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Vera Bradley Inc  (NASDAQ:VRA)
Q4 2019 Earnings Conference Call
March 13, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Vera Bradley Fourth Quarter and Fiscal Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mark Dely, Vera Bradley's Chief Administrative Officer.

Mark Dely -- Chief Administrative Officer

Thank you. Good morning and welcome, everyone. We'd like to thank you for joining us for Vera Bradley's fourth quarter and year-end 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 3, 2018, 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 it 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, also joins me today. We are pleased that our fourth quarter revenues were at the high end of our guidance and our gross margin rate exceeded our expectations and expenses were well controlled. These factors led to fourth quarter EPS of $0.25 at the top of our guidance range. We are also pleased with our fiscal 2019 performance with EPS of $0.59 at the high end of our guidance and substantially better than the annual per share guidance of $0.35 to $0.45 that we originally projected at the same time last year.

As you recall, approximately 18 months ago we initiated Vision 2020, our three year plan to restore our brand and business to a healthy foundation and to return our Company to solid growth. Fiscal 2019 was the first full year in our three year journey. As a reminder, our major focus areas in fiscal 2019 as part of Vision 2020 were: drastically reducing clearance revenues and restoring full price selling; delivering SG&A and COGS reductions, maximizing retention of the Company's customer base and delivering cash from operations.

We made excellent progress against these key initiatives over the last year. We improved the quality of sales by reducing clearance activity in our full line stores and on verabradley.com by approximately 70% and increasing comparable full price selling in these two channels by over 20%. We continue to deliver on our SG&A reductions through diligent expense management and implementation of our Vision 2020 initiatives, reducing SG&A to our targeted level of $212 million for fiscal 2019.

Our reduced level of clearance activity, combined with other efforts in sourcing and distribution, drove meaningful year-over-year gross profit margin improvement. While, as expected, our overall customer count was down in the mid-single digit range for the fiscal year due to the dramatic reduction in clearance promotions and lower than anticipated factory traffic. The customer count in our full line stores and on verabradley.com exceeded our expectations. In addition, a higher percentage of new customers entered the brand through full price purchasing.

We generated operating cash flow of $43.6 million and increased our year-over-year cash and investment balances by nearly $20 million while repurchasing over $16 million of our common stock. But that's not all. We accomplished significantly more during the year. On the product front, we implemented tighter assortment guardrails around categories, patterns and pricing, assuring the right fit for our brand and that our products reflect our core attributes of comfortable, casual and affordable and cater to our traditional yet modern customer. We know that our signature patterns of florals, paisleys and medallions resonate most with our customers. And our overall pattern and assortment performance is becoming more predictable and consistent as we mix art and science. We drove full price selling by focusing on our Top 10 styles, solids and category dominance in our signature categories like back-to-campus and travel. Innovation through new color styles and silhouettes were key.

We saw nice growth out of our Top 10 items, customers responded to new solid colors like denim and rose gold shimmer and new silhouettes and innovation drove sales in travel and backpacks. We made headway on pricing agility and assortment optimization by location. We implemented processes that better allow us to extend the full price selling for patterns that are selling better than plan and to accelerate retirement when a pattern is selling below plan. Our global sourcing team meaningfully decreased our reliance on China and increased production in duty free countries. At the end of the year, our production in China was approximately 54%, down from approximately 70% in the prior year. We continue to strengthen and expand our licensing relationships.

We entered into agreements for a loungewear collection that was launched this month and our soft bath collection that will debut in the fall. We expanded distribution of stationery to Staples and added healthcare apparel to Mark's Canada, one of the largest healthcare apparel retailers in the Canadian market. We collaborated with Disney Theme Park Merchandise to create a limited edition novelty pattern called Mickey's Paisley Celebration. And this launched in September exclusively at our number one volume Disney Springs full-line store with the initial order selling out in just four days.

We launched customization where our customers can design their own bag by mixing patterns and solids, along with creating an embroidered personalization both on the outside and inside. Customization gives our customers another reason to visit verabradley.com and is a great opportunity to learn about what they respond to in product design. In our distribution channels, as planned, we opened six new factory stores and closed 10 under performing full-line stores during the year, each of the new factory locations is in a high traffic tourist location and in aggregate continue to exceed our expectations.

We ended the year with 99 full-line stores and 57 factory locations. We began to experiment with new store formats. For six months, we operated a small pop-up store in Union Station in Washington DC. We catered our assortment to the tourist and commuter population. It was a great way to capture new customer emails. We also took a struggling full-line store located in Del Amo Fashion Center in Torrance, California, and fully customized the assortment, the demographics and customer purchasing trends of the store with travel and leather, two huge areas of emphasis. This focus drove improvement in both conversion and revenue.

We had another successful Annual Outlet Sale in Fort Wayne in April, gathering over 45,000 brand loyalists from all 50 states and several countries in generating sales of nearly $7 million over the five days. This annual pilgrimage speaks to our brand strength and our strong customer community. In the specialty channel as the fiscal year ended, we began to see stabilization in our business. We were very pleased that Giftbeat, the premier trade publication serving the gift industry, voted Vera Bradley as the Vendor of the Year for 2018, an award given to the vendor that contributed the most to the reporting store's bottom lines. Completing the rollout of our Vera Bradley online outlet flash site allowed us to transition to a more full price selling model on our digital flagship, verabradley.com.

The flash site allows us to sell through our clearance merchandise in a much more discreet manner. We took further steps to segregate Vera Bradley from the online discount driven marketplace by exiting our partnership with eBay, and we pursued rigorous prosecution of illegitimate distribution in close partnership with Amazon.

In the marketing area, we continued to increase brand awareness with our Digital-First strategy, focusing on high quality placements and targeted digital efforts, with much more emphasis on full price offerings and less on clearance and sale. Total impressions were up more than 50% to over $2.1 billion for the year. We entered into several successful social media collaborations with our licensed partners and influencers. Instagram followers grew by over 25% and Facebook fans increased to nearly 1.9 million.

We continued our community and charitable initiatives with a particular focus on women and children. For example, our Blessings in a Backpack program provided 25,000 at risk children with the tools they need for a successful school year. Well-known personalities hosted Blessings in a Backpack events throughout the country that garnered a record amount of social media engagement and media coverage for Vera Bradley. In addition, we helped raise $2.2 million for the Vera Bradley Foundation for Breast Cancer.

Now, I will turn the call over to John to review the fourth quarter and fiscal year results and our outlook for the first quarter in fiscal 2020. 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. As I discuss the quarter and the fiscal year, keep in mind that the prior year fourth quarter income statement numbers are non-GAAP and exclude the charges outlined in today's release. Fourth quarter net revenues of $118.2 million were at the high end of our guidance range of $114 million to $119 million. Prior year fourth quarter revenues totaled $132 million. For the current year fourth quarter, we posted net income of $8.6 million or $0.25 per diluted share at the high end of our guidance range of $0.22 to $0.25 per share. Non-GAAP net income totaled $11.8 million or $0.33 per diluted share last year. Fourth quarter Direct segment revenues totaled $98 million, an 11.2% decrease from $110.4 million in the prior year. Comparable sales, including e-commerce, decreased 11.2% for the quarter. As expected, comparable sales continued to be negatively impacted by year-over-year declines in store and e-commerce traffic.

Indirect segment revenues decreased 6.4% to $20.2 million from $21.6 million in the prior year, reflecting lower orders coupled with a reduction in number of specialty accounts. Gross margin totaled $67.1 million or 56.8% compared to non-GAAP gross margin of $74.3 million or 56.3% last year. The 50 basis point adjusted gross margin improvement mainly related to reduced clearance activity and increased full price selling on verabradley.com and in the Company's full-line stores, a higher percentage of made-for-factory product sold within the factory channel and operational savings, partially offset by increased China tariff and higher than expected inbound shipping costs.

The gross margin percentage was modestly above the guidance of 56% to 56.5%, mainly due to the impact of Chinese tariffs being at the lower end of our expectations. SG&A expense totaled $55.6 million or 47.1% of net revenues compared to non-GAAP SG&A of $57.1 million or 43.2% last year. SG&A expenses were lower than the prior year, mainly due to diligent expense management and savings realized in conjunction with Vision 2020.

Fourth quarter SG&A expense were at the high end of our guidance of $53.5 million to $55.5 million. The Company's operating income totaled $11.7 million or 9.9% of net revenues compared to non-GAAP operating income of $17.4 million or 13.2% of net revenues in the prior year. By segment, direct operating income was $24 million or 24.5% of net revenues compared to non-GAAP direct operating income of $26.8 million or 24.3% of net revenues last year.

Indirect operating income was $7.3 million or 36.3% of net revenues compared to non-GAAP indirect operating income of $7.6 million or 35.2% of net revenues last year. For the full year, net revenues totaled $416.1 million compared to $454.6 million last year and at the upper end of our guidance of $412 million to $417 million. For fiscal 2019, we posted net income of $20.8 million or $0.59 per diluted share. This was at the high end of our guidance range of $0.59 to $0.60 per share. On a non-GAAP basis, net income totaled $21.5 million or $0.60 per diluted share for the last year. Direct segment revenues for the current year totaled $328 million, a 6.8% decrease from $351.8 million in the prior year. Comparable sales, including e-commerce, decreased 10.3% for the year. Indirect segment revenues for the current year decreased 14.4% to $88.1 million from $102.9 million in the prior year, reflecting lower orders from both specialty accounts and certain key accounts, coupled with a reduction in a number of specialty accounts.

Gross margin totaled $238.6 million or 57.3% compared to non-GAAP gross margin of $255.1 million or 56.1% last year, an improvement of 120 basis points. The gross margin percentage was in line with our guidance of 57.1% to 57.3%. SG&A expense totaled $212 million or 50.9% of net revenues compared to non-GAAP SG&A of $221.4 million or 48.7% last year. SG&A expenses were in line with guidance of $210 million to $212 million. Operating income totaled $27.1 million or 6.5% of net revenues compared to non-GAAP operating income of $34.5 million or 7.6% of net revenues in the prior year.

By segment, direct operating income was $67.9 million or 20.7% of net revenues compared to non-GAAP direct operating income of $68.9 million or 19.6% of net revenues last year. Indirect operating income was $34.5 million or 39.2% of net revenues compared to non-GAAP indirect operating income of $37.1 million or 36.1% of net revenues in the prior year.

Now let me turn to the balance sheet. Net capital spending for fiscal year totaled $8.1 million, in line with our guidance. During the fourth quarter, we repurchased approximately $5.1 million of common stock or approximately 500,000 shares at an average price of $10.11, bringing the fiscal year total to $16.3 million or an approximate 1.3 million shares at an average price of $12.58.

In November 2018, we completed our then existing $50 million repurchase plan and the Board approved a new $50 million authorization in December 2018. As of fiscal year end, we had approximately $47.2 million remaining under the new authorization. Year-end cash, cash equivalents and investments totaled $156.6 million compared to $138.4 million at last year-end.

We generated operating cash flow of $43.6 million in fiscal 2019 and had no debt outstanding at year-end. Year-end inventory was $91.6 million compared to $87.8 million last fiscal year-end and at the low end of our guidance range of $90 million to $100 million.

Now, let's turn to the outlook for the first quarter and full year. For the first quarter, we expect net sales of $86 million to $91 million compared to prior year first quarter sales of $86.6 million. We expect Direct segment net sales to increase in a low-to-mid single digit range, including flat to slightly positive comparable sales. We believe our indirect net sales will be down in the low-to-mid single digit range for the quarter.

We expect our first quarter gross margin will be between 55.2% and 55.7% compared to last year's rate of 56.1%. Sourcing and operational efficiencies are expected to be more than offset by the impact of Chinese tariffs. SG&A expense is expected to range from $52.5 million to $53.5 million compared to last year's SG&A expense of $50.7 million, reflecting incremental expenses to new factory stores and the timing of marketing expenses.

We expect our first quarter diluted loss per share will be $0.06 to $0.08. The net loss last year totaled $0,04 per diluted share. We expect inventory to be in the $85 million to $95 million range at the end of the first quarter compared to $86.2 million at the end of last year's first quarter. For full year, we expect net sales of $420 million to $440 million compared to $416.1 million last year. This revenue guidance assumes Direct segment net sales will increase in a 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 approximately flat to up in the low single digit range for the full year. The gross margin rate for fiscal 2020 is expected to be approximately flat with 57.3% last year. Sourcing and operational efficiencies are expected to be offset by the impact of Chinese tariffs. We expect these incremental tariffs will negatively affect gross margin by approximately 60 to 80 basis points for the year. We expect SG&A to total between $213 million and $218 million for the year compared to $212 million last year, reflecting incremental expenses related to new factory store locations, partially offset by full-line store closures.

We expect full year EPS will range from $0.64 to $0.74 compared to $0.59 last year. We expect the Chinese tariff impact to be between $0.06 and $0.08 per share this year compared to only $0.01 last year. We expect capital expenditures will total approximately $13 million compared to $8.1 million last year, reflecting investments in new factory store and logistics and technology 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. Allow me to make a few comments about our focus areas for fiscal 2020. As I mentioned earlier, the first stage of Vision 2020 was to restore brand and Company health and I am happy with the progress we've made. Fiscal 2020 promises to be an exciting and challenging year as we move into year two of our journey. While we remain focused on strengthening our foundation in fiscal 2020, our key areas of focus will be growth, operational excellence and ownership.

And let me give you some details. Our goal is to return to positive comp sales growth this year. The key to our growth will come from delivering compelling product tailored to our customers, coupled with engaging marketing and customer experiences that both build engagement with our current customers and bring new and returning customers to the brand.

On the product front, we will continue to build dominance in our key franchise areas like travel, back-to-campus, beach, gifts and our Top 10 items. We continue to make gains in pattern performance and consistency. Cotton remains the most important piece of our business, but we will continue to add lightweight, high performance fabrics like our performance twill collection, which is being introduced in August.

Our products remain authentic and true to our brand, but innovation is becoming more and more critical to our product assortment, including styles that provide both new functionality and beautiful design, new fabric innovations, new product categories, limited edition collections in collaboration with unique partners and special novelty collections. Expanding our licensing initiatives and collaborations will increase our brand awareness and provide momentum to our growth.

Several product collaborations are under way. Just last week, we announced our partnership with New Hope Girls, a non-profit organization that provides jobs for vulnerable women and refuge and education for girls in the Dominican Republic. Women sew and create beautiful bags in the New Hope Girls workshop. Members of our leadership team personally helped fund renovation of the workshop into a fully equipped industrial sewing facility.

The limited edition mini collection featuring a hobo bag and a travel pouch was designed and sewn by New Hope Girls artisans and launched on March 8 in celebration of International Women's Day. The collection sold out online in a matter of hours. The collaboration generated enormous buzz, including coverage on Good Morning America and over 110 million media impressions. We couldn't be happier to support New Hope Girls and bring awareness and funding to their organization through this collection. Building off of the success of Mickey's Paisley Celebration, we have once again partnered with Disney Theme Park Merchandise to create a limited edition novelty pattern, which will launch at the end of this month. We are working with several other iconic, internationally known brands on other exciting product collaborations that will roll out this year. Stay tuned.

We will continue to expand our customized bag offerings with more products and patterns and so far, customers are very positive about both the experience and the product. Visit our website and check out the personalization and customization process.

In the marketing area, we will continue to increase brand awareness with our Digital-First strategy, with a focus on targeted digital efforts and social media engagement. Marketing will focus on driving customer demand and new customer acquisition by increasing brand visibility and awareness. Our marketing efforts will amplify product collaborations with strategic partners, increase exposure for customization and personalization, and focus on product storytelling, performance and functionality.

We are continuing to build our marketing platform by working with strategic partners to forge even stronger relationship with our loyal customer community by building on our authentic heritage and showcasing our new innovations. We are building up our internal customer data and analytics capabilities and becoming more agile in testing within our digital and social advertising platforms while improving the effectiveness of traditional advertising vehicles like our catalogs. And as 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 Classic, one of the largest women's amateur golfing events in the country, typically raises over $1 million for breast cancer research. We will work to grow sales in each of our distribution channels in fiscal 2020.

In the e-commerce arena, we are building a holistic e-commerce plan, offering a consistent customer experience whether on verabradley.com in a third-party marketplace or with a retail partner. In our full-line stores, we will focus on our highest potential stores enhancing the customer experience and further localizing our assortments. We will continue to test, develop and execute new store formats to better service our customer needs.

We expect to close approximately 10 under performing full-line stores during the year, bringing our total full-line closings to 25 since fiscal 2018. We could potentially close up to an additional 20 stores following this fiscal year.

This year, we will maximize factory performance by refining our pricing model, adding six new locations and beginning to expand our highest performance stores. 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 in fiscal 2020. Technology and logistics investments will create a more efficient and nimble organization, which is vital as the pace of change in retail continues to accelerate. We will also work to improve business processes, including enhancing our voice of customer, being data obsessed, building out our data insights practice and further shortening our product development process.

We are working diligently to mitigate the impact of Chinese tariffs through sourcing and pricing. We are continuing to decrease our reliance on China with our production in China expected to drop to about 25% by year-end. And effective February 1, we instituted a new pricing structure equating to a very modest aggregate price increase of about 3%. This is the first systemwide price increase in over a decade. 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.

We are moving to a more innovative, agile, data-obsessed and customer-centric organization. The Vera Bradley brand is like no other. Our authenticity and emotional connection with our customers have allowed us to build a dominant share in the cotton quilted handbag space and successfully expand into other categories. We have accomplished a lot during our first year of our Vision 2020 journey. What I am probably most proud of, though, is our team and culture. Going through the last 18 months would put significant strain on any organization, yet we have seen our team come together as a more united and empowered organization that is not only maintaining but strengthening our extraordinary culture as we restore our brand and Company to a healthy foundation and begin to return to growth.

Our goal is to deliver year-over-year double digit earnings growth this year. We are looking forward to year two of our journey and are very optimistic about the future of our brand and our Company.

Operator, we will now open up the call to questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We will now take our first question from Mark Altschwager from R.W. Baird. Please go ahead.

Mark Altschwager -- Robert W. Baird -- Analyst

Hey, good morning and congrats on the progress in your Vision 2020. I apologize if I missed it, but did you share the full price selling metric for the fourth quarter?

Robert Wallstrom -- President, Chief Executive Officer and Director

We did not talk about it in the script, but we can obviously talk about it. We continue to see very strong double digit full price growth. So we actually saw the momentum of our full price selling even accelerate in fourth quarter over what it had been all year. So continue to see real strength.

Mark Altschwager -- Robert W. Baird -- Analyst

Okay, that's great. And then turning to the revenue guidance for fiscal 2020, Rob, you mentioned that it's the Company's goal to return to positive comps. And I'm trying to reconcile that with the overall guidance of plus 1% to 6%, especially given the context of some comp uncertainty and the pressure that we've seen in the indirect channel over the last several years.

So maybe if you could just talk about some of the revenue drivers beyond the comps that are giving you the confidence in that revenue outlook?

Robert Wallstrom -- President, Chief Executive Officer and Director

Yeah, I think a couple things. I think one, the comps is, obviously, a critical piece of that, but in addition to that, it's the new store openings and factory. So factory is also providing incremental revenue, which is why total revenue looks like it's outpacing comp slightly. It's really due to the new factory store openings.

Mark Altschwager -- Robert W. Baird -- Analyst

Okay, got it. And then finally, I was hoping you could speak a bit about the outlet environment. We've heard about traffic pressure and pretty intense promotional backdrop from some other brands. What did you experience there in Q4? What's your outlook for fiscal 2020? And along those lines, I think about half of your square footage is now in outlet. So what do you embed in your flat gross margin guide in terms of the promotional intensity within the outlet environment?

Robert Wallstrom -- President, Chief Executive Officer and Director

Yeah. Mark, in terms of what we've seen happening in the outlet environment, as we've talked about in the past, that it has become more promotional, particularly within our category, it's been a highly promotional category. You know, for the last year that we basically held back a lot in terms of joining in at the level of promotion that some of our competition was doing. We took the opportunity as we worked through last year in resetting pricing going into this year to set ourselves up to be able to be a little bit more promotional in the factory channel, which we began to test in fourth quarter and we saw a positive response from our customer in doing that. So we feel that we've been able to look at the pricing structure and the promotional structure and plan appropriately for this year, which we believe will help offset some of the traffic pressure that we're seeing in the factory channel.

John Enwright -- Executive Vice President and Chief Financial Officer

And just to mention specifically for the fourth quarter for factory, we actually saw a little bit of an improvement sequentially in factory traffic in the fourth quarter. We've seen a little bit of slowdown in the first quarter but ultimately for the fourth quarter, we saw it be a little bit better than we had expected.

Mark Altschwager -- Robert W. Baird -- Analyst

Great, thanks for all the detail. Best of luck this year.

Robert Wallstrom -- President, Chief Executive Officer and Director

Thanks, Mark.

Operator

(Operator Instructions) We will now take our next question from Oliver Chen from Cowen and Company. Please go ahead.

Oliver Chen -- Cowen and Company -- Analyst

Hi. Thank you. Solid results. On the comp store sales guidance of flat to slight positive, what do you think underpins that in terms of product and marketing and what aspects of newness would you highlight, which are most different versus last year for products? I'm also curious about the opportunity during the process and what are your thoughts on where that could happen and timing of that possibility? Thank you.

Robert Wallstrom -- President, Chief Executive Officer and Director

Thanks, Oliver, I guess a couple things to talk about in terms of the comp piece. One thing that is a big change this year from last year is don't forget that last year we had a significant reduction in overall revenue due to taking clearance out. So we're expecting to see, a slight decrease in our clearance revenue this year, but we don't have that same headwind we had in the prior year. So as we see our full price business continue to grow, we think that that's the primary driver.

And it's been encouraging to see as we've moved into this year that the full price selling continues to be very strong. So that's a key driver as we talked about the comp performance. From a specific product assortment standpoint, what do we believe is driving that, I think it's actually a bunch of factors. So first of all, what we're seeing from a product standpoint is our pattern performance is much more consistent as we put in all of the work around our pattern DNA and really being more consistent in pattern development. We're seeing a positive response from the customer, which is critical.

Second of all, we've been adding in a lot of new fabric and fabrications around solids, whether it's been the denim and the velvets. And our customer really is responding to fabric innovation, which we think is a another key driver for us. And we think one that we're going to be focusing a lot on. And the third area is really around understanding customer needs and therefore style introductions. So whether it's been the success we saw last year, like in our convertible duffel or whether it's some of our product introductions that are coming up this year, we think that this focus on style and focus on problem solution is really going to be critical to our growth. So I'd really say it's a combination of stronger patterns, the customer responding to fabric innovation and number three style.

And then from a kind of a marketing customer standpoint, it's really around two different things. First of all, as we talk about these collaborations and creating this buzz that's going to be a key piece and we are seeing that whether it's been in the Disney response, the New Hope response the Blessings in a Backpack response.

Also, the marketing team has been focusing a lot on analytics driving efficiency in our marketing. And so whether it's through search engine optimization, whether it's through return on advertising spend, we are seeing really significant improvements in those areas as we become much more data obsessed.

Oliver Chen -- Cowen and Company -- Analyst

Thanks, Rob. That's helpful. And on the speed front, it would be great to hear your views on what can happen there? The other question we had is as you think about assortment and localization, what do you see is the opportunity with that and how that may evolve overtime?

Robert Wallstrom -- President, Chief Executive Officer and Director

Great questions. I think they are little bit related. So first of all, from a timeline standpoint, there is two ways we look at timeline. One is core product development, which, obviously, as we move out of China and move to other duty-free countries is actually putting a little bit of pressure, so that's in some ways lengthening timelines that we have to offset to keep our timelines, which we're working hard on. But the other thing is the ability to produce innovative collections, new product reacting to trends on more of a fast-track process. And we have two ways of looking at that. One is through our standard factory process, where we have been able to bring product to market in as little as four months going through our standard channel.

But in addition to that, one of the benefits of our customization program and some of the local manufacturing we are doing in Fort Wayne, we've been able to do things like with -- we just did a special collection through Klokahn (ph) where we actually digitally printed our fabric and made it here and we were able to bring that to market in key styles in under 30 days.

So that's given us a new ability to really do unique innovative small collections with more of a drop mentality to kind of bring them in and sell them out quickly, which we think is healthy not only in understanding our consumer, but also driving a lot of excitement. So we believe that this novelty mini collection drop mentality will be part of what you see us really expand upon in this coming year.

Oliver Chen -- Cowen and Company -- Analyst

Okay. And among your channels, how would you speak to the channels interacting in terms of your indirect partners in light of the product innovation that you are doing and the changes you are making. Would love your thoughts on how the channels are harmonizing?

Robert Wallstrom -- President, Chief Executive Officer and Director

It's a great question. I'll answer it from a couple different ways. First of all, the biggest thing that has been helping our indirect channel and why the business is beginning to improve there is reducing all this clearance activity where we were basically marketing against our indirect partners from a price standpoint. Removing that from the equation is really helping their core business improve, which is great to see. Secondly, as we move forward we are really talking about becoming much more segmented in our offerings. And what we are learning through a hyper focus on data is how we really localize assortments, localize assortments means both geographically in terms of what works, but also from a customer need standpoint.

And as we work with our partners, we believe that getting their assortments very micro focused on what's right in their store will only improve the strength of their business. The days of every store having the same assortment is just not resonating with the customer like they used to. So the ability to micro assort we believe will be critical to helping our indirect partners succeed, at the same time allowing our direct-to-consumer business to succeed.

Oliver Chen -- Cowen and Company -- Analyst

And then a last question just is on that data discussion, which you brought up on your call and in these comments. What are your focus areas for that and what investment there would generate the best return in the near-term as well as your longer-term view of how you will use data throughout the organization?

Robert Wallstrom -- President, Chief Executive Officer and Director

Yes. What we've been doing first is really focus on data from a customer standpoint. So we've done a lot of different things like building a voice of customer practice here where we hired somebody to really come in and look at all of the different areas we are getting customer feedback and turn it into actionable task that we can get done to really focus on our customer more. It's also another area that we focused on data is this learning from our customer in terms of how to micro segment the assortment, that's what we did in our Del Amo store and we saw significant improvement in Del Amo. We think that that's really important.

And so we are continuing on the data side, we've hired more people into our organization with strong data statistical background. So we believe that that's a talent we'll continue to build up. And then we are continuing to just invest in technology of how to make sure our technology is quick and then we are able to respond.

So we are looking at systems at the same time. So we have started to bring a lot of our customer work back in-house, which we think is really helping us become quicker, more knowledgeable and really able to leverage those learnings much quicker.

Oliver Chen -- Cowen and Company -- Analyst

Thank you. Best regards.

Robert Wallstrom -- President, Chief Executive Officer and Director

Thank you, Oliver.

Operator

We will now take our next question from Dana Telsey from Telsey Advisory Group. Please go ahead.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good morning. As you think about margin both on the gross margin side and the SG&A side, excluding the reduced level of markdowns, what do you think of the levers that move in terms of gross margin for this upcoming year and how do you think of the buckets of SG&A whether its marketing or occupancy? Thank you.

John Enwright -- Executive Vice President and Chief Financial Officer

So, hey, Dana, from a gross margin perspective some of the levers that we are pulling really is from a sourcing initiative, ultimately is moving some product out of China and into other GSP countries. And right now that's going to be offset by the Chinese tariffs that are non-comp in the first half for the year.

We are also looking at our distribution center and making some investments in our distribution center in order to become more efficient over there, which should help improve margin over the longer-term probably not in the immediate term in this year, but over the longer term we should see some benefit to gross margin there. From an SG&A perspective, we really focused on driving efficiency, operation efficiencies within the corporate organization and at the stores. Marketing, we are looking to spend pretty flat to the prior year. So I wouldn't say we are going to get a significant leverage this year based on our SG&A rate where that's going to come based on more significant growth in sales as we look at opportunities within corporate, we do think there is probably a few points to get over the longer-term, but in the near-term it will really be more driving it through sales.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Robert Wallstrom -- President, Chief Executive Officer and Director

Thanks, Dana.

Operator

As there are no further questions, I would like to hand the call back over to Robert Wallstrom for any additional or closing remarks.

Robert Wallstrom -- President, Chief Executive Officer and Director

Well, thank you for joining us today. We are pleased with the progress we made in the first year of Vision 2020, and we are looking forward to significant progress this year as we focus on growth. We look forward to speaking to you on our first quarter earnings call scheduled for June 5.

Operator

This concludes today's call. Thank you for your participation, you may now disconnect.

Duration: 43 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

Mark Altschwager -- Robert W. Baird -- Analyst

Oliver Chen -- Cowen and Company -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

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