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Vera Bradley Inc (VRA 0.97%)
Q1Â 2020 Earnings Call
Jun 5, 2019, 9:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the Vera Bradley First Quarter Fiscal 2020 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.
Mark Dely -- Chief Administrative Officer
Good morning and welcome everyone. We'd like to thank you for joining us for Vera Bradley's first quarter call. Some of the statements made on today's call 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 Form 10-K for the fiscal year ended February 2, 2019, 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. The Company undertakes no obligation to update any information discussed on the call.
I will now turn over to Vera Bradley's CEO, Rob Wallstrom. Rob?
Robert Wallstrom -- President, Chief Executive Officer and Director
Thank you, Mark. Good morning, everyone and thank you for joining us on today's call. John Enwright, our CFO and Daren Hull, our Chief Customer Officer, also joined me today. Daren is joining us as we review our progress in marketing and will be available to answer questions at the conclusion of the call.
We are very pleased with our 5.2% first quarter comparable sales increase and that revenues were once again at the high end of our guidance, indicating that our customers are responding to both our innovative product and targeted customer engagement efforts. The first stage of Vision 20/20 was to restore brand and Company health. And we continue to build upon the progress we made in fiscal 2019.
We once again improved the quality of sales in our full-line stores and on verabradley.com by increasing first quarter comparable full price selling in these two channels by approximately 20%. In addition, we are removing another $3 million to $4 million of clearance sales from the second quarter of this year.
Moving into year two of our three-year journey. We are focused on expanding our customer base and increasing sales and profitability. As a reminder, our key areas of focus for fiscal 2020 are, number one growth. Our goal is to return to positive comparable sales growth this year and we were off to a good start in the first quarter. This improvement is being driven by compelling innovative product, combined with targeted marketing and engaging customer experiences.
Number two, operational excellence. Later this year, we will begin a two-year process of replatforming our enterprise resource planning and other key information systems to become more streamlined, nimble and efficient in our technology and business processes.
And number three, ownership. We will continue to reinforce our culture as an ownership-based model, where every associate can drive significant value creation to their individual and team efforts.
Now, I turn the call over to John to review the first quarter results and our outlook for the second quarter and full year. John?
John Enwright -- Executive Vice President and Chief Financial Officer
Thanks, Rob, and good morning. Let me go over a few highlights for the quarter. First quarter net revenues increased 5.1% to $91 million from $86.6 million last year. For the first quarter, we posted a net loss of $2.4 million or $0.07 per diluted share, in line with our guidance range of a net loss of $0.06 to $0.08 per share.
The prior year first quarter net loss totaled $1.4 million or $0.04 per share. First quarter direct segment revenues totaled $71.1 million, an 8.6% increase over $65.5 million last year. As Rob noted, comparable sales, including e-commerce increased 5.2% for the quarter. This was our best performance in quite some time.
Indirect segment revenues decreased 5.7% to $19.9 million from $21.1 million in the prior year first quarter, reflecting a reduction in orders and the number of specialty accounts.
Gross profit for the quarter totaled $50.5 million, or 55.5% of net revenues compared to $48.6 million or 56.1% in the prior year first quarter. As expected, improvement in full-price selling, and sourcing and operational efficiencies were more than offset by the impact of Chinese tariffs, causing a year-over-year 60 basis point gross margin decline. First quarter gross margin was within our guidance range of 55.2% to 55.7%.
SG&A expense totaled $54.3 million or 59.7% of net revenues compared to $50.7 million or 58.6% of net revenues in the prior year first quarter. SG&A expenses were higher than the prior year, primarily due to expenses related to new factory store opening, consulting fees, the timing of certain marketing expense -- expenses planned for the second quarter and variable expenses to drive revenues. First quarter SG&A expenses were above the guidance range of $52.5 million to $53.5 million, primarily due to consulting fees, the timing of certain marketing expenses and variable expenses to drive revenues.
Our first quarter operating loss totaled $3.6 million or 4% of net revenues compared to an operating loss of $1.9 million or 2.2% of net revenues in the prior year first quarter. By segment, direct operating income was $8.4 million or 11.8% of direct net revenues for the first quarter, compared to $7.3 million or 11.1% of direct net revenues in the prior year first quarter. Indirect operating income was $7.7 million or 38.8% of indirect net revenues for the first quarter, compared to $8.3 million or 39.3% of indirect net revenues in the prior year first quarter.
Now let me turn to the balance sheet. Net capital spending for the quarter totaled $3.4 million. During the first quarter, we repurchased approximately $2.9 million of our common stock or approximately 284,000 shares at an average price of $10.24. As of the end of the first quarter, we had approximately $44.3 million remaining on our -- under our $50 million share repurchase authorization.
Cash, cash equivalents and investments as of quarter end totaled $144.2 million compared to $132.3 million at the end of last year's first quarter and we had no debt outstanding. Quarter end inventory was $90.1 million compared to $86.2 million at the end of the first quarter last year and within our guidance range of $85 million to $95 million.
Now let's turn to our outlook for the second quarter and full year. For the second quarter, we expect net sales to be $115 million to $120 million, compared to prior year second quarter revenues of $113.6 million. The sales estimate reflects the removal of approximately $3 million to $4 million of additional clearance sales from the second quarter of this year. We expect direct second net sales to increase in the low-to-mid single-digit range, including low-single-digit positive comparable sales. We believe our indirect net sales will be flat to up in the low-single-digit range for the quarter.
We expect second quarter gross margin will be between 57% and 57.5% compared to last year's second quarter rate of 57.9%. Sourcing and operational efficiencies are expected to be more than offset by the impact of Chinese tariffs.
SG&A expenses expected to range from $55 million to $56 million compared to last year's SG&A expense of $53.8 million, reflecting incremental expenses related to new factory store locations.
We expect second quarter diluted EPS to be $0.25 to $0.28 compared to $0.26 in the prior year second quarter. We expect inventory to be in the $95 million to $105 million range at the end of the second quarter compared to $86.3 million at the end of last year second quarter. The higher normal inventory range is due to the timing of receipts. For full year, we expect net sales to be $425 million to $440 million compared to $416 million last year. This revenue guidance assumes direct segment net sales will increase in the low-to-mid single-digit range compared with prior year, including a low-single-digit increase in comparable sales. We believe indirect net sales will be flat to up in the low-single-digit range for the full year.
Gross margin for fiscal 2020 is expected to be 57.1% to 57.3% compared to 57.3% last year. Sourcing and operational efficiencies are expected to be fully offset by the impact of Chinese tariffs.
We expect SG&A expense to total between $214 million and $218 million for the year, compared to $212 million last year, reflecting incremental expenses associated with new factory store locations, partially offset by full-line store closures. We expect full year diluted EPS will range from $0.67 to $0.74 compared to $0.59 last year.
A note on the tariffs. We previously estimated tariffs would negatively affect gross margin by 60 basis points to 80 basis points for the year, equating to about $0.06 to $0.08 per share. With List 3 tariffs moving to 25% for the balance of the year, we believe incremental impact will only be approximately 10 basis point to gross margin or $0.01 per share. The impact of the aforementioned tariffs is reflected in our fiscal 2020 estimates.
The majority of incremental List 4 tariffs will actually affect fiscal 2020, not fiscal -- will affect 2021, not 2020 due to the timing of shipments. There will be approximately $1.5 million or $0.03 per share of capitalized duty expense that will negatively impact fiscal 2021.
We have not included the effect of List 4 tariffs in our fiscal 2020 estimates, given the uncertainty of implementation timing. If implemented, we do not believe they will have a material impact on fiscal 2020 results.
We expect capital expenditures with total approximately $13 million compared to $8.1 million last year, reflecting investments in new factory stores and technology and logistic enhancements. We expect to generate $40 million to $50 million in operating cash flow in fiscal 2020.
Rob?
Robert Wallstrom -- President, Chief Executive Officer and Director
Thanks, John. As I mentioned at the beginning of our call, our key areas of focus this year are on growth, operational excellence and ownership. And let me give you an update on each. We are off to a great start in returning to positive sales growth this year. We are engaging our current customers and bringing new customers to the brand with our compelling and innovative product, supported by our marketing and customer experiences.
On the product front, we continue to build dominance in our key franchise areas like travel, campus, beach and gifts, as well as our top 10 items. Our pattern performance is more consistent. Our products are authentic and true to our brand, but innovation is becoming more important to our product assortment, including styles that offer new functionality and fabric innovations.
While cotton is the most important piece of our business, we will continue to add lightweight, high performance fabrics to the mix. We have tested our new performance jewel collection in several stores and the results have been great. The full collection will be introduced in August.
Our special limited capsule collection, centered around seasonal periods or novelty add excitement and a sense of urgency for our customers to shop. Offering limited edition collections in collaboration with unique partners increases our brand exposure and provides momentum to our growth.
We announced several high profile product collaborations in the last three months. The New Hope Girls limited edition mini collection launched in March and a collection sold out online in a matter of hours. New Hope Girls is a non-profit organization that provides jobs for vulnerable women and refuge and education for girls in the Dominican Republic.
Building off the success of last fall's Disney collaboration, we once again partnered with DISNEY Theme Park Merchandise to create a limited edition novelty pattern in 16 piece collection that launched at the end of March. The launch was an overwhelming success and the collection continues to sell at a brisk pace.
Disney and Vera Bradley are a perfect match. We are both committed to creating magical moments and fun customer experiences, and we know that many of our Vera Bradley fans are also huge Disney enthusiasts.
In April, Gillette Venus announced the first grooming and fashion collaboration with Vera Bradley. The Vera Bradley plus Venus collection features a popular Vera Bradley design on a selection of Gillette Venus's core and special edition shaving products. We are very honored to work with this iconic brand.
Vera Bradley strives to create thoughtful solutions for women that are both functional and beautiful and this collection does just that. The Vera Bradley Plus Venus collection is currently available at Target locations nationwide and on target.com. The products quickly sold out online and have since been replenished and since the launch have been Target's number one selling Venus razor in store.
In May, we announced the debut of a collaborative drink wear and accessories collection with Starbucks Asia Pacific, and we are excited to closely partner with Starbucks to create a beautiful, unique and fun collection of products for their Asia Pacific stores. This collection will help us expand our reach to a myriad of international customers and distribution points, and broaden our brand awareness to support a potential future international expansion strategy. The Starbucks team noted that they are delighted to partner with modern lifestyle brands like Vera Bradley that align with their aspiration to bring a passion for fun and unique experiences to customers. And we are delighted too.
Our ability to attract such amazing partners like Disney, Gillette and Starbucks is truly a testament to the strength of our brand. We are working with other iconic, internationally known brands and other exciting product collaborations that will roll out in the future. Stay tuned.
Moving on to marketing. Daren Hull joined us the middle of last year and has been working with our digital and marketing teams to accelerate our digital and customer growth and I am excited to share the progress that these organizations have made.
Our first quarter results reflect strong progress in our strategic initiative of in-sourcing our customer data team and the rollout of our new customer data platform. We are actively using the insights we gained from our customer data to adjust our marketing mix. And as a result, we saw customer count accelerate double digits in the quarter. The fastest pace we have seen in over three years. We see these results as very positive progress for our brand during the Vision 20/20 process.
To accelerate this positive progress, we made four key hires in the quarter in the areas of customer data science and business analytics. We are also excited about the results we are seeing from our digital investments in our agency and media partnerships. Online visits and revenue directly derived from digital marketing channels have improved solidly year-over-year. We are going to continue to optimize dollars into the digital channel.
In e-commerce, we are focused on creating a best-in-class experience that is inspirational, engaging and fiction free. We are consistently adding vibrant content to our website and our marketing messages. In the first quarter, we launched a new mobile-friendly product detail page, which not only better showcases our product, helping the customer to better visualize features and functionalities, but also accelerates page load times by 40%. And this creates a greatly improved experience for our mobile customers.
Positive results in our email programs also continued throughout this quarter. Engagement and open rate increases were driven by our improved storytelling and new email personalization models. We have seen full-price revenue attributable to email improve, while at the same time reducing circulation. These results reinforce that relevance matters.
Our focus continues on expanding our personalization capabilities, so we can remain relevant and targeted in our communications with the Vera Bradley purchaser. Brand collaborations and influencer engagement continue to be important for the brand and we saw significant results in the quarter.
In April, Vera Bradley partnered with country music star, Cassadee Pope as she headlined the CMT Next Women of Country Tour, which brings fresh female voices to the forefront of country music. She made personal appearances in select Vera Bradley stores, where she connected with fans over their mutual love for our iconic patterns and designs. The partnership with Cassadee Pope as well as our collaborations with New Hope Girls, Disney, Gillette and Starbucks all show a heightened strength and relevance of our brand and generated enormous media buzz. Media impressions increased more than 40% over the last year's first quarter.
As a key part of our marketing and social media engagement plans, we will continue our impactful community support and charitable initiatives. Our brand has a long history of positively affecting the lives of women and children and we will continue to build initiatives in this area. Our annual Vera Bradley Foundation for Breast Cancer, Golf Classic took place this past weekend and raised over $1 million for breast cancer research. We look forward to once again partnering with Blessings in a Backpack this back-to-school season. We will work to grow sales in each of our distribution channels in fiscal 2020.
You just heard about our enhancements in the e-commerce arena which are paying off. In our full-line stores, we are focusing on our highest potential stores, enhancing the customer experience and further localizing our assortments. We closed two under-performing full-line stores in the first quarter and expect to close approximately eight more stores this year, which will bring our total full-line closings to 25 since the beginning of fiscal 2018. We could potentially close up to an additional 15 stores, following this fiscal year. At the end of the quarter, we had 97 full-line stores.
This year, we are working to maximize factory performance by refining our pricing model, adding six new locations and beginning to expand our highest-performing stores.
In the first quarter, we opened factories stores in Phoenix, Arizona, Southaven, Mississippi, Hilton Head, South Carolina, Lubbock, Texas and Lehi, Utah. We also began relocations and expansion plans for three of our top volume factory stores in Sevierville, Tennessee, Destin, Florida and Branson, Missouri. These expanded locations will open later this year. At the end of the quarter, we had 62 factory stores.
We continue to focus on creating an engaging customer experience in both our full-line and factory stores, with customer service that meets and often beats that of our much higher priced competitors. We rolled out a new customer service model to our full-line store associates that saw us add 4 percentage points to our industry-leading customer satisfaction scores in the first quarter. In the specialty channel, efforts are centered on growing our top accounts and reengaging lapsed accounts. Our focus on operational excellence will include investing in technology, strengthening business processes and addressing Chinese tariffs.
The pace of change in retail continues to accelerate in order to compete. In this new world and establish our strong foundation for growth, we must update our technology. We are embarking on a two-year project to revamp our systems. This conversion will result in a new systems platform that will enhance the experience of our customers by reducing the complexity and overlap of our myriad of current systems, adding more functionality and allowing us to become more speedy, agile and data driven and decision making.
The design phase will begin this summer with full implementation expected early in calendar 2021. We continue to work to mitigate the impact of Chinese tariffs through sourcing and pricing efforts. We are continuing to decrease our reliance on China, with our production in China expected to drop to about 25% by the year end.
Finally, we will continue to build our culture into an ownership-based model where every associate has the framework to drive significant value creation through their individual and team efforts. And we are moving to a more innovative, agile, data-obsessed and customer-centric organization.
Our brand is strong. Our team is remarkable and our future is bright. Over the last year, we have made great strides in restoring our Company to a healthy foundation and have begun to return to growth. Our goal remains to deliver year-over-year double-digit earnings growth this year. We are looking forward to completing our Vision 20/20 journey and focusing on continued growth. We are optimistic about the future of our brand and our Company.
And operator, we will now open up the call to questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) We'll take our first question from Mark Altschwager with Baird. Please go ahead.
Connor -- Robert W. Baird -- Analyst
Hey, guys. Thanks for taking my question. It's Connor on for Mark. Nice start to the year and progression on your 2020 plan. My first question is, can you discuss the trends in your full-price stores versus your outlets? I believe the outlet channel has been fairly promotional as of late. Does your updated margin guidance reflect anything different in terms of embedded promotional activity for the year?
Robert Wallstrom -- President, Chief Executive Officer and Director
First of all in terms of breaking down performance, what I can say is in terms of our full-price stores right now and our full-price e-commerce business are outpacing our factory business. So they are definitely leading it. As we look at gross margin, it really is the impact of the Chinese tariffs that's working through our margin numbers. It does not reflect increased promotional pressure in terms of the impact on margin.
John Enwright -- Executive Vice President and Chief Financial Officer
And Connor, for the full year performance, we have embedded into that number the expected promotional cadence for the remainder of the year.
Connor -- Robert W. Baird -- Analyst
Great. Thanks. And then I guess just one more. You had a really strong cash balance. How should investors think about the priorities for cash at this point and what do you need to see through the year to make -- to take a more aggressive action with your cash balance?
John Enwright -- Executive Vice President and Chief Financial Officer
Yeah. So I think we've spoken about this in the past. Last year, we were fairly conservative with kind of the use of cash getting through the first year of Vision 20/20. We're now having kind of strategic conversations internally and with our board on kind of the best uses of cash going forward. So as we continue to process -- progress through this year, we can -- we'll speak to that a little bit later in the year, but right now we're currently still spending toward our share repurchase plan and we spent $3 million for our -- to repurchase shares this year. So I think more to come on kind of what the uses of cash would be because we're currently having strategic conversations.
Connor -- Robert W. Baird -- Analyst
Thanks. Best of luck to you.
John Enwright -- Executive Vice President and Chief Financial Officer
Thanks.
Operator
We'll take our next question from Oliver Chen with Cowen and Company. Please go ahead.
Joanna -- Cowen and Company -- Analyst
Hi, this is Joanna on for Oliver today. Thanks for taking our question. I'm just curious about how your full-price selling performed this year versus last year? And have you seen a lot of your deep value customers migrating back to your full-line channels? And just one other question, if you could provide any color on your retail partners' performance this quarter just given highly promotional environment, that would be great. Thank you.
Robert Wallstrom -- President, Chief Executive Officer and Director
Yeah, first of all in terms of our full price performance, we continue to see significant improvements in full-price performance, up about 20% for the first quarter. So we're continuing to see real strength there. And we are beginning to see our reactivation of our customers continue to really outpace our overall customer growth. So we are seeing customers reengaging with the brand this year.
Joanna -- Cowen and Company -- Analyst
Got it, and just the retail partners, any color there you can provide, what they saw this quarter, that will be helpful.
Robert Wallstrom -- President, Chief Executive Officer and Director
When you say retail partners, are you speaking specifically to our indirect partners or are you speaking to kind of --?
Joanna -- Cowen and Company -- Analyst
Indirect partners, correct. Correct. Yeah, indirect partners.
Robert Wallstrom -- President, Chief Executive Officer and Director
Yeah, I think in terms of our indirect partners overall, we are hearing a lot particularly in the specialty channel about the strength that sell-throughs and Vera Bradley performing well in their stores. So that has been very encouraging to hear from them. So we are beginning to see some strength in the Vera Bradley performance in that channel.
Joanna -- Cowen and Company -- Analyst
Got it. Thank you so much.
Operator
(Operator Instructions) We will take our next question from Steven Marotta with CL King & Associates. Please go ahead.
Steve Marotta -- CL King & Associates -- Analyst
Good morning Rob, John and Daren. Can you just remind us where the year started from a China exposure standpoint. You mentioned wanting to be 25% at year end. Where did the year begin?
John Enwright -- Executive Vice President and Chief Financial Officer
So last year we ended -- Steve, this is John. Last year we ended at 57%, it was -- were from China perspective. So we expect to take that down to 25%.
Steve Marotta -- CL King & Associates -- Analyst
That's pretty fast. Congratulations on that. And can you talk about any insight that you're gleaning from the new customer profiles that are opting in right now? Do they have, to the best as you can tell, an increased buying intend to either average ticket or frequency, can you talk a little bit about them versus the existing customer list?
Daren Hull -- Chief Customer Officer
Hi, this is Daren. I'd look at it two different ways. I think one we're focused on adding new customers that add some diversity to our current customer mix and we're still working through the formula of how to get them to buy with the same loyalty and frequency of our existing customer base. Rob alluded to it a moment ago, we're seeing very strong reactivation in Q1. We're seeing a lot of much stronger frequency than what we saw obviously in Q1 last year. So we're encouraged by what we're picking up, but we're still working through the mix of both our products and the new product -- new customers that we're bringing into the pool.
Steve Marotta -- CL King & Associates -- Analyst
Great. And John, could you just please review the tariff differential again? You mentioned that there were 60 basis points to 80 basis points of impact in the current year, which -- again I'm sorry that the message got garbled, I simply didn't understand it. That was -- what was expected (Multiple Speakers) what is now expected?
John Enwright -- Executive Vice President and Chief Financial Officer
Yeah. So we previously communicated based on the Chinese tariffs a 10% for List 3 that I would have about a 60 basis point to 80 basis point impact with List 3 moving to 25%. Based on timing of receipts, we only anticipate that being an additional 10 basis point impact or $0.01 impact to the current year, which we've embedded in our 2020 expectations.
Now if List 4 comes to pass, ultimately, we have not embedded anything associated with that, but we expect that to be immaterial this year. In regards to List 3, what might have got a little bit garbled as we were just talking about the real impact of 25% moves to next year has probably roughly a $0.03 impact next year. Just based on when we expect to take those receipts and how we will account for them. So that will be more about 2021 impact when List 3 goes to 25% versus 2020.
Steve Marotta -- CL King & Associates -- Analyst
Would you like to comment, what do you think of next fiscal year China penetration will be?
John Enwright -- Executive Vice President and Chief Financial Officer
Our goal is based on, if List 4 goes 25%, our goal is to bring that number down. I think the intent would be to bring it down in the teens. I don't know where in the teens we'd end up, but I think that would be our intent.
Steve Marotta -- CL King & Associates -- Analyst
Very helpful. Thank you.
Robert Wallstrom -- President, Chief Executive Officer and Director
Thanks, Steve.
Operator
And at this time, there are no further questions.
Robert Wallstrom -- President, Chief Executive Officer and Director
So, thank you for joining us today. We are pleased with the progress we have made since we launched Vision 20/20 and are especially glad to see momentum in the first quarter as we focus on growth this year. We look forward to speaking with you on our second quarter earnings call scheduled for Wednesday, September 4.
Operator
This concludes today's call. Thank you for your participation. You may now disconnect.
Duration: 31 minutes
Call participants:
Mark Dely -- Chief Administrative Officer
Robert Wallstrom -- President, Chief Executive Officer and Director
John Enwright -- Executive Vice President and Chief Financial Officer
Daren Hull -- Chief Customer Officer
Connor -- Robert W. Baird -- Analyst
Joanna -- Cowen and Company -- Analyst
Steve Marotta -- CL King & Associates -- Analyst
