You should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this report, particularly under the headings "Risk Factors," "Selected Financial Data" and "Business." This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity, and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See "Forward-Looking Statements." These forward-looking statements are subject to numerous risks and uncertainties, including those described under "Risk Factors." Our actual results could differ materially from those suggested or implied by any forward-looking statements. The COVID-19 Pandemic 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 fiscal 2021. Although e-commerce operations remained open for both of our brands, 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, 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. Update on COVID-19 Actions as ofJanuary 30, 2021 OnMay 5, 2020 , we began to open our Vera Bradley retail stores in a phased approach. All factory and full line stores were opened as of the end of the fiscal year, although with reduced hours, lower staffing levels, reduced foot traffic, and greatly enhanced safety protocols. The sales of cotton face masks, coupled with a full year of Pura Vida operations, helped to offset sales declines otherwise associated with Vera Bradley. Net revenues from masks represented approximately 10% of consolidated net revenues for fiscal 2021. We have brought back substantially all of our associates from furlough; reinstated the base compensation reductions; reinstated the cash compensation to our Board of Directors; paid back$60.0 million of borrowings under our Credit Agreement, leaving us with no debt as of the end of the fiscal year; and reinstated the 401(k) match inJanuary 2021 . We continued to manage operating expenses and inventory levels, and work with landlords on rent abatement and payment terms, which helped in the achievement of expense leverage. In addition, the Company is leveraging elements of the Coronavirus Aid Relief and Economic Security (CARES) Act. The CARES Act tax provisions include retention credits, the deferral of the employer portion of certain payroll taxes, and tax benefits related to a net operating loss carryback. 35 -------------------------------------------------------------------------------- Table of Contents Executive Summary As more fully described herein, fiscal 2021 was the final year of our Vision 20/20 strategic plan, which we began implementing in the third quarter of fiscal 2018. Despite the COVID-19 situation, we strengthened our infrastructure and better positioned both the Pura Vida and Vera Bradley brands for the future. Strategic Progress Highlights •In the Information Technology area: •We completed Project Novus, our information technology platform conversion, migrating our e-commerce site to cloud-based Shopify Plus and replacing our existing ERP, POS, Business Intelligence, and Order Management systems with cloud-based Microsoft D365. This conversion not only decreased the complexity of our IT systems but has provided us with a more efficient technology platform enabling our entire enterprise to make quick, data-based, informed decisions in order to further enhance our customer experience and achieve our long-term growth objectives. •In the Vera Bradley product area: •We quickly reacted to the consumer demand for personal protective equipment, producing and selling millions of cotton face masks, generating meaningful revenue and gross margin dollars for the fiscal year. •We continued another year of collaborations with several iconic brands, including Crocs,Disney , and Gillette Venus to create and sell limited-edition product collections; introduced our signature masks and 1982 backpacks in Target stores and on target.com; and launched our collaboration withWarner Bros. Consumer Products for the creation of our Harry Potter™ + Vera Bradley collection. •In the Vera Bradley distribution area: •We continued to strengthen and rationalize our store base. We opened six new factory stores and closed 13 underperforming full-line stores, ending the fiscal year with 75 full-line and 69 factory locations. •We expanded and strengthened our partnerships with key online retailers such as Amazon. •In the Vera Bradley marketing area: •We successfully launched our new verabradley.com site which allowed us to improve our customer's online buying experience. We added a number of key site capabilities to support customers who shifted to online purchasing during the pandemic. •Our investments in customer data science and business analytics positioned us to navigate through the pandemic, allowing us to collect and analyze data and respond to customer changes and adjust marketing spend in an agile way. •We reinforced our commitment to be an ESG-driven organization. •We continued to strengthen our community support and charitable efforts under the umbrellas of VB Cares, particularly through organizations that can profoundly improve the lives of women and children, including raising and donating$1.4 million to theVera Bradley Foundation Center for Breast Cancer Research , over$630,000 to theCoronavirus Response Fund for Nurses , and donations to New Hope Girls, Blessings in a Backpack, and other causes. •As another aspect of VB Cares focused on caring for our associates, we paid over$800,000 in bonuses to those serving on the front lines during the pandemic. Our associate engagement scores also continued to be best in class, underscoring the engagement and commitment from our talented teams. •For Pura Vida: •Using Vera Bradley's global sourcing expertise, we significantly strengthened Pura Vida's supply chain, diversifying raw material sourcing, and adding three additional production facilities in countries outside ofEl Salvador . •We re-examined promotional activity and eliminated deep discounting, particularly around Black Friday, which led to gross margin rate improvement. •In the Pura Vida Product area: •Pura Vida continued to show strength as a lifestyle brand by successfully expanding into new product categories. Nearly 50% of our e-commerce business is now comprised of jewelry categories other than traditional string bracelets, such as metal, semi-precious stones, charms, and the engravable collection, 36 -------------------------------------------------------------------------------- Table of Contents underscoring the brand's lifestyle appeal. We believe this lifestyle appeal will continue to be a key driver of growth. •Charity bracelets remained an important element of the Pura Vida lifestyle and an important draw for our cause-minded customers. Since inception, Pura Vida has donated over$3.0 million to more than 200 charities. •In the Pura Vida Distribution area: •Pura Vida expanded on the distribution front by launching fulfillment capabilities inCanada and entering into a third-party agreement for the wholesale distribution of our products inEurope to complement our existing e-commerce business and third-party operations there. •We added Pura Vida shop-in-shops to six full-line Vera Bradley stores and expanded our presence in wholesale partners with larger in-store presentations. •In the Pura Vida Marketing area: •Our brands in the accessories space remained one of the most highly-engaged brands in terms of social media engagement, with over 2.0 million Instagram followers. We are consistently listed as one of the most, if not the most, engaged jewelry brands on Instagram.TikTok exposure also increased with over 200,000 followers, a team of Brand Ambassadors, and close to 150,000 micro influencers who collectively are an active part of the brand and a key part of our marketing strategy. Financial Summary Refer to "The COVID-19 Pandemic" for additional information regarding the impacts of the pandemic on fiscal 2021 financial results. Fiscal 2020 results (our prior fiscal year) included Pura Vida operations as ofJuly 17, 2019 , the first full-day following the acquisition. •Net revenues were$468.3 million in fiscal 2021 compared to$495.2 million in fiscal 2020. •Vera Bradley Direct ("VB Direct") segment sales were$289.3 million in fiscal 2021 compared to$347.5 million in fiscal 2020. •Vera Bradley Indirect ("VB Indirect") segment sales were$66.5 million in fiscal 2021 compared to$81.8 million in fiscal 2020. •Pura Vida segment sales were$112.5 million in fiscal 2021 compared to$65.9 million for the partial period since the acquisition. •Gross profit was$265.5 million (56.7% of net revenue) in fiscal 2021 compared to$271.8 million (54.9% of net revenue) in fiscal 2020. COVID-19-related purchase order cancellations totaled$1.3 million (0.3% of net revenue) during fiscal 2021. Inventory step-up amortization related to the Pura Vida acquisition totaled$8.3 million (1.7% of net revenue) during fiscal 2020. •SG&A expenses were$252.6 million (53.9% of net revenue) in fiscal 2021 compared to$253.4 million (51.2% of net revenue) in fiscal 2020. •During fiscal 2021, SG&A expenses included$9.2 million of Pura Vida purchase-related charges;$7.4 million of store asset impairment charges;$2.7 million of charges related to Project Novus; and$0.2 million of COVID-19-related charges. •During fiscal 2020, SG&A expenses included$8.0 million of Pura Vida purchase-related charges and$3.0 million of charges related to Project Novus. •Operating income was$13.1 million (2.8% of net revenue) in fiscal 2021 compared to$19.5 million (3.9% of net revenue) in fiscal 2020. •During fiscal 2021, operating income was negatively impacted by$9.2 million of Pura Vida purchase-related charges;$7.4 million of store asset impairment charges;$2.7 million of charges related to Project Novus; and$1.5 million of COVID-19-related charges. •During fiscal 2020, operating income was negatively impacted by Pura Vida purchase-related charges of$16.3 million and charges of$3.0 million related to Project Novus. •Net income attributable toVera Bradley, Inc. was$8.7 million in fiscal 2021 compared to$16.0 million in fiscal 2020. 37 -------------------------------------------------------------------------------- Table of Contents •During fiscal 2021, net income attributable toVera Bradley, Inc. was negatively impacted by$4.5 million of store asset impairment charges;$5.0 million of Pura Vida purchase-related charges;$2.1 million of charges related to Project Novus; and$1.1 million of COVID-19-related charges. •During fiscal 2020, net income attributable toVera Bradley, Inc. was negatively impacted by Pura Vida purchase-related charges of$9.7 million and charges of$2.4 million related to Project Novus. •Diluted net income per share was$0.26 in fiscal 2021 compared to$0.47 in fiscal 2020. The aforementioned charges negatively impacted net income per share by$0.38 and$0.35 in fiscal 2021 and 2020, respectively. •Cash, cash equivalents, and investments were$65.5 million atJanuary 30, 2021 compared to$73.8 million atFebruary 1, 2020 . The Company provided cash consideration of$76.0 million during fiscal 2020 for the Pura Vida acquisition. •Capital expenditures for fiscal 2021 totaled$5.7 million compared to$13.3 million for fiscal 2020. •Repurchases of common stock for fiscal 2021 totaled$2.9 million , or 0.4 million shares, compared to$11.3 million , or 1.1 million shares, in fiscal 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. 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 included within the Company's comparable sales beginning with the fiscal 2021 third quarter. Pura Vida e-commerce operations include sales from the subscription club. 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. As a result, data in this report regarding our comparable sales and comparable store sales may not be comparable to similar data made available by other companies. Non-comparable sales include sales from stores not included in comparable sales or comparable store sales. As a result of the temporary closure of all Vera Bradley stores due to COVID-19 during portions of the first and second quarters, the Company's fiscal 2021 comparable store sales and comparable sales calculations are not meaningful and therefore are not provided. Typically, measuring the change in year-over-year comparable sales allows us and our investors 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; 38 -------------------------------------------------------------------------------- Table of Contents •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 (for fiscals 2020 and 2019), and sales tax credits received for timely filings. In addition, we support many of our Indirect retailers' marketing efforts by distributing certain catalogs and promotional mailers to current and prospective customers. Our Vera Bradley 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 Operating income is equal to gross profit less SG&A expenses plus other income. Operating income excludes interest income, interest expense, and income taxes. Income Before Income Taxes Income before income taxes is equal to operating income plus interest income less interest expense. Net Income Net income is equal to income before income taxes less income tax expense. 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 Attributable toVera Bradley, Inc. Net income attributable toVera Bradley, Inc. is equal to net income less net income (loss) attributable to redeemable noncontrolling interest. 39 -------------------------------------------------------------------------------- Table of Contents 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 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 strengthened 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 fiscal 2021. Pre-tax transaction costs totaled$2.7 million for fiscal 2020. 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 15 to the Notes to the 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 2 to the Notes to the Consolidated Financial Statements herein. Impairment charges of$7.4 million were recognized in the fiscal year endedJanuary 30, 2021 for property, plant, and equipment assets and lease right-of-use assets related to underperforming stores and are included in SG&A expenses in the Consolidated Statements of Operations and in impairment charges in the Consolidated Statements of Cash Flows. The impairment charges are included in the VB Direct segment. There were no impairment charges recorded during the fiscal years endedFebruary 1, 2020 orFebruary 2, 2019 . The COVID-19 pandemic, including the temporary closure of Vera Bradley retail stores beginning in mid-March, significantly impacted the Company's operations and cash flows which was the main driver of the impairment charges. We are unable to predict the extent of the impact that the COVID-19 pandemic will have on our operations, the economy, or other factors; therefore, it is possible additional impairments could be identified in future periods, and such amounts could be material. 40 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables summarize key components of our consolidated results of operations for the last three fiscal years, both in dollars and as a percentage of our net revenues. Fiscal 2020 includes Pura Vida operations beginning onJuly 17, 2019 , the first full business day following the acquisition. Fiscal 2019 has not been recast to include the results of Pura Vida. Refer to Note 15 to the Notes to Consolidated Financial Statements herein for additional information. Fiscal Year Ended (1) January 30, February 1, February 2, ($ in thousands) 2021 2020 2019 Statement of Income Data: Net revenues$ 468,272 $ 495,212 $ 416,097 Cost of sales 202,754 223,411 177,510 Gross profit 265,518 271,801 238,587 Selling, general, and administrative expenses (2) 252,588 253,425 211,984 Other income 135 1,098 498 Operating income 13,065 19,474 27,101 Interest expense (income), net 1,203 (1,085) (1,125) Income before income taxes 11,862 20,559 28,226 Income tax expense (3) 1,173 5,315 7,469 Net income 10,689 15,244 20,757
Less: Net income (loss) attributable to redeemable noncontrolling interest
2,008 (803) - Net income attributable to Vera Bradley, Inc.$ 8,681 $ 16,047 $ 20,757 Percentage of Net Revenues: Net revenues 100.0 % 100.0 % 100.0 % Cost of sales 43.3 % 45.1 % 42.7 % Gross profit 56.7 % 54.9 % 57.3 % Selling, general, and administrative expenses 53.9 % 51.2 % 50.9 % Other income - % 0.2 % 0.1 % Operating income 2.8 % 3.9 % 6.5 % Interest expense (income), net 0.3 % (0.2) % (0.3) % Income before income taxes 2.5 % 4.2 % 6.8 % Income tax expense 0.3 % 1.1 % 1.8 % Net income 2.3 % 3.1 % 5.0 %
Less: Net income (loss) attributable to redeemable noncontrolling interest
0.4 % (0.2) % - % Net income attributable to Vera Bradley, Inc. 1.9 % 3.2 % 5.0 % 41 -------------------------------------------------------------------------------- Table of Contents The following tables present net revenues by operating segment, both in dollars and as a percentage of our net revenues, and Vera Bradley full-line and factory outlet store data for the last three fiscal years:
Fiscal Year Ended (1)
January 30, February 1, February 2, ($ in thousands, except as otherwise indicated) 2021 2020 2019 Net Revenues by Segment: VB Direct$ 289,274 $ 347,484 $ 328,034 VB Indirect 66,517 81,811 88,063 Pura Vida 112,481 65,917 - Total$ 468,272 $ 495,212 $ 416,097 Percentage of Net Revenues by Segment: VB Direct 61.8 % 70.2 % 78.8 % VB Indirect 14.2 % 16.5 % 21.2 % Pura Vida 24.0 % 13.3 % - % Total 100.0 % 100.0 % 100.0 % Fiscal Year Ended January 30, February 1, February 2, 2021 2020 2019 Vera Bradley Store Data (4): Total stores opened during period 6 6 6 Total stores closed during period (13) (11) (10) Total stores open at end of period 144 151 156 Comparable sales (including e-commerce) increase (decrease) (5) NM 3.4 % (10.3) % Total gross square footage at end of period 380,100 386,028 379,792 Average net revenues per gross square foot (6)
NM
(1)The Company utilizes a 52-53 week fiscal year ending on the Saturday closest toJanuary 31 . Fiscal years 2021, 2020, and 2019 consisted of 52 weeks. (2)Impairment charges, related to underperforming stores, totaled$7.4 million during the fiscal year endedJanuary 30, 2021 . There were no impairment charges recorded during the fiscal years endedFebruary 1, 2020 andFebruary 2, 2019 . (3)Includes a$2.8 million tax benefit related to the net operating loss carryback provisions of the CARES Act in fiscal 2021. (4)Includes Vera Bradley full-line and factory outlet stores. (5)Comparable sales are calculated based upon stores that have been open for at least 12 full fiscal months and net revenues from e-commerce operations. Increase (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 a portion 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. As a result of Vera Bradley retail stores being temporarily closed for approximately half of the first and second quarters of fiscal 2021, comparable sales were not meaningful and were therefore not provided.(6)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 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 Vera Bradley retail stores being temporarily closed for approximately half of the first and second quarters of fiscal 2021, average net revenues per gross square foot were not meaningful and were therefore not provided. Fiscal 2021 Compared to Fiscal 2020 Net Revenues For fiscal 2021, net revenues decreased$26.9 million , or 5.4%, to$468.3 million , from$495.2 million for fiscal 2020. VB Direct. For fiscal 2021, net revenues decreased$58.2 million , or 16.8%, to$289.3 million , from$347.5 million for fiscal 2020. The decline primarily resulted from the 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 42 -------------------------------------------------------------------------------- Table of Contents 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 49.0% over the comparable period in the prior-year. VB Indirect. For fiscal 2021, net revenues decreased$15.3 million , or 18.7%, to$66.5 million , from$81.8 million for fiscal 2020. 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 fiscal 2021, net revenues were$112.5 million compared to$65.9 million in the partial period of the prior-year. E-commerce revenues increased 6.5% during the comparable six-month periods of fiscals 2021 and 2020. Refer to Note 15 to the Consolidated Financial Statements herein for additional information regarding the Pura Vida acquisition. Gross Profit For fiscal 2021, gross profit decreased$6.3 million , or 2.3%, to$265.5 million , from$271.8 million for fiscal 2020. As a percentage of net revenues, gross profit increased to 56.7% for fiscal 2021, from 54.9% for fiscal 2020. 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 0.3%. The prior-year period included$8.3 million of inventory step-up amortization related to the Pura Vida acquisition that negatively impacted gross margin as a percentage of net revenues by 1.7%. The remaining increase as a percentage of net revenues was primarily due to mask sales, product collaborations, and inventory management. Selling, General, and Administrative Expenses ("SG&A") For fiscal 2021, SG&A expenses decreased$0.8 million , or 0.3%, to$252.6 million , from$253.4 million for fiscal 2020. As a percentage of net revenues, SG&A expenses were 53.9% and 51.2% for fiscal 2021 and fiscal 2020, respectively. SG&A expenses related to Vera Bradley and corporate unallocated were$194.7 million compared to$219.9 million in the comparable prior-year period. SG&A expenses related to Pura Vida were$57.9 million compared to$33.5 million in the partial period of the prior-year. The decrease in consolidated SG&A expenses for fiscal 2021 was primarily due to: •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 retention credit; and reducing other non-payroll expenses including marketing, professional fees, and travel; •a reduction of approximately$6.3 million in lease expense primarily as a result of lower contingent rent, lease right-of-use asset impairments recorded in the first quarter of the current-year, 13 full-line store closures during the last 12 months, and COVID-19-related rent abatements; •a reduction of$4.5 million in depreciation expense primarily as a result of legacy software depreciation in the prior-year period that did not recur in the current-year period and savings as a result of property, plant, and equipment impairments recorded in the first quarter of the current-year; and •$2.7 million of Pura Vida acquisition-related transaction costs that were incurred in the prior-year period that did not recur in the current-year. These expense savings were partially offset by incremental Pura Vida operating expenses of$20.7 million ; store impairment charges of$7.4 million ;$3.7 million for incremental intangible asset amortization; and an adjustment to reduce the earn-out liability related to the Pura Vida acquisition of$1.6 million in the prior-year period that did not recur in the current-year period. 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 fiscal 2021, other income decreased$1.0 million , or 87.7%, to$0.1 million , from$1.1 million for fiscal 2020, primarily due to a legal settlement received in the prior-year period that did not recur in the current-year period, as well as 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. Operating Income For fiscal 2021, operating income decreased$6.4 million , or 32.9%, to$13.1 million from$19.5 million for fiscal 2020. As a percentage of net revenues, operating income was 2.8% and 3.9% for fiscal 2021 and fiscal 2020, respectively. Operating income decreased due to the factors described above. The following table provides additional information about our operating income (in thousands). 43
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Table of Contents Fiscal Year Ended January 30, February 1, $ % 2021 2020 Change Change Operating Income (Loss): VB Direct$ 48,524 $ 68,505 $ (19,981) (29.2) % VB Indirect 24,502 31,077 (6,575) (21.2) % Pura Vida 8,031 (3,179) 11,210 352.6 % Less: Unallocated corporate expenses (67,992) (76,929) 8,937 (11.6) % Operating income$ 13,065 $ 19,474 $ (6,409) (32.9) % VB Direct. For fiscal 2021, operating income decreased$20.0 million , or 29.2%. As a percentage of VB Direct segment net revenues, operating income in the VB Direct segment was 16.8% and 19.7% for fiscals 2021 and 2020, respectively. The decrease in operating income as a percentage of VB Direct segment net revenues was primarily due to store impairment charges, legacy software depreciation in the prior-year period that did not recur in the current-year period, and an allocation of charges for the cancellation of certain purchase orders related to COVID-19. These decreases were partially offset by an increase in gross margin as a percentage of net revenues and COVID-19-related expense savings, as described above. VB Indirect. For fiscal 2021, operating income decreased$6.6 million , or 21.2%. As a percentage of VB Indirect segment net revenues, operating income in the VB Indirect segment was 36.8% and 38.0% for fiscals 2021 and 2020, respectively. The decrease in operating income as a percentage of VB Indirect segment net revenues was primarily due to SG&A expense de-leverage 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 fiscal 2021, operating income in the Pura Vida segment was$8.0 million , or 7.1% of Pura Vida segment net revenues, compared to an operating loss of$(3.2) million , or (4.8)% of Pura Vida segment net revenues, in the partial prior-year period. The current-year operating results included$9.0 million of intangible asset amortization expense. The prior-year period included$8.3 million of inventory step-up amortization and$5.4 million of intangible asset amortization. Refer to Note 15 to the Notes to Consolidated Financial Statements herein for additional information regarding the Pura Vida acquisition. Corporate Unallocated. For fiscal 2021, unallocated expenses decreased$8.9 million , or 11.6% to$68.0 million from$76.9 million in the prior-year period. The decrease in unallocated expenses was primarily due to COVID-19-related expense savings, Pura Vida acquisition-related transaction costs of$2.7 million in the prior-year period, as well as a reduction in depreciation expense primarily as a result of legacy software depreciation in the prior-year period that did not recur in the current-year period. These decreases were partially offset by a$1.6 million adjustment to reduce the earn-out liability in the prior-year period. Interest Expense (Income), Net For fiscal 2021, interest expense totaled$1.2 million compared to interest income of$1.1 million in fiscal 2020. Interest expense increased primarily due to borrowings under the Company's credit agreement during the current-year period. Income Tax Expense For fiscal 2021, we recorded income tax expense of$1.2 million at an effective tax rate of 9.9%, compared to income tax expense of$5.3 million at an effective tax rate of 25.9% for fiscal 2020. The effective tax rate decreased primarily due to the relative impact of a$2.8 million tax benefit related to the net operating loss carryback provisions of the CARES Act, partially offset by the impact of non-deductible executive compensation and tax shortfalls related to stock-based compensation. Net Income For fiscal 2021, net income decreased$4.5 million , or 29.9%, to$10.7 million from$15.2 million in fiscal 2020 due to the factors described above. Net Income (Loss) Attributable to Redeemable Noncontrolling Interest For fiscal 2021, net income attributable to redeemable noncontrolling interest was$2.0 million compared to a net loss of$0.8 million in the 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. 44 -------------------------------------------------------------------------------- Table of Contents Net Income Attributable toVera Bradley, Inc. For fiscal 2021, net income attributable toVera Bradley, Inc. decreased$7.3 million to$8.7 million from$16.0 million in fiscal 2020 due to the factors described above. Fiscal 2020 Compared to Fiscal 2019 Refer to the Company's Annual Report on Form 10-K filed with theSEC onMarch 31, 2020 , for a comparison of fiscal 2020 to fiscal 2019 operating results. 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 borrowings under our$75.0 million asset-based revolving credit agreement (the "Credit Agreement") which was entered into onSeptember 7, 2018 . There were$60.0 million of borrowings under the Credit Agreement during the fiscal year endedJanuary 30, 2021 which were repaid by the end of the fiscal year, and there was no debt outstanding as ofJanuary 30, 2021 . 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. We believe that cash on hand and cash equivalents, investments, cash flows from operating activities, and the availability of borrowings under our Credit Agreement or other financing arrangements will be sufficient to meet working capital requirements and anticipated capital expenditures, and other strategic uses of cash, if any, for the foreseeable future. Investments Cash Equivalents. Investments classified as cash equivalents relate to highly-liquid investments with a maturity of three months or less from the date of purchase. As ofJanuary 30, 2021 andFebruary 1, 2020 , these investments consisted of a money market fund. The balance as ofFebruary 1, 2020 also included commercial paper. Short-Term Investments. As ofJanuary 30, 2021 , short-term investments consisted ofU.S. and non-U.S. corporate debt securities with a maturity within one year of the balance sheet date. As ofFebruary 1, 2020 , short-term investments consisted ofU.S. and non-U.S. corporate debt securities, commercial paper, municipal securities, andU.S. asset-backed securities.Long-Term Investments . As ofFebruary 1, 2020 , these investments consisted ofU.S. and non-U.S. corporate debt securities,U.S. and non-U.S. asset-backed securities, and other foreign securities with a maturity greater than one year from the balance sheet date. There were no long-term investments as ofJanuary 30, 2021 . Refer to Note 14 to the Notes to Consolidated Financial Statements herein for additional information regarding our investments. Cash Flow Analysis A summary of operating, investing, and financing activities is shown in the following table (in thousands): Fiscal Year Ended January 30, February 1, February 2, 2021 2020 2019 Net cash provided by operating activities$ 20,702 $ 20,624 $ 43,564 Net cash provided by (used in) investing activities 17,680 (69,966) 17,955 Net cash used in financing activities (24,146) (14,285) (16,771) Net Cash Provided by Operating Activities Net cash provided by operating activities consists primarily of net 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 provided by operating activities was$20.7 million during fiscal 2021, as compared to$20.6 million during fiscal 2020. Cash provided by operating activities was substantially similar to the prior-year period. The net income adjusted for non- 45 -------------------------------------------------------------------------------- Table of Contents cash items in the current-year benefited by the full-year of Pura Vida operations compared to six months of operations in the prior-year period. Additional inventory payments primarily related to incremental Pura Vida inventory purchases which included inventory for the Charli D'Amelio launch inMarch 2021 and the acceleration of inventory purchases for Vera Bradley to mitigate industry-wide port and shipping delays. There were also additional payments related to Project Novus expenditures. These purchases were offset by timing of payments, including for income taxes (which included a benefit associated with the net operating loss carryback provisions of the CARES Act); deferrals of certain payments associated with the CARES Act; and accrued expenses, as well as timing; deferrals; rent abatements; and store closures associated with operating leases. Net Cash Provided by (Used in) Investing Activities Investing activities consisted primarily of investments and capital expenditures related to new store openings, buildings, operational equipment, and information technology investments, as well as the Pura Vida acquisition. Net cash provided by investing activities was$17.7 million in fiscal 2021, compared to net cash used in investing activities of$70.0 million in fiscal 2020. The increase in cash provided by investing activities was a result of the decreased spending related to property, plant, and equipment and net investment activity in the current year, as well as theJuly 2019 acquisition of Pura Vida that occurred in the prior-year period. Capital expenditures for fiscal 2022 are expected to be approximately$8.0 million to$10.0 million .Net Cash Used in Financing Activities Net cash used in financing activities was$24.1 million in fiscal 2021 compared to$14.3 million in fiscal 2020. The increase in cash used in financing activities was primarily due to the$18.7 million payment of contingent consideration associated with theJuly 2019 acquisition of Pura Vida, partially offset by a decline of$8.3 million in repurchases of common stock. Refer to the Company's Annual Report on Form 10-K filed with theSEC onMarch 31, 2020 , for a comparison of fiscal 2020 to fiscal 2019 cash flow activity. Credit Agreement OnSeptember 7, 2018 ,Vera Bradley Designs, Inc. ("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 toVera Bradley International, LLC andVera 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 ofJanuary 30, 2021 . 46 -------------------------------------------------------------------------------- Table of Contents The Credit Agreement also requires the loan parties, as defined in the Credit Agreement, 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 onSeptember 7, 2023 . Off-Balance Sheet Arrangements We do not have any off-balance sheet financing or unconsolidated special purpose entities. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted inthe United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues, and expenses, as well as the disclosures relating to contingent assets and liabilities at the date of the consolidated financial statements. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. We evaluate the development and selection of our critical accounting policies and estimates and believe that the following policies and estimates involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. Our historical results for the periods presented in the consolidated financial statements, however, have not been materially impacted by such variances. More information on all of our significant accounting policies can be found in Note 2, "Summary of Significant Accounting Policies," to the consolidated financial statements. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out ("FIFO") method. Appropriate consideration is given to obsolescence, excess quantities, and other factors, including the popularity of a pattern or product, in evaluating net realizable value. We record valuation adjustments to our inventories, which are reflected in cost of sales, if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. This adjustment calculation requires us to make assumptions and estimates, which are based on factors such as merchandise seasonality, historical trends, and estimated sales and inventory levels, including sell-through of remaining units. In addition, as part of inventory adjustments, we provide for inventory shrinkage based on historical trends from our physical inventory counts. We perform physical inventory counts throughout the year and adjust the shrinkage provision accordingly. The balance of inventory adjustments was$0.7 million for these matters as of the fiscal years endedJanuary 30, 2021 , andFebruary 1, 2020 . The balance related primarily to certain collections being discontinued or currently discontinued by Vera Bradley and retired patterns. We have the ability to move retired finished goods through a number of channels, including the Vera Bradley annual outlet sale, our Vera Bradley website and online outlet site, factory outlet stores, and through third-party liquidators as needed. 47 -------------------------------------------------------------------------------- Table of Contents Valuation of Long-lived Assets Property, plant, and equipment and operating right-of-use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. In evaluating an asset group for recoverability, we estimate the future cash flows expected to result from the use of the asset group at the store level, the lowest identifiable level of cash flow, if applicable. If the sum of the estimated undiscounted future cash flows related to the asset group is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by an estimated discounted cash flow analysis of the asset. Factors used in the valuation of long-lived assets include, but are not limited to, our plans for future operations, brand initiatives, recent operating results, and projected future cash flows. With respect to our stores, we analyze store economics, location within the shopping center, the size and shape of the space, and desirable co-tenancies in our selection process. Impairment charges are classified in SG&A expenses and were$7.4 million for the period endedJanuary 30, 2021 . There were no impairment charges recorded for the periods endedFebruary 1, 2020 andFebruary 2, 2019 . 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. Business Combinations The Company acquired a majority interest in Pura Vida onJuly 16, 2019 . In connection with a business combination, the Company records the identifiable assets acquired, liabilities assumed, contingent consideration liabilities, if any, and any noncontrolling interest in the acquiree at their acquisition-date fair values.Goodwill is measured indirectly as the excess of the sum of (1) the consideration transferred (including contingent consideration, if any) and (2) the fair value of any noncontrolling interest in the acquiree over the net assets acquired and liabilities assumed. These fair value assessments require management judgment and include the use of significant estimates and assumptions including future cash flows, discount and other market rates, and asset lives, among other items. The details of these assessments for the Pura Vida acquisition are as follows: •Inventories were valued using the cost approach. The significant assumptions used for the valuation include inventory balances, projected gross and operating margins, and cost and time to dispose (sell) inventory on hand. •The Pura Vida brand intangible asset was valued using the relief-from-royalty method. The significant assumptions used for the valuation include the royalty rate, estimated projected revenues, long-term growth rate, and the discount rate. •Customer relationships were valued using the multi-period excess earnings method. Significant assumptions used for the valuation include projected cash flows, the discount rate, and customer attrition rate. •Contingent consideration related to the earn-out provision was valued using a Monte Carlo simulation in order to forecast the value of the potential future payment. Significant assumptions used for the valuation include the discount rate, projected cash flows, and calculated volatility.Goodwill and Other Intangible Assets The Company tests goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. The Company may first use a qualitative analysis to assess whether it is more-likely-than-not that the fair value of the reporting unit (including goodwill) is less than its carrying value. This qualitative analysis may include, but is not limited to: macroeconomic factors; industry and market considerations; cost factors that have a negative effect on earnings and cash flows; entity specific factors; a change in the composition or carrying amount of the reporting unit's net assets; and a sustained decrease in stock price. If it is determined that it is more-likely-than-not that the fair value is less than the carrying value after this analysis, a quantitative impairment test is performed. If we elect to bypass the qualitative assessment for the reporting unit, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value of the reporting unit exceeds its fair value, we perform a quantitative goodwill impairment test. Under the quantitative test, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. The fair value of the reporting unit is determined using an income-based approach and a market-based approach. 48 -------------------------------------------------------------------------------- Table of Contents The income approach estimates fair value of the reporting unit using a discounted cash flow model that involves subjective estimates and assumptions such as projected revenue growth, operating profit, and the discount rate. Under the market approach, the Company may use the guideline public company method and/or the guideline transaction method to estimate fair value of the reporting unit. The guideline public company method uses market multiples derived from market prices of stocks of companies that are engaged in the same or similar lines of business as the reporting unit. The guideline transaction method employs transaction multiples derived from the acquisition of controlling interests in stocks of companies that are engaged in the same or similar lines of business as the reporting unit. As ofJanuary 30, 2021 , the Company had recorded$44.3 million of goodwill which was allocated to the Pura Vida reporting unit. For the annual goodwill impairment analysis performed during fiscal 2021, we performed a quantitative analysis. No impairment was recorded for goodwill during fiscal 2021. Our indefinite-lived intangible asset represents the Pura Vida brand. We test the Pura Vida brand for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Our annual impairment test may be completed through a qualitative assessment to determine if the fair value of the Pura Vida brand is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value, we test for impairment using a quantitative process. Our quantitative process includes comparing the carrying value to the fair value of the Pura Vida brand, with any excess recognized as an impairment loss. Fair value is estimated using a relief-from-royalty method. The estimates and assumptions used in the determination of the fair value of the Pura Vida brand include the projected revenue growth, long-term growth rate, the royalty rate, and discount rate. As ofJanuary 30, 2021 , the carrying value of the Pura Vida brand was$36.7 million . For the annual impairment analysis performed during fiscal 2021, we performed a quantitative analysis. No impairment was recorded for the Pura Vida brand during fiscal 2021. The estimated fair values of our Pura Vida reporting unit and the Pura Vida brand are subject to change as a result of many factors including changing economic conditions. Should actual cash flows and our future estimates deteriorate from the estimates we used, impairment charges may be necessary in future years. Transactions with Related Parties See Item 13, "Certain Relationships and Related Transactions, and Director Independence," of this report for information regarding transactions with related parties. 49
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