Greetings. Welcome to the Vera Bradley Second Quarter Fiscal 2025 Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that the conference is being recorded. I'll now turn the call over to Mark Dely, Chief Administrative Officer. Mr. Dely, you may go ahead to proceed.

Good morning and welcome everyone. I'd like to thank you for joining us for today's call. Some of the statements made during our prepared remarks 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 today's call. I will now turn the call over to Vera Bradley CEO, Jackie Ardrey, Jackie?

Thank you, Mark. Good morning, everyone and thank you for joining us on today's call. As we discussed in our last call, late in the second quarter, we rolled out the initial phase of project restoration to our brand stores and the verabradley.com website. This was a public-facing reintroduction of our iconic Vera Bradley brand, anchored on a renewed vision and positioning as we pivot our organization towards a bright future geared to sustainable long-term profitable growth. The initial phase was designed to elevate and differentiate the assortment and positioning from our outlet channels, attract new customers, and fuel a higher mix of full-price selling. I'm so proud of what the organization delivered in a very short time in the extremely successful marketing campaigns we launched. We targeted a younger, more affluent customer for this launch and were successful at driving traction with this segment at mostly full price. Our modernized brand marketing and products are also attracting partnerships with new retailers like Urban Outfitters that launched this month. Our top of the pyramid collections like Leather and Oxford Canvas sold especially well to existing customers even at higher retails. Average transactions for our brand channels were up 9.3% to last year post-launch, reflecting a higher level of full price selling and a shift to products at the top of the pyramid. Although we were pleased with many aspects of this rollout, our overall results were disappointing and reflected continuation of first quarter macro consumer headwinds, as well as some elements that are within our control. At Pure Vida, we continued to see elevated digital media acquisition costs that prevented further investment and customer growth. Our indirect channel was also cautious in the first part of second quarter as specialty and destination store traffic for our partners was initially down.…

Thanks Jackie. Good morning everyone and thank you for joining us. We will open it for questions in a few minutes, but first I'd like to cover some highlights for the quarter and briefly discuss our updated guidance for the year. For the sake of clarity, all the numbers I'm discussing today are non-GAAP and exclude the charges outlined in today's press release. A complete detail of the items excluded from the non-GAAP numbers, as well as reconciliation of GAAP to non-GAAP numbers can be found in that release. For the second quarter, our consolidated revenues totaled $110.8 million, compared to $128.2 million in the prior year second quarter. Our net income for second quarter totaled $3.9 million or $0.13 per diluted share, that's compared to a net income of $10.2 million last year or $0.33 per diluted share. In terms of segment performance, Vera Bradley direct segment revenues for this current year's second quarter totaled $72.2 million, approximately a 16% decrease from $85.7 million in the prior year second quarter. Comparable sales declined approximately 11%. Total revenues year-over-year were also impacted by five store closures, one store opening and the movement of the annual outlet sale from the second quarter last year to first quarter this year. Vera Bradley indirect segment revenues totaled $21.8 million, a 25% increase from $17.4 million in the prior year second quarter. This increase was related primarily to new assortment purchasing by our indirect partners, as well as older assortment liquidations associated with project restoration. As Jackie noted earlier, we are very pleased with many aspects of our indirect business for this quarter. For example, our comparable indirect partner accounts posted amid single-digit increase in orders, as well as experiencing meaningful or average order size increases. We've also seen great business development as evidenced…

Thank you. We'll now be conducting the question-and-answer session. [Operator Instructions] Thank you. Thank you, and our first question is from the line of Daniel Harriman with Sidoti & Company. Please, proceed with your question.

Hey, good morning, Jackie. Good morning, Michael.

Good morning.

Good morning.

Just a couple quick ones for me. On the first quarter call, you highlighted consumer weakness, but in particular, the lower income consumer, which had an impact in the outlet channel. Is that more or less what you're seeing thus far into the third quarter? Is it more evenly spaced out across all income channels? And then I was just wondering, Jackie, I know you mentioned you're going to provide more details on the third quarter call, but if you could just maybe expand a little bit upon some of the new wholesale partners that you've identified and hope to team up with in the future?

Sure. Great question. First of all to your question about the lower income consumer and whether it's spread across all levels or concentrated, I would say we don't share specific detail about our consumer levels, but I have talked about before that our outlet channels, which have really been the most challenged this year, are really highly indexed to a lower income customer, and that's where we're seeing the softness. So that's definitely the answer to your first question. And then in terms of the partners we're looking at, really, we're looking at largely how we can appeal to targets that really align with our customer acquisition targets. So it's too early to comment on anything yet, but what I do want you to take away is that there's a lot of interest that we've never really seen this level before based on all of the new marketing and Zooey and all of the efforts that we've made in the rebranding. So we've definitely seen a lot more interest. We're having a lot more conversations. And the success of our Urban Outfitters Partnership and its expansion into holiday, I think, is a great example of how we are continued to be confident in the direction we're taking the business and how project restoration is really supporting where we're going, although, you know, admittedly again, in my comments, I said a little slower than we planned.

Okay, great. Thank you all so much and I'll hop back into queue.

Thank you. Our next question comes from the line of Doug Lane with Water Tower Research. Please proceed with your questions.

Yes, hi. Thanks and good morning, everybody.

Good morning.

Good morning, Michael. I'm just looking at the cash flow statement. And your free cash flow was negative in the first-half of the year. And you're going to end up slightly positive. So you're optimistic about free cash flow generation in the second-half of the year? Sticking on the first-half, the big swing I see is in inventories where it was a $15 million use this year, and last year it was a $3 million source. Can you put some color around that?

Yes, absolutely. One of the aspects of project restoration, as everyone has heard us talk a number of times, is the new assortments that we were bringing over into the brand channels. Because of the timing of that, that created basically an overlapping period over a couple of, a few months here. We also had a significant amount of in-transit inventories coming across the water in preparation for the fall season as well. So there's a little bit of a timing issue. As I mentioned in my comments earlier, we do continue to expect, we were down 5% to last year on inventories despite that in-transit issue and we expect to continue to be down 5% through the end of this year. Q3 might look a little bit different just from a timing issue, but by the end of the year we expect to be 5% down to last year. I'm really pleased with the work that the team did and that's in context of the revised guidance as well. So our teams have done an exceptionally good job of reacting to the environment, doing so in a very productive way and preserving our ability to maneuver and flex as we look forward.

So we can look at inventories as maybe a key area to be a source of cash in the back half of the year, right? So it was the use of cash in the first-half of the year. Is that fair?

That would be fair. I think, you know, there's a number of things that we've talked a lot about all the different initiatives and things we've been working on. We've not talked until this call about some of the work that we've been doing in our inventory or sourcing and our buying practices. So this is, I think, an example of one of those things that we have been working in the background amidst everything else, knowing that we have to build a very strong and solid organization to carry this business into the future. So we are really pleased with the work that the teams have done in that regard.

Okay, that's helpful. And business is difficult. You said that up front, but your capital spending outlook hasn't changed, which is encouraging. So it's an investment year and it continues to be an investment year. So you mentioned in your first quarter release that you had incremental marketing investment as well. Is that still on tap or are you being a little bit more judicious in your marketing spending given the environment?

I'll start if you want to add any color, Jackie. Yes, this is an investment year across lots of different aspects of the business, as you noted, CapEx and marketing as well. So we are carrying some elevated marketing in the Vera Bradley brand in second quarter and we will continue to carry that through the balance of this year. A significant amount of this is about brand awareness and driving brand awareness, as well as transactional activity, but there's -- it continues to be an investment year.

Yes, and I would add that, you know, again, overall, our goal here is we're pivoting this organization to sustainable, long-term, profitable growth, and it's going to take time. That's the headline, is that it's going to take time. But in the meantime, what we're building on is a foundation of strong business discipline with a highly engaged team, strong balance sheet, and a robust technology platform. So all of those things are really kind of underscore your question about marketing investment. Strong business discipline is the team is looking at all of that in the back half of the year and saying, okay, what are the investments that we need to make to keep moving along this path of pivoting to the sustainable long-term growth. And one big part is brand awareness, and that is critical for us to continue to invest in. But again, they have to be smart investments and that's what we'll do.

Okay, thanks Jackie. Just one last thing, I've had other digital marketing companies comment on the election and the impact that may have in changing the business environment. Do you have any comment on the upcoming election and how it might affect your business?

I don't have comments specifically about the election. I mean, I think we are really heads down and looking at analyzing every part of our business results. I mean, we don't -- we're not discounting the value of where the consumer's mind is going to be as we come up to the election time period. But what we're doing is just controlling the controllables, making sure that we're nurturing all the green shoots that we're seeing in the business and planning the back half with this much more conservative lens, obviously, that is reflected in our guidance.

Okay, thanks, Jackie. Thanks, Michael.

Thank you, Doug.

You're welcome. Thank you.

Thank you. [Operator Instructions] The next question is from the line of Eric Beder with SCC Research. Please proceed with your questions.

Good morning.

Good morning, Eric.

Good morning, Eric.

Good morning. I want to talk about some pieces around the stores. So let's talk about collaboration, first let's talk about collaborations. I know that in the outlets, you've added a direct Disney collaboration, which is the first time we've seen that as on the outlet channel. And I'm curious how collaborations fit in the newer -- the mainline stores in terms of their ability to drive kind of a younger, newer customer. I know that historically that has been a big push there for driving new customer base to get them in with the collaborations?

Yes, great question, Eric. So we did launch the new dedicated Disney collection in outlets for the first time in August, so outside of this quarter, and it was very well received. And I do want to say, and I said in my comments, we did have -- during the launch, we had a reduced level of collaborations with Disney and Peanuts to last year, but those are absolutely part of our go-forward strategy here in all channels. So they're very important for our existing customer. We definitely are kind of reading all of the results that we have from these most recent collaborations to see what kind of customer is bringing, what does the demographics look like, what is she spending, and really ensuring that we're choosing the right properties for the future. So you'll see some new things for us. We're definitely looking at not only keeping the fan favorites that we've had and again deploying them in all channels, but looking at some new properties that we think will -- both new and existing customers will love.

Okay. When you look at -- you also did a very strong rollout last year in leather, which you've expanded here, and now you have faux leather in the outlets also. Again, that's Q3, but it came in at the outlets, I think it's been pretty strong there. Now, what are you seeing in terms of that customer who's focusing on that higher product, and A, their ability to kind of continue to buy on the higher level and B, what you're kind of planning to do with that category and that fabric going forward?

So for leather, like I said, I think one of the big positive surprises was the reception of the leather program, even at the higher retail. So we did launch a leather program last year. We tested it. It was very strong. But this is even, the leather that we just launched for the brand channels is even, even has higher price points. So we're going, there are, you know, there's a good, better, best strategy within leather as well. And what we were -- I think, a little surprised by is that those higher price points actually did very well and they over-indexed to existing consumers or reactivated consumers. So that was a positive surprise for sure. And the leather -- the faux leather in the outlets, that has actually initially is a very positive read as well. So we're kind of regrouping to see what does that mean for future assortments. But overall, we're very pleased with the results of the leather program and our higher price point items. And that will be part of what we're building into our future assortment.

I think there's one other last point on this. Just to recall everybody's memory on this, what we did last year was a very narrow, very tight test of leather. We did not, because of how quickly we were moving, we did not have the ability to get quantities in scale. And so we were very pleased with that, as Jackie said, and as we said at the time. But as we want to make sure we understand, that was a pretty limited amount of business that we did last year. We're really pleased with the business we're doing now and what that portends for the future.

Yes.

Last question. So, when you look at the new stores and the kind of the core customer who wanted to buy cotton pattern product, I know that you do have to kind of move on somewhat, but at the same time that has been somewhat the base of the company for a very long time. What should we be seeing, and I kind of hinted about this already, but I'd like to get a little bit more color on it, going forward for that customer who is drawn to that product and that's the product going forward?

Sure. So, here's what I would say to that and what I'd like you to take away is that, this was never an attempt to move away from our existing customers. I think in my comments I said we did receive some constructive feedback on some style adjustments that we made, which we actually made those style adjustments based on customer feedback that told us that they wanted these things. And so again, when we launched and got feedback the other way, we said, okay, well, we need to make some adjustments. We -- it's really important to us that both our new and existing customers find the products they love with the functions that they need. And what they told us was we need longer and wider straps, more pockets and zip closures, and then ultimately we needed more print assortment. And so those are not difficult adjustments to make. And we're making them on a rolling basis starting in holidays. So we kind of immediately read that. And it's not -- we're making adjustments and we're not going all the way back, but we're making sure that both new and existing customers have a robust assortment that reflects the aesthetic and the pivots that we're making, but doesn't, you know, is inclusive of all of our customers' needs. So it's, you know, I think again, there's -- overall there's -- when we launched this in the stores, there's been less discounting to a much lesser degree than we've had in the past. And that's also been a place where we've -- customers have paused and, we're evaluating all of that as well. But in terms of the styling we're very happy with where we are, but again, you know, always taking customer feedback and analyzing the data and making the right changes, so that we're offering the best assortment we can.

Okay. Good luck with the rest of the year and the holiday season.

Thanks, Eric.

Thank you, Eric.

Thank you. At this time we've reached the end of the question-and-answer session. I'll now turn the call over to Jackie Ardrey for closing remarks.

In closing, our team is dedicated to returning the company to long-term profitable growth and creating value for our shareholders. Thank you for joining us today, and we look forward to speaking with you again on our third quarter earnings call on December 11.

This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.