VERA BRADLEY, INC. The following discussion summarizes the significant factors affecting the condensed consolidated operating results, financial condition, liquidity, and cash flows of the Company as of and for the thirteen and twenty-six weeks endedAugust 1, 2020 andAugust 3, 2019 . The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 , and our unaudited condensed consolidated financial statements and the related notes included in Item 1 of this Quarterly Report. The results of operations for the thirteen and twenty-six weeks endedAugust 1, 2020 , are not necessarily indicative of the results to be expected for the full fiscal year. COVID-19 The COVID-19 pandemic resulted in travel restrictions both domestically and internationally, community and self-quarantines, certain factory closures or reduced operations, as well as mall closures and reduced mall operating hours during the first and second quarters of fiscal 2021. Although the Vera Bradley and Pura Vida e-commerce operations remained open, the aforementioned items had a material adverse impact on overall consumer demand, traffic, and sales. We cannot currently predict the extent that COVID-19 will impact our future liquidity, operating results, and financial condition of the Company, but it could have a significant adverse effect on these metrics. Beginning inmid-March 2020 , we began taking several actions to navigate the COVID-19 pandemic, protect our financial position, maximize our liquidity, and to position the Company for a strong reopening and future. These actions included: •Temporarily closing all Vera Bradley store locations onMarch 19 ; •Temporarily furloughing approximately 80% of our workforce mid first quarter; •Temporarily reducing base compensation for remaining salaried associates, with reductions on a graduated scale ranging from 15% to 30%, and 75% for our Chief Executive Officer; •Temporarily suspending cash compensation to our Board of Directors; •Temporarily suspending our share repurchase program; •Drawing$60.0 million of our$75.0 million Credit Agreement; •Temporarily eliminating the Company 401(k) and associate charitable contribution matches; •Tightly managing inventory levels through the cancellation of purchase orders, delay of receipts, or seeking price concessions where possible; •Actively working with landlords on addressing rent abatement, payment terms, accelerating store closures, and delaying or cancelling certain planned new store openings; •Reducing non-payroll operating expenses, including but not limited to, marketing and travel; and •Extending vendor payment terms. During the second quarter, we began to open our temporarily closed Vera Bradley retail stores albeit with reduced staffing, hours, and capacity limitations; brought back the majority of associates from furlough; began to reinstate portions of the base compensation reductions; and paid back$30.0 million of our$60.0 million borrowing under our Credit Agreement. We continued to reduce operating expenses, work with landlords on rent abatement and payment terms, and carefully manage our inventory levels and non-payroll operating expenses, which helped in the achievement of expense leverage during the quarter. In addition, the Company is leveraging elements of the Coronavirus Aid Relief and Economic Security (CARES) Act to enhance the financial well-being of associates and to maximize the financial health of the Company. Reopening Vera Bradley Retail Stores OnMay 5, 2020 , we began to open our Vera Bradley retail stores in a phased approach, with 58 out of 82 full-line stores and 64 out of 65 factory stores open as of the end ofJune 2020 . All factory stores and all but three full line stores were opened as of the end of the second quarter, although with reduced hours, lower staffing levels, and greatly enhanced safety protocols. While we are making no assumptions of future performance based upon a limited number of days of sales data, the 133 existing stores that have been opened for the entire month of fiscal July, generated revenues, in the aggregate, of approximately 70% of the prior year's sales. While traffic is generally down, conversion and units per transaction are up. Second quarter Vera Bradley e-commerce revenues increased over the comparable-prior year period. The sales of cotton face masks helped to drive revenues at Vera Bradley. 30 -------------------------------------------------------------------------------- Table of Contents Executive Summary Below is a summary of our strategic progress and financial results for the second quarter of fiscal 2021: Strategic Progress COVID-19 has significantly impacted our Vision 20/20 goal of robust growth. However, despite the COVID-19 situation, we remain focused on our core Vision 20/20 strategies of enhancing our brands and long-term growth through heightened customer engagement and continued product innovation while navigating through the crisis. At Vera Bradley, we launched our Vera Bradley +Harry Potter collaboration in July with an exclusive Home to Hogwarts pattern and select pieces also available in solid corduroy; expanded manufacturing and distribution of masks, as well as added different styles, sizes, patterns, and solids; and introduced our second Gillette Venus collaboration distributed through Target in July. In early August, we migrated our e-commerce site to the cloud-based Shopify Plus platform. Subsequent to the second quarter, cloud-based Microsoft D365 replaced our existing ERP, POS, Business Intelligence, and Order Management systems, streamlining and simplifying our work and providing for additional capabilities such as mobile POS. We also continued to see success in our data-driven marketing and data science and were able to quickly adjust marketing spending into different product categories due to the changes in consumer demand related to COVID-19. At Pura Vida, we had several product introductions during the second quarter including our Pride andMother's Day bracelets, hair accessories, daisy seed bead jewelry, kitten earring, and alphabet bead bracelets; partnered with Vera Bradley to create a limited-edition face mask; continued to add to our charity charm bracelets that were introduced earlier this year; and continued to expand "above the keyboard" items including necklaces and earrings. Financial Summary (all comparisons are to the second quarter of fiscal 2020) •Net revenues increased 10.0% to$131.8 million . •Vera Bradley Direct ("VB Direct") segment sales decreased 13.9% to$81.2 million . •Vera Bradley Indirect segment ("VB Indirect") sales decreased 11.4% to$17.7 million . •Pura Vida segment sales were$32.8 million . •Gross profit was$79.6 million , or 60.4% of net revenue. •Operating income was$17.5 million and net income attributable toVera Bradley, Inc. was$7.2 million . Operating income included intangible asset amortization related to the Pura Vida acquisition of$2.3 million and$1.3 million of charges related to the Company's technology-related re-platforming. •Capital expenditures for the thirteen weeks totaled$2.0 million . •Cash and cash equivalents and investments were$77.1 million atAugust 1, 2020 . How We Assess the Performance of Our Business In assessing the performance of our business, we consider a variety of performance and financial measures. Net Revenues Net revenues reflect sales of our merchandise and revenue from distribution and shipping and handling fees, less returns and discounts. Revenues for the VB Direct segment reflect sales through Vera Bradley full-line and factory outlet stores; verabradley.com; our Vera Bradley online outlet site; and our Vera Bradley annual outlet sale inFort Wayne, Indiana . Revenues for the VB Indirect segment reflect sales of Vera Bradley-branded products to specialty retail partners; department stores; national accounts; third-party e-commerce sites; third-party inventory liquidators; and royalties recognized through licensing agreements related to the Vera Bradley brand. Revenues for the Pura Vida segment reflect revenues generated through the Pura Vida websites, www.puravidabracelets.com, www.puravidabracelets.eu, and www.puravidabracelets.ca and through the distribution of Pura Vida-branded products to wholesale retailers. 31 -------------------------------------------------------------------------------- Table of Contents Comparable Sales Typically, comparable sales are calculated based upon our stores that have been open for at least 12 full fiscal months and net revenues from our Vera Bradley e-commerce operations. Pura Vida e-commerce operations are not currently included within comparable sales, but will be considered comparable sales once reflected in the Company's operations for 12 full fiscal months. Comparable store sales are calculated based solely upon stores that have been open for at least 12 full fiscal months. Remodeled stores are included in both comparable sales and comparable store sales unless the store was closed for more than one week of the current or comparable prior period, in which case the non-comparable temporary closure periods are not included, or the remodel resulted in a significant change in square footage. Some of our competitors and other retailers calculate comparable or "same store" sales differently than we do. However, as a result of the temporary closure of all Vera Bradley stores due to COVID-19, the Company's fiscal 2021 second quarter and year-to-date comparable store sales and comparable sales calculations are not meaningful and therefore are not provided for the current-year second quarter and six months. Typically, measuring the change in year-over-year comparable sales allows us to evaluate how our store base and e-commerce operations are performing. Various factors affect our comparable sales, including: •Overall economic trends; •Consumer preferences and fashion trends; •Competition; •The timing of our releases of new patterns and collections; •Changes in our product mix; •Pricing and level of promotions; •Amount of store, mall, and e-commerce traffic; •The level of customer service that we provide in stores and to our on-line customers; •Our ability to source and distribute products efficiently; •The number of stores we open and close in any period; and •The timing and success of promotional and marketing efforts. Gross Profit Gross profit is equal to our net revenues less our cost of sales. Cost of sales includes the direct cost of purchased merchandise, distribution center costs, operations overhead, duty, and all inbound freight costs incurred. The components of our reported cost of sales may not be comparable to those of other retail and wholesale companies. Gross profit can be impacted by changes in volume; fluctuations in sales price; operational efficiencies, such as leveraging of fixed costs; promotional activities, including free shipping; commodity prices, such as for cotton; tariffs; and labor costs. Selling, General, and Administrative Expenses ("SG&A") SG&A expenses include selling; advertising, marketing, and product development; and administrative expenses. Selling expenses include: •VB Direct business expenses, such as store expenses, employee compensation, and store occupancy and supply costs; •VB Indirect business expenses consisting primarily of employee compensation and other expenses associated with sales to Indirect retailers; and •Pura Vida business expenses primarily related to employee compensation. Advertising, marketing, and product development expenses include employee compensation, media costs, creative production expenses, marketing agency fees, new product design costs, public relations expenses, and market research expenses. A portion of our advertising expenses may be reimbursed by Indirect retailers, and such amount is classified as other income. Administrative expenses include employee compensation for corporate functions, corporate headquarters occupancy costs, consulting and software expenses, and charitable donations. Other Income Other income includes certain legal settlements, proceeds from the sales of tickets to our annual outlet sale, and sales tax credits received for timely filings. In addition, we support many of our Indirect retailers' marketing efforts by distributing certain 32 -------------------------------------------------------------------------------- Table of Contents catalogs and promotional mailers to current and prospective customers. Our Indirect retailers reimburse us for a portion of the cost to produce these materials. Reimbursement received is recorded as other income. The related cost to design, produce, and distribute the catalogs and mailers is recorded as SG&A expense. Operating Income (Loss) Operating income (loss) is equal to gross profit less SG&A expenses plus other income. Operating income (loss) excludes interest income, interest expense, and income taxes. Net Income (Loss) Net income (loss) is equal to operating income (loss) plus interest income less interest expense and income taxes. Net Income (Loss) Attributable to Redeemable Noncontrolling Interest Net income (loss) attributable to redeemable noncontrolling interest represents the operating results of Pura Vida that are not attributable toVera Bradley, Inc. Net Income (Loss) Attributable toVera Bradley, Inc. Net income (loss) attributable toVera Bradley, Inc. is equal to net income (loss) less net income (loss) attributable to redeemable noncontrolling interest. Pura Vida Acquisition OnJuly 16, 2019 , the Company completed its acquisition of a seventy-five percent (75%) ownership interest inCreative Genius, Inc. or "Pura Vida" (the "Transaction") in exchange for total cash consideration of approximately$75.0 million . During the third quarter of fiscal 2020, the Company provided additional cash consideration of approximately$3.0 million for a working capital adjustment. The Company also received a working capital reimbursement of$1.0 million during the first quarter of fiscal 2021. Additional measurement period adjustments were recorded for conditions that existed as of the acquisition date. Pura Vida, based inLa Jolla, California , is a rapidly growing, digitally native, and highly engaging lifestyle brand that deeply resonates with its loyal consumer following. The Pura Vida brand has a differentiated and expanding offering of bracelets, jewelry, and other lifestyle accessories. The Company believes that the acquisition will strengthen the Company by providing increased product diversification and future growth opportunities partially as a result of resource and knowledge-sharing. In accordance with the Interest Purchase Agreement, the Company also agreed to a contingent payment of up to$22.5 million payable during the first quarter of calendar year 2020 based on calendar year 2019 adjusted EBITDA of Pura Vida, as defined in the Interest Purchase Agreement. This contingent payment was made during the first quarter of fiscal 2021 totaling$18.7 million . The Company's existing available cash, cash equivalents, and investments funded the purchase price due at the closing of the Transaction and subsequent to the closing. There were no transaction costs during the thirteen and twenty-six weeks endedAugust 1, 2020 . Pre-tax transaction costs totaled$1.9 million and$2.7 million for the thirteen and twenty-six weeks endedAugust 3, 2019 , respectively. These costs are recorded within selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations and within corporate unallocated expenses. Pura Vida has been fully consolidated within our financial statements beginning onJuly 17, 2019 , the first full day following the acquisition. Pura Vida was also added as a reportable segment as a result of the acquisition. Refer to Note 12 to the Notes to the Condensed Consolidated Financial Statements herein for additional information regarding the Pura Vida acquisition. Impairment Charges Property, plant, and equipment and lease right-of-use assets (the "asset group" for store-related assets) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. The reviews are conducted at the lowest identifiable level of cash flows. If the estimated undiscounted future cash flows related to the asset group are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, as further defined in Note 5 to the Notes to the Condensed Consolidated Financial Statements herein. Impairment charges of$3.8 million were recognized during the twenty-six weeks endedAugust 1, 2020 , for property, plant, and equipment and lease right-of-use assets related to underperforming stores and are included in selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations and in impairment charges in the Condensed Consolidated Statements of Cash Flows. The impairment charges are included in the Direct segment. There were no impairment charges recorded during the thirteen weeks endedAugust 1, 2020 or during the thirteen and twenty-six weeks endedAugust 1, 2019 . The COVID-19 pandemic, including the temporary closure of Vera Bradley retail stores beginning in mid-March, 33 -------------------------------------------------------------------------------- Table of Contents significantly impacted the Company's operations and cash flows which was the main driver of the impairment charges. We are unable to predict the extent of the impact that the COVID-19 pandemic will have on our operations, the economy, or other factors; therefore, it is possible additional impairments could be identified in future periods, and such amounts could be material. The discounted cash flow models used to estimate the applicable fair values involve numerous estimates and assumptions that are highly subjective. Changes to these estimates and assumptions could materially impact the fair value estimates. The estimates and assumptions critical to the overall fair value estimates include: (1) estimated future cash flow generated at the store level; (2) discount rates used to derive the present value factors used in determining the fair values; and (3) market rentals at the retail store. These and other estimates and assumptions are impacted by economic conditions and our expectations and may change in the future based on period-specific facts and circumstances. If economic conditions were to deteriorate, future impairment charges may be required and may be material. Results of Operations The following tables summarize key components of our condensed consolidated results of operations for the periods indicated, both in dollars and as a percentage of our net revenues ($ in thousands): Twenty-Six Weeks Thirteen Weeks Ended Ended August 1, August 3, August 1, August 3, 2020 2019 2020 2019 Statement of Operations Data: Net revenues$ 131,770 $ 119,785 $ 201,054 $ 210,788 Cost of sales 52,149 52,452 87,245 92,987 Gross profit 79,621 67,333 113,809 117,801 Selling, general, and administrative expenses 62,155 60,745 121,937 115,042 Other income 33 760 53 944 Operating income (loss) 17,499 7,348 (8,075) 3,703 Interest expense (income), net 485 (375) 557 (822) Income (loss) before income taxes 17,014 7,723 (8,632) 4,525 Income tax expense (benefit) 8,687 2,005 (1,422) 1,212 Net income (loss) 8,327 5,718 (7,210) 3,313 Less: Net income (loss) attributable to redeemable noncontrolling interest 1,111 (136) 911 (136) Net income (loss) attributable to Vera Bradley, Inc.$ 7,216 $ 5,854 $ (8,121) $ 3,449 Percentage of Net Revenues: Net revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 39.6 % 43.8 % 43.4 % 44.1 % Gross profit 60.4 % 56.2 % 56.6 % 55.9 % Selling, general, and administrative expenses 47.2 % 50.7 % 60.6 % 54.6 % Other income - % 0.6 % - % 0.4 % Operating income (loss) 13.3 % 6.1 % (4.0) % 1.8 % Interest expense (income), net 0.4 % (0.3) % 0.3 % (0.4) % Income (loss) before income taxes 12.9 % 6.4 % (4.3) % 2.1 % Income tax expense (benefit) 6.6 % 1.7 % (0.7) % 0.6 % Net income (loss) 6.3 % 4.8 % (3.6) % 1.6 % Less: Net income (loss) attributable to redeemable noncontrolling interest 0.8 % (0.1) % 0.5 % (0.1) % Net income (loss) attributable to Vera Bradley, Inc. 5.5 % 4.9 % (4.0) % 1.6 % 34
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The following tables present net revenues and operating income by operating
segment, both in dollars and as a percentage of associated net revenues, and
store data for the periods indicated ($ in thousands, except as otherwise
indicated):
Twenty-Six Weeks
Thirteen Weeks Ended Ended
August 1, August 3, August 1, August 3,
2020 2019 2020 2019
Net Revenues by Segment:
VB Direct $ 81,233 $ 94,380 $ 118,070 $ 165,516
VB Indirect 17,730 20,017 28,959 39,884
Pura Vida 32,807 5,388 54,025 5,388
Total $ 131,770 $ 119,785 $ 201,054 $ 210,788
Percentage of Net Revenues by Segment:
VB Direct 61.6 % 78.8 % 58.7 % 78.5 %
VB Indirect 13.5 % 16.7 % 14.4 % 18.9 %
Pura Vida 24.9 % 4.5 % 26.9 % 2.6 %
Total 100.0 % 100.0 % 100.0 % 100.0 %
Twenty-Six Weeks
Thirteen Weeks Ended Ended
August 1, August 3, August 1, August 3,
2020 2019 2020 2019
Operating Income (Loss) by Segment:
VB Direct $ 22,822 $ 22,137 $ 11,857 $ 30,497
VB Indirect 6,477 7,162 9,233 14,869
Pura Vida 4,445 (542) 3,644 (542)
Less: Corporate unallocated (16,245) (21,409) (32,809) (41,121)
Total $ 17,499 $ 7,348 $ (8,075) $ 3,703
Operating Income (Loss) as a Percentage of
Net Revenues by Segment:
VB Direct 28.1 % 23.5 % 10.0 % 18.4 %
VB Indirect 36.5 % 35.8 % 31.9 % 37.3 %
Pura Vida 13.5 % (10.1) % 6.7 % (10.1) %
Store Data (1):
Total stores opened during period 4 - 4 5
Total stores closed during period (1) (3) (6) (5)
Total stores open at end of period 149 156 149 156
Comparable sales (including e-commerce)
increase (2) NM 2.1 % NM 3.3 %
Total gross square footage at end of period
(all stores) 389,144 391,819 389,144 391,819
Average net revenues per gross square foot
(3) NM $ 198 NM $ 330
(1)Includes Vera Bradley full-line and factory outlet stores.
(2)As a result of the temporary closure of Vera Bradley stores due to COVID-19,
the Company's fiscal 2021 second quarter and year-to-date comparable store sales
and comparable sales calculations were not meaningful and therefore were not
provided. Comparable sales are calculated based upon Vera Bradley stores that
have been open for at least 12 full fiscal months and net revenues from our Vera
Bradley e-commerce operations. Pura Vida e-commerce operations are not currently
included within comparable sales. Increase or decrease is reported as a
percentage of the comparable sales for the same period in the prior fiscal year.
Remodeled stores are included in comparable sales unless the store was closed
for more than one week of the current or comparable prior period, in which case
the non-comparable temporary closure periods are not included, or the remodel
resulted in a significant change in square footage.
(3)Dollars not in thousands. Average net revenues per gross square foot are
calculated by dividing total net revenues for our stores that have been open at
least 12 full fiscal months as of the end of the period by total gross square
footage for
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those stores. Remodeled stores are included in average net revenues per gross
square foot unless the store was closed for a portion of the period. As a result
of the temporary closure of Vera Bradley stores due to COVID-19, the Company's
fiscal 2021 second quarter and year-to-date average net revenues per gross
square foot calculations were not meaningful and therefore were not provided.
Thirteen Weeks Ended August 1, 2020 , Compared to Thirteen Weeks Ended August 3,
2019
Net Revenues
For the thirteen weeks ended August 1, 2020 , net revenues increased
$12.0 million , or 10.0%, to $131.8 million , from $119.8 million in the
comparable prior-year period.
VB Direct. For the thirteen weeks ended August 1, 2020 , net revenues in the VB
Direct segment decreased $13.2 million , or 13.9%, to $81.2 million , from
$94.4 million in the comparable prior-year period. The decline primarily
resulted from the Company's stores that were temporarily closed as a result of
COVID-19 during the quarter and lower traffic and sales as they reopened with
reduced staffing, hours, and capacity. This decline was partially offset by
second quarter Vera Bradley e-commerce sales which increased 99.1% over the
comparable period in the prior-year.
VB Indirect. For the thirteen weeks ended August 1, 2020 , net revenues in the VB
Indirect segment decreased $2.3 million , or 11.4%, to $17.7 million , from
$20.0 million in the comparable prior-year period. The decline was primarily due
to a reduction in orders from specialty, department stores and other key
accounts, largely related to COVID-19, as well as a reduction in the number of
specialty and department store accounts.
Pura Vida. For the thirteen weeks ended August 1, 2020 , net revenues in the Pura
Vida segment were $32.8 million compared to $5.4 million for the partial period
in the prior year. Refer to Note 12 to the Notes to the Condensed Consolidated
Financial Statements herein for additional information regarding the Pura Vida
acquisition.
Gross Profit
For the thirteen weeks ended August 1, 2020 , gross profit increased
$12.3 million , or 18.2%, to $79.6 million , from $67.3 million in the comparable
prior-year period. As a percentage of net revenues, gross profit increased to
60.4% for the thirteen weeks ended August 1, 2020 , from 56.2% in the comparable
prior-year period. The increase as a percentage of net revenues was primarily
due to mask sales, product collaborations, inventory management, and controlled
promotional activity.
Selling, General, and Administrative Expenses
For the thirteen weeks ended August 1, 2020 , SG&A expenses increased
$1.5 million , or 2.3%, to $62.2 million , from $60.7 million in the comparable
prior-year period. As a percentage of net revenues, SG&A expenses decreased to
47.2% for the thirteen weeks ended August 1, 2020 , from 50.7% in the comparable
prior-year period. SG&A expenses related to Vera Bradley and corporate
unallocated were $46.4 million compared to $57.9 million in the comparable
prior-year period. SG&A expenses related to Pura Vida were $15.8 million
compared to $2.8 million in the partial period of the prior-year. The increase
in consolidated SG&A expenses for the thirteen weeks ended August 1, 2020 was
primarily due to incremental Pura Vida operating expenses of $11.1 million , as
well as incremental amortization of intangible assets associated with the Pura
Vida acquisition of $1.9 million . These charges were partially offset by Vera
Bradley initiatives to reduce expenses in light of COVID-19 including
temporarily reducing the base compensation for salaried associates; certain
expense reductions associated with the CARES Act; the temporary furlough of
certain associates during the quarter; and reducing other non-payroll expenses
including marketing, professional fees, travel, and retail store rent. There was
also $1.9 million related to Pura Vida transaction costs in the prior-year
period that did not recur in the current-year period. SG&A expenses as a
percentage of net revenues decreased primarily due to expense leverage
associated with the aforementioned expense savings.
Other Income
For the thirteen weeks ended August 1, 2020 , other income decreased $0.7 million
to $33.0 thousand compared to $0.8 million in the comparable prior-year period.
The decrease in other income was primarily due to a legal settlement in the
prior-year period.
Operating Income
For the thirteen weeks ended August 1, 2020 , operating income increased
$10.2 million to $17.5 million in the current-year period, from $7.3 million in
the comparable prior-year period. As a percentage of net revenues, operating
income was 13.3% and 6.1% for the thirteen weeks ended August 1, 2020 and August
3, 2019 , respectively. Operating income increased due to the factors described
above.
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VB Direct. For the thirteen weeks ended August 1, 2020 , operating income in the
VB Direct segment increased $0.7 million , to $22.8 million from operating income
of $22.1 million in the comparable prior-year period. As a percentage of VB
Direct segment net revenues, operating income in the VB Direct segment was 28.1%
and 23.5% for the thirteen weeks ended August 1, 2020 and August 3, 2019 ,
respectively. The increase in operating income as a percentage of VB Direct
segment net revenues was primarily due to an increase in gross margin as a
percentage of net revenues as described above and SG&A expense leverage
associated with the aforementioned expense savings.
VB Indirect. For the thirteen weeks ended August 1, 2020 , operating income in
the VB Indirect segment decreased $0.7 million , or 9.6%, to $6.5 million from
$7.2 million in the comparable prior-year period. As a percentage of VB Indirect
segment net revenues, operating income in the VB Indirect segment was 36.5% and
35.8% for the thirteen weeks ended August 1, 2020 and August 3, 2019 ,
respectively. The increase in operating income as a percentage of VB Indirect
segment net revenues was primarily due to an increase in gross margin as a
percentage of net revenues, partially offset by an increase in the bad debt
provision.
Pura Vida. For the thirteen weeks ended August 1, 2020 , operating income in the
Pura Vida segment was $4.4 million , or 13.5% of Pura Vida segment net revenues
compared to an operating loss of $(0.5) million , or (10.1)% for the partial
prior-year period. The current-year operating results included $2.3 million of
intangible asset amortization expense. The prior-year period included
$1.0 million of inventory step-up amortization and $0.4 million of intangible
asset amortization. Refer to Note 12 to the Notes to the Condensed Consolidated
Financial Statements herein for additional information regarding the Pura Vida
acquisition.
Corporate Unallocated. For the thirteen weeks ended August 1, 2020 , unallocated
expenses decreased $5.2 million , or 24.1%, to $16.2 million from $21.4 million
in the comparable prior-year period. The decrease in unallocated expenses was
primarily due to initiatives to reduce expenses in light of COVID-19 including
the temporary furlough of certain associates; temporarily reducing the base
compensation for salaried associates; and reducing other non-payroll expenses
including marketing, professional fees, and travel. There were also $1.9 million
of Pura Vida transaction costs in the prior-year period that did not recur in
the current-year period.
Income Tax Expense
The effective tax rate for the thirteen weeks ended August 1, 2020 , was 51.1%,
compared to 26.0% for the thirteen weeks ended August 3, 2019 . The year-over
year effective tax rate increase was primarily due to a change in the projection
of the Company's annual income in the current fiscal quarter. This change
resulted in the reversal of the impact from the net operating loss ("NOL")
carryback that was estimated in the first quarter as a result of the Coronavirus
Aid, Relief, and Economic Security Act ("CARES Act") that was enacted on March
27, 2020 in response to the COVID-19 pandemic.
Net Income
For the thirteen weeks ended August 1, 2020 , net income increased $2.6 million
to $8.3 million from $5.7 million in the comparable prior-year period due to the
factors described above.
Net Income (Loss) Attributable to Redeemable Noncontrolling Interest
For the thirteen weeks ended August 1, 2020 , net income attributable to
redeemable noncontrolling interest was $1.1 million compared to net loss
attributable to redeemable noncontrolling interest of $(0.1) million in the
comparable prior-year period. This represents the allocation of the Pura Vida
net income (loss) to the noncontrolling interest. The net income (loss) was due
to the factors described above in the Pura Vida operating segment.
Net Income Attributable to Vera Bradley, Inc.
For the thirteen weeks ended August 1, 2020 , net income attributable to Vera
Bradley, Inc. increased $1.3 million to $7.2 million from $5.9 million in the
comparable prior-year period due to the factors described above.
Twenty-Six Weeks Ended August 1, 2020 , Compared to Twenty-Six Weeks Ended
August 3, 2019
Net Revenues
For the twenty-six weeks ended August 1, 2020 , net revenues decreased $9.7
million , or 4.6%, to $201.1 million , from $210.8 million in the comparable
prior-year period.
VB Direct. For the twenty-six weeks ended August 1, 2020 , net revenues in the VB
Direct segment decreased $47.4 million , or 28.7%, to $118.1 million , from $165.5
million in the comparable prior-year period. The decline primarily resulted from
the
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Company's stores that were temporarily closed as a result of COVID-19 and lower
traffic and sales as they reopened with reduced staffing, hours, and capacity,
as well as the COVID-19-related cancellation of our annual outlet sale which
typically occurs in April. This decline was partially offset by current-year
period Vera Bradley e-commerce sales which increased 64.9% over the comparable
period in the prior-year.
VB Indirect. For the twenty-six weeks ended August 1, 2020 , net revenues in the
VB Indirect segment decreased $10.9 million , or 27.4%, to $29.0 million , from
$39.9 million in the comparable prior-year period. The decline was primarily due
to a reduction in orders from specialty, department stores and other key
accounts, largely related to COVID-19, as well as a reduction in the number of
specialty and department store accounts.
Pura Vida. For the twenty-six weeks ended August 1, 2020 , net revenues in the
Pura Vida segment were $54.0 million compared to $5.4 million in the partial
period of the prior-year. Refer to Note 12 to the Notes to the Condensed
Consolidated Financial Statements herein for additional information regarding
the Pura Vida acquisition.
Gross Profit
For the twenty-six weeks ended August 1, 2020 , gross profit decreased $4.0
million , or 3.4%, to $113.8 million , from $117.8 million in the comparable
prior-year period. As a percentage of net revenues, gross profit increased to
56.6% for the twenty-six weeks ended August 1, 2020 , from 55.9% in the
comparable prior-year period. Charges for the cancellation of certain purchase
orders due to COVID-19 in the current-year totaled $1.3 million and negatively
impacted gross margin as a percentage of net revenues by 0.7%. The prior-year
period included $1.0 million of inventory step-up amortization related to the
Pura Vida acquisition that negatively impacted gross margin as a percentage of
net revenues by 0.5%. The remaining increase as a percentage of net revenues was
primarily due to mask sales, product collaborations, inventory management, and
controlled promotional activity.
Selling, General, and Administrative Expenses
For the twenty-six weeks ended August 1, 2020 , SG&A expenses increased $6.9
million , or 6.0%, to $121.9 million , from $115.0 million in the comparable
prior-year period. As a percentage of net revenues, SG&A expenses increased to
60.6% for the twenty-six weeks ended August 1, 2020 , from 54.6% in the
comparable prior-year period. SG&A expenses related to Vera Bradley and
corporate unallocated were $93.5 million compared to $112.2 million in the
comparable prior-year period. SG&A expenses related to Pura Vida were
$28.4 million compared to $2.8 million in the partial period of the prior-year.
The increase in consolidated SG&A expenses for the twenty-six weeks ended
August 1, 2020 was primarily due to incremental Pura Vida operating expenses of
$21.3 million ; Vera Bradley store impairment charges of $3.8 million ;
incremental amortization of intangible assets associated with the Pura Vida
acquisition of $4.3 million ; and an incremental $2.1 million of certain
professional fees and accelerated depreciation charges related to the Vera
Bradley information technology re-platforming. These charges were partially
offset by Vera Bradley initiatives to reduce expenses in light of COVID-19
including the temporary furlough of certain associates; temporarily reducing the
base compensation for all other salaried associates; certain expense reductions
associated with the CARES Act; and reducing other non-payroll expenses including
marketing, professional fees, travel, and rent. In addition, there was a
reduction in incentive compensation expense as a result of Company performance
driven by COVID-19. SG&A expenses as a percentage of net revenues increased
primarily due to the aforementioned items, as well as SG&A expense de-leverage
associated with decreased sales.
Other Income
For the twenty-six weeks ended August 1, 2020 , other income decreased $0.9
million to $53.0 thousand compared to $0.9 million in the comparable prior-year
period. The decrease in other income was primarily due to outlet sale ticket
sales not received in the current-year period due to the cancellation of our
2020 annual outlet sale as a result of COVID-19, as well as a legal settlement
received in the prior-year period that did not recur in the current-year period.
Operating (Loss) Income
For the twenty-six weeks ended August 1, 2020 , operating loss increased $11.8
million to $(8.1) million in the current-year period, from operating income of
$3.7 million in the comparable prior-year period. As a percentage of net
revenues, operating (loss) income was (4.0)% and 1.8% for the twenty-six weeks
ended August 1, 2020 and August 3, 2019 , respectively. Operating loss increased
due to the factors described above.
VB Direct. For the twenty-six weeks ended August 1, 2020 , operating income in
the VB Direct segment decreased $18.6 million , to $11.9 million from $30.5
million in the comparable prior-year period. As a percentage of VB Direct
segment net revenues, operating income in the VB Direct segment was 10.0% and
18.4% for the twenty-six weeks ended August 1, 2020 and August 3, 2019 ,
respectively. The decrease in operating income as a percentage of VB Direct
segment net revenues was primarily due to SG&A expense de-leverage associated
with lower sales primarily as a result of temporary store closures due to
COVID-19, store impairment charges, an allocation of charges for the
cancellation of certain purchase orders related to
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COVID-19, and certain professional fees and accelerated depreciation charges for
the Company's technology re-platforming. These decreases were partially offset
by an increase in gross margin as a percentage of net revenues, as described
above.
VB Indirect. For the twenty-six weeks ended August 1, 2020 , operating income in
the VB Indirect segment decreased $5.7 million , or 37.9%, to $9.2 million from
$14.9 million in the comparable prior-year period. As a percentage of VB
Indirect segment net revenues, operating income in the VB Indirect segment was
31.9% and 37.3% for the twenty-six weeks ended August 1, 2020 and August 3,
2019 , respectively. The decrease in operating income as a percentage of VB
Indirect segment net revenues was primarily due to SG&A expense deleverage
associated with lower sales and an increase in the bad debt provision, partially
offset by an increase in gross margin as a percentage of net revenues as
described above.
Pura Vida. For the twenty-six weeks ended August 1, 2020 , operating income in
the Pura Vida segment was $3.6 million , or 6.7% of Pura Vida segment net
revenues compared to an operating loss of $(0.5) million in the partial
prior-year period. The current-year operating results included $4.7 million of
intangible asset amortization expense. The prior-year period included
$1.0 million of inventory step-up amortization and $0.4 million of intangible
asset amortization. Refer to Note 12 to the Notes to the Condensed Consolidated
Financial Statements herein for additional information regarding the Pura Vida
acquisition.
Corporate Unallocated. For the twenty-six weeks ended August 1, 2020 ,
unallocated expenses decreased $8.3 million , or 20.2%, to $32.8 million from
$41.1 million in the comparable prior-year period. The decrease in unallocated
expenses was primarily due to initiatives to reduce expenses in light of
COVID-19 including the temporary furlough of certain associates; temporarily
reducing the base compensation for all other salaried associates; and reducing
other non-payroll expenses including marketing, professional fees, and travel.
In addition, there was a decrease in incentive compensation expense compared to
the prior-year period as a result of Company performance driven by COVID-19.
Income Tax (Benefit) Expense
The effective tax rate for the twenty-six weeks ended August 1, 2020 , was 16.5%,
compared to 26.8% for the twenty-six weeks ended August 3, 2019 . The year-over
year effective tax rate decrease was primarily due to the relative impact of
permanent and discrete items in the current-year period compared to the
prior-year period, primarily as a result of stock-based compensation.
Net (Loss) Income
For the twenty-six weeks ended August 1, 2020 , net loss increased $10.5 million
to $(7.2) million from net operating income of $3.3 million in the comparable
prior-year period due to the factors described above.
Net Income (Loss) Attributable to Redeemable Noncontrolling Interest
For the twenty-six weeks ended August 1, 2020 , net income attributable to
redeemable noncontrolling interest was $0.9 million compared to net loss of
$(0.1) million in the partial prior-year period. This represents the allocation
of the Pura Vida net income (loss) to the noncontrolling interest. The net
income (loss) was due to the factors described above in the Pura Vida operating
segment.
Net (Loss) Income Attributable to Vera Bradley, Inc.
For the twenty-six weeks ended August 1, 2020 , net loss attributable to Vera
Bradley, Inc. increased $11.5 million to $(8.1) million from net income
attributable to Vera Bradley, Inc. of $3.4 million in the comparable prior-year
period due to the factors described above.
Liquidity and Capital Resources
General
Our primary sources of liquidity are cash on hand and cash equivalents,
investments, and cash flow from operations. We also have access to additional
liquidity, if needed, through incremental borrowings under our $75.0 million
asset-based revolving credit agreement (the "Credit Agreement") which began on
September 7, 2018 . Net borrowings under the credit agreement totaled
$30.0 million during the twenty-six weeks ended August 1, 2020 , and there was
$30.0 million in debt outstanding as of August 1, 2020 . Historically, our
primary cash needs have been for merchandise inventories; payroll; store rent;
capital expenditures associated with operational equipment, buildings,
information technology, and opening new stores; and share repurchases. The most
significant components of our working capital are cash and cash equivalents,
short-term investments, merchandise inventories, accounts receivable, accounts
payable, and other current liabilities.
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In light of the COVID-19 pandemic, we anticipate that we will have increased
needs for cash due to store closures and a general decline in sales related to
the pandemic. While we believe that cash on hand and cash equivalents,
investments, cash flows from operating activities, and the additional
availability of borrowings under our Credit Agreement or other financing
arrangements will be sufficient to meet working capital requirements and
anticipated capital expenditures, other strategic uses of cash, if any, and debt
payments for the foreseeable future, we cannot predict the full cash needs of
the Company during the pandemic.
Investments.
Cash Equivalents. Investments classified as cash equivalents relate to
highly-liquid investments with a maturity of three months or less at the date of
purchase. As of August 1, 2020 and February 1, 2020 , these investments in the
Company's portfolio consisted of a money market fund. The balance as of
February 1, 2020 also included commercial paper.
Short-Term Investments. As of August 1, 2020 and February 1, 2020 short-term
investments consisted of U.S. and non-U.S. corporate debt securities with a
maturity within one year of the balance sheet date. The balance as of
February 1, 2020 also included commercial paper, municipal securities, and U.S.
asset-backed securities.
Long-Term Investments. As of August 1, 2020 and February 1, 2020 , long-term
investments consisted of U.S. and non-U.S. corporate debt securities with a
maturity greater than one year from the balance sheet date. The balance as of
February 1, 2020 also included U.S. and non-U.S. asset-backed securities and
other foreign securities.
Refer to Note 11 "Investments" within Item 1 "Financial Statements" of this
Quarterly Report on Form 10-Q for additional detail regarding investments.
Cash Flow Analysis
A summary of operating, investing, and financing activities is shown in the
following table (in thousands):
Twenty-Six Weeks Ended
August 1, August 3,
2020 2019
Net cash (used in) provided by operating activities $ (77) $ 1,091
Net cash provided by (used in) investing activities 18,901 (61,412)
Net cash provided by (used in) financing activities 6,816 (6,351)
Net Cash (Used in) Provided by Operating Activities
Net cash (used in) provided by operating activities consists primarily of net
(loss) income adjusted for non-cash items, including depreciation, amortization,
impairment charges, deferred taxes, and stock-based compensation; the effect of
changes in assets and liabilities; and tenant-improvement allowances received
from landlords under our store leases.
Net cash used in operating activities for the twenty-six weeks ended August 1,
2020 was $0.1 million compared to cash provided by operating activities of $1.1
million for the twenty-six weeks ended August 3, 2019 . The increase in cash used
in operating activities was primarily related to the change in assets and
liabilities. The increases that resulted in a use of cash were primarily related
to an increase in the income tax receivable due to the increased net loss
compared to the prior-year period and payments made for Pura Vida operations not
in the prior-year period, as well as certain Vera Bradley technology project
expenditures. Increases resulting in a source of cash were primarily related to
the deferral of rent payments as a result of COVID-19, as well as timing of
other payments.
Net Cash Provided by (Used in) Investing Activities
Investing activities consist primarily of short-term and long-term investments
and capital expenditures related to new store openings, buildings, operational
equipment, and information technology investments.
Net cash provided by investing activities was $18.9 million for the twenty-six
weeks ended August 1, 2020 compared to cash used in investing activities of
$61.4 million for the twenty-six weeks ended August 3, 2019 . The increase in
cash provided by investing activities was primarily a result of decreased
spending related to property, plant, and equipment and net investments in the
current year, as well as the July 2019 acquisition of Pura Vida that occurred in
the prior-year period.
Capital expenditures for fiscal 2021 are expected to be approximately
$8.0 million to $10.0 million .
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Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was $6.8 million for the twenty-six
weeks ended August 1, 2020 compared to cash used in financing activities of $6.4
million for the twenty-six weeks ended August 3, 2019 . The increase in cash
provided by financing activities was primarily due to net borrowings of
$30.0 million under our Credit Agreement, partially offset by the $18.7 million
payment of the contingent consideration associated with the July 2019
acquisition of Pura Vida.
Credit Agreement
On September 7, 2018 , VBD, a wholly-owned subsidiary of the Company, entered
into an asset based revolving Credit Agreement (the "Credit Agreement") among
VBD, JPMorgan Chase Bank, N.A ., as administrative agent, and the lenders from
time to time party thereto. The Credit Agreement provides for certain credit
facilities to VBD in an aggregate principal amount not to initially exceed the
lesser of $75.0 million or the amount of borrowing availability determined in
accordance with a borrowing base of certain assets. Any proceeds of the credit
facilities will be used to finance general corporate purposes of VBD and its
subsidiaries, including but not limited to Vera Bradley International, LLC and
Vera Bradley Sales, LLC (collectively, the "Named Subsidiaries"). The Credit
Agreement also contains an option for VBD to arrange with lenders to increase
the aggregate principal amount by up to $25.0 million .
Amounts outstanding under the Credit Agreement bear interest at a per annum rate
equal to either (i) for CBFR borrowings (including swingline loans), the CB
Floating Rate, where the CB Floating Rate is the prime rate which shall never be
less than the adjusted one month LIBOR rate on such day, plus the Applicable
Rate, where the Applicable Rate is a percentage spread ranging from -1.00% to
-1.50% or (ii) for each eurodollar borrowing, the Adjusted LIBO Rate, where the
Adjusted LIBO Rate is the LIBO rate for such interest period multiplied by the
statutory reserve rate, for the interest period in effect for such borrowing,
plus the Applicable Rate, where the Applicable Rate is a percentage ranging from
1.00% to 1.30%. The applicable CB Floating Rate, Adjusted LIBO Rate, or LIBO
Rate shall be determined by the administrative agent. The Credit Agreement also
requires VBD to pay a commitment fee for the unused portion of the revolving
facility of up to 0.20% per annum.
VBD's obligations under the Credit Agreement are guaranteed by the Company and
the Named Subsidiaries. The obligations of VBD under the Credit Agreement are
secured by substantially all of the respective assets of VBD, the Company, and
the Named Subsidiaries and are further secured by the equity interests in VBD
and the Named Subsidiaries.
The Credit Agreement contains various affirmative and negative covenants,
including restrictions on the Company's ability to incur debt or liens; engage
in mergers or consolidations; make certain investments, acquisitions, loans, and
advances; sell assets; enter into certain swap agreements; pay dividends or make
distributions or make other restricted payments; engage in certain transactions
with affiliates; and amend, modify, or waive any of its rights related to
subordinated indebtedness and certain charter and other organizational,
governing, and material agreements. The Company may avoid certain of such
restrictions by meeting payment conditions defined in the Credit Agreement. The
Company was in compliance with these covenants as of August 1, 2020 .
The Credit Agreement also requires the Loan Parties to maintain a minimum fixed
charge coverage ratio of 1.00 to 1.00 during periods when borrowing availability
is less than the greater of (A) $7.5 million , and (B) 10% of the lesser of (i)
the aggregate revolving commitment, and (ii) the borrowing base. The fixed
charge coverage ratio, availability, aggregate revolving commitment, and the
borrowing base are further defined in the Credit Agreement.
The Credit Agreement contains customary events of default, including, among
other things: (i) the failure to pay any principal, interest, or other fees
under the Credit Agreement; (ii) the making of any materially incorrect
representation or warranty; (iii) the failure to observe or perform any
covenant, condition, or agreement in the Credit Agreement or related agreements;
(iv) a cross default with respect to other material indebtedness; (v) bankruptcy
and insolvency events; (vi) unsatisfied material final judgments; (vii) Employee
Retirement Income Security Act of 1974 ("ERISA") events that could reasonably be
expected to have a material adverse effect; and (viii) a change in control (as
defined in the Credit Agreement).
Any commitments made under the Credit Agreement mature on September 7, 2023 .
As of August 1, 2020 the Company had outstanding borrowings of $30.0 million and
availability of $45.0 million under the Credit Agreement, compared to no
borrowings outstanding and availability of $75.0 million as of February 1, 2020
under the Credit Agreement.
Off-Balance-Sheet Arrangements
We do not have any off-balance-sheet financing or unconsolidated special-purpose
entities.
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Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, and expenses, as well as the related disclosures of contingent assets
and liabilities at the date of the financial statements. A summary of the
Company's significant accounting policies is included in Note 2 to the Company's
consolidated financial statements in the Company's Annual Report on Form 10-K
for the fiscal year ended February 1, 2020 .
Certain accounting policies and estimates of the Company are considered
critical, as these policies and estimates are the most important to the
depiction of the Company's consolidated financial statements and require
significant, difficult, or complex judgments, often about the effect of matters
that are inherently uncertain. Such policies are summarized in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2020 .
There were no significant changes to any of the critical accounting policies and
estimates described in the Annual Report as of August 1, 2020 .
Recently Issued Accounting Pronouncements
Refer to Note 1 "Description of the Company and Basis of Presentation" within
Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q for a
discussion of recently issued accounting pronouncements.
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