Good day, and welcome to the Vera Bradley Third Quarter Fiscal 2024 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mark Dely, Chief Administrative Officer. Please go ahead, sir.

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 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 and 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 today's call. I'll now turn the call over to Vera Bradley's CEO, Jackie Ardrey. Jackie?

Thank you, Mark. Good morning and thank you for joining us on today's call. Our efforts continue on Project Restoration as our associates across the Company work together to position Vera Bradley Inc. for long-term profitable growth. We are very pleased with the meaningful progress we have made so far. Year-over-year, third quarter non-GAAP income was essentially flat as we delivered solid gross margin expansion and carefully managed our expenses despite sales challenges. Total third quarter revenues for the Vera Bradley brand decreased 5% from last year. Vera Bradley direct revenue declines primarily resulted from continued weakness in the outlet store channel and the impact of store closures. Year-over-year, Vera Bradley indirect revenues were up to last year. Pura Vida year-over-year sales decreased 18.3% with declines in both wholesale and e-commerce revenues as prior year sales were driven by meaningfully higher levels of marketing spend along with increased liquidation and clearance activity. Store sales remain strong. With our diligent expense management and focus on profitability, Pura Vida year-over-year third quarter operating income improved. At both brands, customers have responded to our latest iconic product collaborations and to our new innovative and on-trend product offerings even as they have been more careful with their discretionary spending in the current macro environment. We continue to diligently manage our debt-free balance sheet, adding to our year-over-year cash position while strategically lowering our inventory levels. Strength in this area is important in navigating an uncertain retail environment as well as in supporting our Project Restoration initiatives. Presently, we are taking targeted and prudent actions to stabilize revenues, and we remain focused on strong financial discipline in controlling what we can control as we react both strategically and tactically to current market conditions. Simultaneously, we have made meaningful progress and are right on track with…

Thanks, Jackie, and good morning, everyone. I'm going to begin with some details about our third quarter and then go into a revised guidance for the year. For the sake of clarity, the numbers I am discussing today are on a non-GAAP basis and exclude charges as outlined in today's press release, a complete detail of items excluded from non-GAAP numbers as well as that reconciliation of GAAP to non-GAAP can be found in the release. For the third quarter, our consolidated net revenues totaled $115 million compared to $124 million in the prior year third quarter. Consolidated net income totaled $6.1 million or $0.19 per diluted share compared to $6.3 million or $0.20 per diluted share last year. Current year third quarter Vera Bradley Direct segment revenues totaled $72.3 million which is a 9.7% decrease from $80.1 million in the prior year third quarter. Comparable sales declined 8.2% in the third quarter, primarily driven by weakness in the outlet channel. Total revenues were also impacted by store closures over the last 12 months, including 15 full line and two outlet store closures. We also opened three outlet stores over the last 12 months. Vera Bradley Indirect segment revenues totaled $25 million, a 12% increase over $22.3 million in the prior year third quarter, reflecting a significant onetime key account order that did not take place in the prior year. Pura Vida segment revenues totaled $17.7 million, an 18.3% decrease from $21.7 million in the prior year, reflecting the decline in sales to wholesale accounts and a decline in e-commerce sales, partially offset by a growth in retail store sales. Third quarter gross margin totaled $63 million or 54.8% of net revenues compared to $65.6 million or 52.9% of net revenues in the prior year. The current year gross profit…

[Operator Instructions] And our first question comes from Joe Gomes with NOBLE Capital.

So Jackie, and Michael, last time when we talked for the second quarter, your traffic had been down and you guys were taking some steps, including some paid media, mall takeovers, et cetera, to try and drive additional traffic. I was wondering, if you can kind of give us what the takeaways so far are? And what else are you looking at to help drive traffic?

Yes. Thanks for your question, Joe. So a couple of points on that. So first of all, we -- the marketing initiatives that we undertook throughout Q3 were successful in driving traffic and improving trend. They -- unfortunately, because of the conversion metrics, they weren't as -- they weren't as effective in driving sales. So, we've had several tests going and things that we've adopted for Q4. We're continually changing up our marketing mix to find those things that are working and drive those and leverage them as best as we can.

Okay. Maybe switching gears over to Pura Vida here. We started out the year at a pretty positive environment there. Sales were actually up year-over-year. But then they declined in the second quarter. This quarter, they climbed back to that nearly 20% down. I know some of it you talked about was due to some kind of onetime events. I don't know if you break out what it would be outside of those onetime events? Or what do you think we can do here in the short term and kind of reverse that transact to what we saw earlier in the year?

Yes, that's a great question. So for August and September, we really were comping against some promotional activity that we did not repeat this year. And that and combined with a better focus on profitability for the brand, really caused us to pull back some marketing spend in those two months. So the first two months of the quarter were definitely more challenging. And then we had a better October. So, we're continually evaluating what's the right level of spend to drive customer acquisition. Now conversely, our retail stores did perform well in Q3 at Pura Vida. And they also had the -- the advantage of driving some more customer acquisition. So, we're looking at that very carefully to inform our plans for next year.

Okay. Great. One last one for me on the inventory. Again, great job there. But pardon me, down basically another $10 million sequentially, just wondering, is there really more there that you think you can take out on the inventory side? Are we kind of at a level where we're going to need this as hopefully, we see the sales begin to grow?

Yes. Joe, I think there are several issues in play when we think about inventory, especially as you look to the end of the year and then beyond. The first is we continue to expect to see inventory down 10% to 15% year-over-year by the end of the year. There may be a little bit of slip -- more call slip and swap because the Chinese New Year cutoff is right at our year-end, where there's normally there's about a week a week of lag from our year-end to Chinese that just affects the importation of goods and the timing of that. So -- but regardless, we still expect to see 10% to 15% reduction from -- on a year-over-year basis. As we look forward to next year, we'll provide more specific guidance for next year, but there continues to be opportunities in our inventory management. They will be a little bit masked next year just due to the changeover of products as part of project restoration, which will land midyear. So, I expect that we'll continue to see improvement in our operations with some improvement in the overall level of inventory, but there will be more guidance to come at our next call.

And our next question comes from Eric Beder with SCC Research.

Congratulations on Q3. I want to talk about a few things here. First is the indirect sales channel and the opportunities for more, I guess, indirect/wholesale. This is the second quarter where this has gone up year-over-year after a long period of declining here, what is driving that in terms of your -- are you seeing more people want to take the product? Are you seeing you taking more product? What are you seeing in the indirect channel? And you brought it up for both Pure Vida and for the Vera Bradley brand, that's driving that to go forward as a positive driver here.

Yes, it's a great question, Eric. So I think there's a couple of things in the indirect channel that are happening. We did have -- For some of our key accounts, we did have some product that was working better and had some reorders on those products. And we -- our business with Amazon is strong. And then finally, we took advantage in third quarter to really look at our inventories and figure out where we had some opportunities for discounters or onetime orders to reduce some undesirable inventory. So really, it was those three pieces. So we do see, though, that our wholesale channel is obviously very sensitive to just customer trends right now. So when our partners are seeing better traffic and sales, we're actually benefiting from that. So, we did -- we did see some of that happen in the third quarter and actually in the second quarter.

Interesting. You mentioned leather more expensive item also the customer who's buying it spent a lot more in the store. You mentioned the performance product, which is slightly more expensive to you. When we think about going forward, these are items that's probably driving new customers, younger customers. Is there an opportunity to, a, continue to expand those pieces; and b, continue to drive higher pricing from them which can drive, I guess, better returns?

Yes. That's a great question too, Eric. And we were able to deliver this leather collection, it had kind of a truncated time period compared to our normal supply chain lead times. So, we got this in to test informed some of our leather expansion that we're planning to do next year, and we were really pleased with the results. A lot of it sold through fairly quickly. And I would say from a new customer perspective, our existing customers were so excited to see this that we didn't really have as much opportunity to drive new customer acquisition from it because a lot of it was really sold through in the first three or four weeks. So, we're really looking forward to learning and continuing to grow that segment of our business. It used to be a very important part of our business.

Okay. Last question. Is there a 53rd week in your Q4? And how big is that if it is there?

There is a 53rd week in this fiscal year. It's a relatively small amount of sales overall.

Okay. Congratulations again, and good luck into the holiday season.

And that does conclude the question-and-answer session. I'll now turn the conference back over to you.

Our entire team is dedicated to returning both Vera Bradley and Pura Vida to profitable growth and generating strong cash flow through Project Restoration. This should deliver value to our shareholders over the long term. We are right on track with our Project Restoration initiatives. This year, we have been diligently focusing on stabilizing sales, expanding gross margin and controlling expenses. We believe this focus at a minimum should nearly double year-over-year operating income and more than double EPS. We are excited about the opportunities for both brands. Thank you for joining us today, and we look forward to sharing our progress with you on our year-end earnings call on March 13.

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