-digit numbers. When you look at individual items, in some cases, we are seeing price increases in items that could be 10% to 15%. But when you blend in between where we're increasing prices, where we're not increasing prices, you end up more in the single digit, right?

We'll go next to Dana Telsey at Telsey Advisory Group.

Can you talk a little bit about with price increases, have you taken price increases in the past and what is the magnitude in the past? And then on the indirect accounts, what's happening with those accounts? Is it more concentration in fewer accounts? And then I just have a quick follow-up.

So I think overall, from a pricing increase, Dana, I'd answer it a couple of ways. If you think about this year, generally, our price increase started kind of in the fourth quarter. And we have taken double-digit type of increases on individual items is how I would look at the magnitude. If you look at it historically going back a few years across both brands, we did have a period a few years ago where we made price increases across Vera Bradley as we were dealing with all of the China tariff issues, and that was kind of in the single-digit, low single-digit type of range. So not as aggressive as what we're seeing this year. Pura Vida did have back a few years ago, they did have a significant increase, kind of double-digit increase in their core product. And they just took another double-digit increase in their core product in November. So we have had fairly large magnitude increases at Pura Vida over time, and we think there's opportunity there.

The only thing I would add to that the Pura Vida was prior to our ownership, that has happened over the last couple of years.

Talking about indirect.

So from an indirect perspective, if you think about both brands, in the Pura Vida brand, it's really expanding ultimately, there's an expansion of doors that are happening in that brand. It continues to accelerate -- it has accelerated this year as compared to last year. If you think about the Vera Bradley brand, we're really diversifying our partners there, while we're diversifying kind of product offerings there. So that's the thought and kind of the plan associated with the Vera Bradley brand.

And I think as you -- as we mentioned, right, the partners like chewy.com, how do we find again? So much of what we're doing at Vera Bradley now is playing target, right? So how do we take our pet line, put it in chewy.com, which obviously has a significant amount of eyeballs and really use our wholesale opportunities to grab new customer eyeballs as much as just volume.

And then on SKU count, how do you think of the SKUs for each of the brand? Any expansion reduction or a percent of sales that comes from the most dominant SKUs? How do you think of SKU counts and where you are now?

So a few different things, right? The top items are always a key focus for us. They always have been at Vera Bradley. You can think about the iconic items there between our large floral Campus Backpack, lanyards, all of those are -- the throw blanket, the tote, very much needle movers. We continue to focus on those. We also do believe that Vera Bradley, there's an opportunity in the core product, right, the bag business to continue to tighten that assortment, really focused on the best SKUs, make sure that we're really driving key items in the core assortment and then expand in categories on the edge. So adding more into the apparel area or the home area, giving the customer another reason to buy as opposed to just trading from one bag to the other, really focus that buying but really add another reason to buy. That's one of the key strategies at Vera Bradley. If you think about Pura Vida, the focus there has really been how do we maintain that great core string bracelet business, expand out into jewelry, which has been successful, continue to monitor that SKU count. But in something like jewelry newness has become very important in terms of new SKUs in driving new growth. But bringing something new, sell out, bring in something new. And then we're just testing into apparel. We want to make sure we don't go too broad, but try to have kind of a tight SKU assortment. And we think that will be a great strategy for us as we move forward.

And that will conclude today's question-and-answer session. With no other questions holding, I'll turn the conference back to Mr. Rob Wallstrom for any additional or closing comments.

Thank you. We have an extraordinary culture, a dedicated team, loyal customers and a clear vision to be a purpose-driven multi lifestyle brand, high-growth company. Our strong cash position, debt-free balance sheet and capacity to generate free cash flow will allow us to continue to invest in our 2 unique brands and seek out other acquisitions at comfortable, affordable, purpose-driven brands over time. Although there are near-term headwinds with rising digital expenses, supply chain disruptions and elevated costs and the delay in the GSP renewal, we have demonstrated an ability to manage through short-term challenges while delivering on our long-term strategy. We have an exciting future ahead and the opportunity to create long-term value for all of our stakeholders by pursuing growth within our current brands and continuing to seek nonorganic growth through new brand innovation and acquisitions over time. Thank you for your time and interest in Vera Bradley, Inc., and we hope you can join us for our year-end earnings call on March 9.

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time, and have a great day.