Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley First Quarter Conference Call. [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 today's 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 in 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 today's call. I will now turn the call 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. While total company first quarter revenues of $98.5 million fell below our expectations and resulted in a net loss before certain charges of $0.19 per diluted share, we continued implementation of our price increases, which helped to offset logistics and sourcing pressures, continue to drive product innovation, controlled expenses and completed $10.5 million of share repurchases, while maintaining a strong debt-free balance sheet. We are clearly seeing a bifurcation in the spending of our customer base. At Vera Bradley, Direct channel full-line revenues were above last year as customers with higher household incomes remained engaged and spent more than last year. We also saw a healthy year-over-year rebound in Indirect channel revenues. However, inflationary pressures, including rate -- including rising gas prices, particularly impacted the spending of Vera Bradley customers with household incomes below 55,000 as well as traffic and spending in our Vera Bradley Direct channel factory stores for the quarter. In addition, Pura Vida's e-commerce revenues continue to be significantly affected by the shift in social and digital media effectiveness and rising digital media costs. For the balance of the year, we are taking decisive actions to strengthen the enterprise and remain highly focused on our 2 core brands. On a company-wide basis, we are in the midst of a comprehensive cost reduction and efficiency process. We expect we will complete the identification of cost reductions and continue implementation in the second quarter, and we anticipate we will realize annualized savings in the range of $15 million to $25 million. We are also continuing to evaluate and execute strategic price increases for both brands to offset rising raw material and freight cost as appropriate. As you…

Thanks, Rob, and good morning. Let me go over a few highlights for the first quarter. The numbers I will discuss today are all non-GAAP. For a complete detail of 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 $98.5 million compared to $109.1 million in the prior year first quarter. The consolidated net loss totaled $6.1 million or $0.19 per diluted share compared to a loss of $1.7 million or $0.05 per diluted share in the prior year. Vera Bradley Direct segment revenues totaled $61.6 million to 7.6% decrease from $66.7 million last year. Comparable sales declined 11.1% in the first quarter. Vera Bradley Indirect segment revenues totaled $17 million or 11.2% increase over $15.3 million in the prior year first quarter. Pura Vida segment revenues totaled $19.8 million, a 26.8% decrease from $27.1 million from last year. First quarter consolidated gross profit totaled $52.5 million or 53.3% of net revenues compared to $59.2 million or 52.2% last year. The current year rate was negatively impacted by higher inbound and outbound trade expense, partially offset by price increases. Consolidated SG&A expense totaled $59.6 million or 60.5% for the current quarter compared to $60.1 million or 55.1% last year. The first quarter consolidated operating loss totaled $6.9 million or 7% of net revenues compared to $1.2 million or 1.1% of net revenues in the prior year. Now let's turn to the balance sheet. Cash, cash equivalents and investments as of April 30, 2022, totaled $64 million compared to $52.7 million at the end of last year's first quarter. We had no borrowings on our $75 million ABL credit facility at quarter-end. We remain in a strong cash position with a debt-free balance sheet. We…

[Operator Instructions] Our first question will come from Oliver Chen with Cowen.

Tom Nash on for Oliver Chen. A couple of questions on consumer health. With regard to price increases, could you provide some additional color on where these are occurring across both channel and category? And are there some areas of the business that are taking prices better than others?

Yes. In terms of prices, talk about it maybe first by brand. At Pura Vida, that they've had price increases across nearly all of the product categories. And it seems to be a good level of acceptance from the consumer. At Vera Bradley, we've been more targeted in those price increases, really looking at it by item because of the diversity of our assortment there. And what we're seeing though is that as we've increased price increases that the consumers are accepting it, but not with an unlimited acceptance. So we're having to be very disciplined and very targeted and we'll continue to evaluate that and continue to look at prices as we move forward. But I would say, overall, the reaction, it's not necessarily been different by channel. But what we have seen, as we talked about earlier, is just more acceptance, more spending overall by the higher income customer and obviously, a pullback from the lower-income customer. But what's been interesting is even looking at promotional activity, we found that the promotional activity is really not necessary for the high-income customer that they seem to be accepting their price increases.

Okay. Great. And a follow-up on supply chain disruptions. I'd love to hear your thoughts on inventory management through the summer. And additionally, if we reach peak inflation here, how does the overall business view promotional possibilities across categories and channel?

I can take that question. In regards to supply chain, we continue to see kind of some disruptions in the supply chain. We're not back to pre-pandemic levels on on-time delivery, even with extending our expectation of when that product should be delivered. All that being said, we are in a good inventory -- better inventory -- I’m going to say, better inventory position than we were throughout the year -- last year, and we expect to be in a better inventory position during the summertime. And given our sales reduction, we will be looking at potentially cutting forward purchases given where our current inventory level is. In regards to promotionality, as we think about the -- later in the year, as with our kind of our gross margin guidance, we expect promotionality not to change based on our original expectation, but we'll continue to assess that throughout the summer and throughout the rest of this year.

That's very helpful. And 1 final question on Pura Vida. Can you provide some additional detail regarding the strategies for the marketing platform enhancements and any synergies that might be available from the Vera Bradley platform?

Yes. Great question. First of all, bringing Lockie in was a critical step. If you've been following our story a few years ago, we brought Daren Hull in, who kind of rebuilt the marketing platform at Vera Bradley brought in data analytics and really kind of moved us forward. What we're doing is with Pura Vida is basically going down a similar path by bringing Lockie in, that the Pura Vida team has done an extraordinary job of really leveraging the social media platforms for customer acquisition over the years, we're really best of class. But as this whole -- if the whole channel and the word change, that's become obviously much less effective. And so now what we're doing is really building out our data platform, building out our first-party marketing, but then also starting to expand in stores and using stores as another avenue for acquisition will be really critical. And then the other thing is, as we're thinking about the marketing for Pura Vida, it's not just the data, but it's also looking at different channels, both from a performance marketing and also leveraging even heavier, the influencer part of the business because what we're seeing in a lot of the direct-to-consumer companies with lower AOVs is the importance of kind of releveraging out the influencer put more time and energy into the influencer tribe, so to speak. And that is well underway with Griff really leading that initiative .

And our next question will come from Eric Beder with SCC Research.

Could you talk a little bit about the collaborations quite obviously with being very-- you've been a little more expensive with them and also has been innovative in terms of things like the recent Tupperware collaboration. How do you -- where is, I guess, kind of a limit on how far you want to take the collaborations going forward for both Pura Vida and for Vera Bradley?

One, our collaboration partnerships that we're doing is really about customer acquisition, reaching out to new customers, expanding the tribe of customers inside Vera Bradley and Pura Vida. And over the last couple of years, we've really had a lot of success in doing that through our Disney partnerships, our Harry Potter partnerships, and most recently through the Star Wars partnership that we find it really brings a new excitement and a new customer who discovers our brands, which we think is great. I think you're right that as we think about the Coleman opportunity, right, moving into some of this outdoor space being in Target, it's great to see the brand and kind of the in-cap in Target. It gets a lot of new customers to see it as well as thinking about things like Tupperware that it's a way to get new customers into brand, people that might not be thinking about us from a bag business. But love the pattern and love the brand and a new way to join. So we think we have to continue to balance that, continue to look for new, unique partnerships to keep it fresh and keep it exciting. And I would say that probably the level of collaborations we've been doing is probably around where we would want to be. I don't think that we'll continue to do more and more. I think the trick is continuing to find more and more powerful ones. But we've been very excited with the ones we've launched in both brands so far and have had very good customer responses.

Okay. When we look at -- and you mentioned a little bit the back-to-campus season, obviously, that's a big season for you and last year there were some opportunities that because of supply chain flows didn't materialize great news we like. How focused and what should we be thinking about you guys doing in terms of that season going forward for -- in Pura Vida, I'm sure that's going to start in about 2 to 3 weeks.

Yes. No, I think the back -- we're definitely very hopeful on the back-to-campus season coming up. If you think about last year, there still was a lot of noise shall we say, around COVID, people going back to school, all the stuff that was happening out in the media. So between having some supply chain disruptions, having maybe a lack of singular focus with kids getting back to school, we think there's some opportunity as we move into this year. Our inventories are in much better position than they were last year, and we're anticipating that the customer will have more open to spend overall as they go back to school. So we are hopeful. We feel like we're set up and ready to go. And then we'll start -- what we're doing this year to is really leveraging now that Vera Bradley kind of the streaming TV, and we think it's a way to bring new customers into our back-to-campus business.

Great. And last question. In terms of the store mix, you are now more outlets in the Vera Bradley side with more outlet stores than full-price stores. What should we may be thinking about that mix and kind of where is the store -- and you've obviously been shrinking the full price store base, where is the kind of correct mix of product and amount of stores that should be out there for Vera Bradley?

Yes. In terms of store mix, I think 2 things as we think about our full line business, what we think about is the omnichannel approach, right, between our e-commerce business and our full-line stores, we think it's important that we have a mix of both. We think that brick-and-mortar plays an important role in that mix, and we'll continue to. And I think you will see us continue to look at different ways of innovating within our full line portfolio and continuing to look at opportunities. Particularly, I think going forward, as we look at new real estate formats opportunities where customers are, I think you'll continue to see experimentation there. At the same time, we do believe that the factory channel is an important channel for us. Obviously, right now, with gas prices, there's a cyclical pressure on that channel. But long term, it's been a very good channel for us, both from an acquisition and the volume and profitability standpoint. So we expect that we'll continue with the focus on the factory channel to kind of balance our full price e-commerce/brick-and-mortar strategy.

And our next question will come from Joe Gomes with Noble Capital.

The first question, you mentioned the household income under $55,000, we're seeing some difficulty there. Any data on what percentage of your overall customers that group makes up? And how has that been shifting over time?

Yes. A couple of things. One, it's about 20% of our customer spend is coming out of that customer group. It -- over the last kind of 2 years, we've been focusing on really bringing in the 25- to 35-year-old customer, as we've continued to bring new customers into the Vera Bradley brand. And when we started bringing in that younger customer, the average household income was lower in that group than in our traditional customer base. So we've seen that group grows slightly, but it's really due to the age. So we think that acquiring that customer and that age category is really important to the long-term health of the brand. The cyclical pressure we're experiencing, obviously, is painful to go through. But again, we do believe it's a cyclical one that will change and having that population in our database and attracted to our brand, we think will make the brand stronger over the long term.

Okay. And then you mentioned about the cost reduction initiatives. I think you said you hope to identify them here by the end of this quarter. Maybe a little more color on when you think those reductions will be implemented? And when do you think you'll start to see the $15 million to $25 million of cost savings come through?

It's a great question. And first of all, we already have begun to take some of the cost out. But what we're really doing is a top-to-bottom scrub to figure out with the economy potentially being in this lower household income customer really already in a recession. And if that continues for a while, we feel that bringing down the overall cost structure, more what I'll call the structural cost structure is important. So we've been involved already. We're in the midst of doing all of that work to look at both the short-term actions that we'll begin to take even now as we're identifying them as well as more of the long-term, what I'll call, process improvement one that might take a little bit of time kind of months to implement that might take a little bit longer. But we'll begin to continue to push those cost reductions even now. And we'll have a lot more clarity on the next call, but we wanted to make sure everybody knew that the work was underway.

Yes. I think to Rob's point -- last point there, we'll be able to give a little bit more color on the second quarter call. But the range of $15 million to $25 million, if you want to think about it, that is an annualized number as you can think about for next year that ultimately, our structure would be about $15 million to $25 million less in SG&A that would be the intent. And we will work through some of that -- we'll get some of that benefit, call it, in the second, third and fourth quarter of this year, but we will not get all of that benefit this year.

And then we have other SG&A acts underway and variable cost actions underway as we speak.

And we've embedded what we believe we'll get in benefit this year in the SG&A guidance of $240 million to $253 million.

Okay. And one last one for me, if I may. One of the things that we've talked about in the past is the potential of doing another Pura Vida type of acquisition. Given the challenges in the market today, it would seem to be a potentially opportunistic time to make such a type of acquisition. Just trying to get a feel for what your guys' thoughts are given today on the acquisition pipeline?

I think it's a great question. And you're right, there's always this balance between the macro environment being more challenging and then that can put some pressure on valuations downward, which can be opportunistic. And so we are watching that. But at the same time, we do believe that focusing on getting the expenses out, really working on the 2 core businesses, really getting those strong in the short term is our #1 focus, but we continue to keep our eyes open in the M&A market. So -- but right now, our heads really kind of head down, let's focus on these 2 brands. Let's get the cost structure right and make sure that we really do the best -- the best we can as we move through this short-term recessionary environment.

Our next question comes from Steve Marotta with CL King & Associates.

John, can you talk a little bit about the costing increases that you're feeling -- the offsetting price increases and how that may play out in gross margin in the second, third and fourth quarter?

Yes. So the second quarter is going to continue to be under pressure from the inbound and outbound freight expense that we're seeing. We're not lapping some of the high points of last year that we'll be lapping that next year. So second quarter will definitely have more pressure in it, similar to the pressure you saw in the first quarter. And as we think about the back half of the year, we should be lapping some of the higher freight expense and hopefully seeing some benefit with inbound and outbound freight expense if we see some change in the macroeconomic environment. But all that being said, we're also seeing some incremental expense associated with fuel surcharges that's hitting kind of our P&L, we expect to be hitting a lot of P&Ls right now. So that's also going to be a headwind as we kind of manage our way through the rest of this year. If you think about from a cost increase, your question in regards to kind of input cost increase, that will be mostly in regards to next year. We'll see some -- the cotton price increases will flow into next year, and we're trying to get ahead of that with some price increases this year that ultimately will help benefit next year.

That's helpful. And besides travel and the back-to-campus, Rob, that you had already mentioned, are there other categories that you're relatively optimistic about in the second half? And if so, why?

Yes. I think the other thing that we've been doing is building out what we've called our winning intersections in terms of things like our home category, and we're seeing nice growth there. We have the important launches coming out like our cloud footwear launch that will be coming up. So we feel really good about what's in the pipeline, a lot of innovation coming forward and a lot of reason for excitement. The real balance is how to continue to expand the brand and then manage through the cyclical short-term recessionary pressure, but we have a lot of great innovation in the pipeline that will make the brand even stronger as we move forward.

And that does conclude the question-and-answer session. I'll now turn the conference back over to Rob Wallstrom for closing remarks.

Before I close, I would like to thank John Kyees, who has served with distinction on the Vera Bradley Inc. Board since 2010, and he has held the important roles of Lead Independent Director and Chair of the Audit Committee. John retired from the Board in conjunction with this year's Annual Shareholders Meeting last month. And on behalf of the other Directors and the entire company, I would like to express my gratitude to him for his service and invaluable counsel over the last 12 years. Fran Philip has been named Lead Independent Director. She has tremendous institutional knowledge serving on our Board since 2011 and a wealth of industry experience, having served as Chief Merchandising Officer of L.L. Bean and holding a variety of roles with other retailers, including Williams-Sonoma and The Gap. Fran is currently on the boards of publicly traded Coats Group and Vista Outdoor. Kristina Cashman on our Board 2 years has stepped into the role of Audit Chair, a CPA with a strong financial and accounting background, she has served as the CFO for several companies and currently as the Audit Committee Chair for publicly held Bassett Furniture Industries. In closing, we are preparing for the macro environment to remain challenging through the remainder of this year and into next year. And despite the strength in Pura Vida store business and opportunity for new store growth, we know that it will take time to return the e-commerce business to growth as we're building the marketing platform and remixing the marketing program is underway. We are taking decisive actions that will further strengthen both core brands and our enterprise as a whole, not only to successfully manage through this period but position us for the future. Our teams are focused, and our cash position and balance sheet remains strong. We have managed through difficult periods before, and we will again. We look forward to returning both brands to steady growth. We will keep you posted on our progress. Thank you for joining us today, and we look forward to speaking with you on the August 31 on our second quarter earnings call.

And that does conclude today's conference. We do thank you for your participation. Have an excellent day.