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Vera Bradley (NASDAQ:VRA)

Q4 2014 Earnings Conference Call

March 19, 2014 9:30 am ET

Executives

Robert Wallstrom – President, Chief Executive Officer

Kevin Sierks – Executive Vice President, Chief Financial Officer

Sue Fuller – Executive Vice President, Merchandising

Stacy Knapper – Senior Vice President, General Counsel

Analysts

Edward Yruma – Keybanc Capital Markets

Mark Altschwager – Robert W. Baird

Randy Konik – Jefferies

Neely Tamminga – Piper Jaffray

Nancy Hilliker – Citigroup

Evren Kopelman – Wells Fargo

Dana Telsey – Telsey Advisory Group

Ike Boruchow – Sterne Agee

Janet Kloppenburg – JJK Research

Steve Marotta – CL King & Associates

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Vera Bradley Fourth Quarter and Fiscal Year-End 2014 Earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to enter the queue for questions. As a reminder, today’s presentation is being recorded.

I would now like to turn the call over to Stacy Knapper, Vera Bradley’s Senior Vice President and General Counsel. Please go ahead.

Stacy Knapper

Good morning and welcome everyone. We'd like to thank you for joining us this morning for Vera Bradley's Fourth Quarter and Fiscal Year-End 2014 Earnings conference call.

Some of the statements made on today’s call during our prepared remarks and in response to your questions may constitute forward-looking statements made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect. Please refer to today's press release and the company's Form 10-K for the fiscal year ended February 2, 2013, filed with the SEC for a discussion of known risks and uncertainties. Investors should not assume that the statements made during the call will remain operative at a later time. The company undertakes no obligation to update any information discussed on the call.

I will now turn the call over to Vera Bradley's Chief Executive Officer, Rob Wallstrom.

Robert Wallstrom

Thank you, Stacy. Good morning everyone and thank you for joining us on today’s call. With me today are Kevin Sierks, our EVP and Chief Financial Officer; Sue Fuller, our EVP of Merchandising, and Julia Bentley, our VP of IR and Communications.

2014 was a challenging year for our business. Sales were soft, gross margin suffered, and our EPS fell for the first time since becoming a public company. We continue to face external headwinds and certain challenges within the business, and fiscal 2015 will be a year of some continued uncertainty and one of transition as we begin to implement elements of our strategic plan. This is reflected in our guidance that Kevin will discuss later on the call.

We have spent the last few months developing our comprehensive five-year strategic plan designed to improve financial performance and shareholder value over the long term. Our vision is to build on our rich heritage and establish Vera Bradley as a premium lifestyle brand that is relevant to the future, expanding our customer reach, and growing our customer connections. We will achieve this vision through our strategic plan with encompasses three key elements: product, distribution channels, and marketing. After Kevin gives us an update on the financial information, Sue and I will fill you in on more details related to these three components of our strategic plan.

Of course, our strategic plan will be supported by three key foundational elements: sustaining and enhancing our unique company culture, attracting and retaining top talent, and improving our analytics and reporting to drive fact-based decision making. These three things will be core to our success.

Let me make a couple of comments on the talent piece in our organizational structure. My number one priority was filling the chief merchant role, and Sue came to us with a wealth of experience at several well respected retailers, including Ralph Lauren, Lands’ End, and LL Bean. Her experience at Kohl’s and Carhartt are proving particularly applicable and valuable to Vera Bradley, and she has hit the ground running. Merchandising, merchandise planning and product sourcing all report directly to Sue. I’m excited for you to hear directly from Sue about our product vision and initiatives.

In early February, we announced several key executive promotions and realignments. We have a lot of talent and experience within our company and these appointments will help position us for the future. Kevin Sierks, who served as our interim CFO since early 2013, was deservedly promoted to the post of EVP and CFO. Roddy Mann has assumed the oversight of IT and operations in addition to strategy in his role as EVP of Strategy and Operations, and Pam Sour was promoted to SVP of Operations after serving as our VP of Manufacturing and Global Quality for the last nine years, and she is reporting to Roddy. Finally, Stacy Knapper, who served as our VP and General Counsel, was promoted to the SVP level.

I am confident that we are on the process of assembling the right team to achieve our long-term goals, drawing from both our own leadership team and attracting new talent to the organization. We still have some key positions to fill, including the Chief Marketing Officer, the Head of Sales, and the Head of Ecommerce, but the team is coming together. Even though fiscal 2015 will be challenging and a year of enormous change, our entire team is aligned and very excited about the future of our brand. By successfully executing our five-year strategic plan, we believe that we can grow to a billion dollars in revenue and generate an operating margin in the high teens.

With that, I’ll turn it over to Kevin, who will provide additional details regarding our fourth quarter and full-year financial results, as well as guidance for our fiscal 2015 first quarter and full year.

Kevin Sierks

Thanks Rob, and good morning. Net revenues totaled $157.5 million for the current year fourth quarter compared to $162.6 million in the prior year fourth quarter. Net income totaled $19.4 million or $0.48 per diluted share for the current year fourth quarter. These results included a pre-tax inventory write down of $4.8 million, equating to approximately $3 million after tax or $0.07 per share. The inventory write down primarily related to fabrics and certain retired patterns no longer considered saleable, and to certain merchandise in the baby gift category, which is being discontinued by the company. Net income totaled $25.1 million or $0.62 per diluted share in the prior year fourth quarter.

Keep in mind that the fourth quarter and fiscal year ended February 1, 2014 represented 13-week and 52-week periods respectively. The prior year fourth quarter and fiscal year ended February 2, 2013 represented 14-week and 53-week periods respectively. The 53rd week of fiscal 2013 contributed $4.9 million of net revenues and approximately $0.02 per diluted share to both the fourth quarter and full year of fiscal 2013.

Our fourth quarter sales and earnings were below last year’s levels; however, net income exceeded our expectations as revenue, gross margin excluding the aforementioned write off, and SG&A expenses were all favorable to our projections. Current year fourth quarter direct segment revenues increased 5.2% to $108.7 million from $103.3 million in the prior year. Fourth quarter year-over-year net revenues from the company stores grew 14.5%. This growth reflected the opening of 19 full line and 4 outlet stores during the past 12 months and was partially offset by a comparable store decline of 10.2%.

Ecommerce revenues decreased 7.2% compared to the prior year. The decreases in comparable store and ecommerce revenues were due to year-over-year declines in traffic, a lower average transaction size, and underperformance of the product offering. Severe winter weather also negatively affected store traffic during the quarter.

The direct segment accounted for 69% of total net revenues in the fourth quarter versus 64% in the prior year fourth quarter. Indirect segment revenues decreased 17.5% to $48.9 million from $59.2 million in the prior year, primarily due to lower levels of inventory orders from our specialty retail accounts combined with closing approximately 400 wholesale accounts during the year.

Gross profit for the quarter totaled $83.3 million or 52.9% of net revenues compared to $94.1 million or 57.9% of net revenues in the prior year fourth quarter. The previously mentioned inventory write down negatively affected the fourth quarter gross margin rate by approximately 300 basis points. In addition, the gross margin rate was negatively affected by increased year-over-year promotional activity as well as an increase in the sales mix of lower margin product. Excluding the write down, our gross margin rate was actually better than expected primarily due to freight expense improvements and a focused effort to reduced packaging costs.

We continue to focus on expense management. SG&A expense totaled $53.6 million in the current year fourth quarter compared to $55.8 million in the prior year fourth quarter. SG&A as a percentage of net revenues decreased 30 basis points to 34% compared to 34.3% in the prior year, primarily as a result of tight expense management, including reductions in discretionary spending and a reduction in variable compensation expenses associated with the company’s financial performance.

Operating income totaled $30.8 million or 19.6% of net revenues in the current year fourth quarter compared to operating income of $40 million or 24.6% of net revenues in the prior year fourth quarter.

Now let me provide more details on the full-year performance. Net revenues totaled $536 million for the fiscal 2014 compared to $541.1 million for fiscal 2013. Net income totaled $58.8 million or $1.45 per diluted share for fiscal 2014, which included the previously mentioned inventory write down. Net income totaled $68.9 million or $1.70 per share for fiscal 2013.

For fiscal 2014, direct segment revenues increased 11.5% to $326.2 million from $292.6 million in fiscal 2013. Year-over-year net revenues in the company’s stores grew 21%. This growth reflected the opening of the previously mentioned new stores and was partially offset by a comparable store sales decline of 5.7%. The decrease in comparable store sales was due to year-over-year declines in traffic, a lower average transaction size, and underperformance of the product offering. Ecommerce revenues were essentially flat on a year-over-year basis.

For fiscal 2014, indirect segment revenues decreased 15.6% to $209.8 million from $248.6 million in fiscal 2013 primarily due to lower orders from our specialty retail accounts combined with closing approximately 400 wholesale accounts during the year. We ended the fiscal year with distribution in approximately 3,100 specialty retail doors. The direct segment accounted for 61% of total net revenues in fiscal 2014 versus 54% in the prior year. We ended the fiscal year with 84 full-price and 15 outlet stores.

Fiscal 2014 gross profit totaled $295.4 million or 55.1% of net revenues compared to $308.3 million or 57% of net revenues in fiscal 2013. The inventory write down negatively affected the full-year gross margin rate by approximately 90 basis points. In addition, the gross margin rate was negatively affected by increased year-over-year promotion activity as well as increase in sales mix of lower margin product. There was a slight offset to these negative factors from improved freight rates and a reduction in packaging costs.

SG&A expense totaled $206 million in fiscal 2014 compared to $204.4 million in fiscal 2013. SG&A as a percentage of net revenues increased 60 basis points to 38.4% compared to 37.8% in the prior year. The increase in SG&A expense as a percentage of net revenues was primarily due to fixed expenses being spread over lower revenues in the indirect segment, the deleveraging of store operating expenses, and the impact of increased employee-related expenses from the headcount additions in the first half of fiscal 2014, all of which was partially offset by discretionary spending cuts and reductions in variable compensation expenses associated with the company’s financial performance.

Fiscal 2014 operating income totaled $94.3 million or 17.6% of net revenues compared to operating income of $110.1 million or 20.4% of net revenues in fiscal 2013. Cash flow from operations for fiscal 2014 totaled $87.9 million compared to $51.5 million for fiscal 2013. The improvement was driven primarily by slower growth in inventory levels.

Key balance sheet highlights as the end of the fiscal year include cash and cash equivalents of $59.2 million compared to $9.6 million at prior year end, a debt-free balance sheet, accounts receivable of $27.7 million compared to $34.8 million at the prior year end, and related days sales outstanding of 43 compared to 48 in the prior year. Inventory was $136.9 million compared to $131.6 million in the prior year, an increase of 4%. This increase was lower than the expected inventory balance of approximately $160 million due to approximately $6 million of summer product which was expected to be received in the fourth quarter of fiscal 2014 but was received early in fiscal 2015, higher than expected revenues, and the $4.8 million inventory write down.

Net capital spending for fiscal 2014 totaled $22.9 million, which primarily related to new store openings, IT investment, and initial spend on our corporate campus consolidation.

I would now like to move on to guidance for fiscal 2015 first quarter and full year. Weather has impacted our business during February and early March. The winter storms, severe cold weather, and related store closures have negatively affected sales in our stores and in the specialty gift channel. We also expect that the challenging consumer environment and the softness in consumer response to our current merchandise assortment will continue in fiscal 2015, resulting in continued weak traffic and promotional activity. In addition, there may be certain disruptions in the business as we begin to make product and distribution channel changes related to our strategic plan.

In the first quarter of fiscal 2015, we expect net revenues to be in the range of $116 million to $120 million compared to $123 million in the prior year first quarter. We expect the direct segment net revenues to increase by low to mid-single digits with comparable store sales down high single digits. Indirect net revenues are anticipated to decline in the low to mid-teens. The gross margin rate for the first quarter of fiscal 2015 is expected to range from 52 to 52.6%. This represents a year-over-year decline of 300 to 360 basis points, primarily due to not leveraging overhead and the planned inventory liquidation.

First quarter SG&A is expected to range from 46% to 46.6% of net revenues, which represents 110 to 170 basis point decline in leverage. First quarter diluted earnings per share are expected to be in the range of $0.11 to $0.13. Our earnings per share estimate assumes an effective tax rate of 40% and fully diluted weighted average shares outstanding of 40.7 million. We estimate inventory to be in the range of $128 million to $133 million at the end of the first quarter compared to $138.9 million at the end of last year’s first quarter.

For full-year fiscal 2015, we expect net revenues to be in the range of $545 million to $565 million, which includes up to $12 million of sales to a third party liquidator. This revenue guidance includes direct segment net revenue growth of high single to low double digits with a comparable store sales decline of low to mid-single digits. Indirect net revenues are expected to decline in the mid to high single digits.

The gross margin rate for fiscal 2015 is expected to range from 53% to 54%, which represents a year-over-year decline of 110 to 210 basis points. This reflects our planned inventory liquidation, not leveraging overhead costs, and continued promotional activity in fiscal 2015.

SG&A is expected to range from 39.5% to 40.5% of net revenues, which represents 110 to 210 basis point decline in leverage. While expense control remains top of mind, we will be making certain investments in the business in fiscal 2015, including key management hires that will increase SG&A but that are intended to enable us to realize our long-term objective. In addition, incremental incentive compensation expense for the entire year is expected to be approximately $8 million.

We expected diluted earnings per share for the full year to be in a range of $1.20 to $1.30. This estimate includes an effective tax rate of 38.4% and fully diluted weighted average shares outstanding of 40.7 million. We expect our total capital expenditures to be approximately $40 million for the full year with approximately $20 million related to our corporate office campus consolidation. The balance primarily is related to the planned opening of 13 new full line and 7 new outlet stores and continued investment in our systems, including our ecommerce platform.

Let me turn the call back over to Rob.

Robert Wallstrom

Thanks Kevin. As I noted earlier, our vision is for Vera Bradley to be a true lifestyle brand that while rooted in our rich heritage continues to remain relevant and modern. We certainly want to keep our existing customers, but it is imperative that we broaden our reach in our customer base. As we implement the three key elements of our five-year strategic plan – product, distribution channels, and marketing – I believe we can achieve that goal.

First, product – we have a relevancy issue with our existing product. While we have a very loyal customer base and a dominant share of market in the cotton casual handbag and travel accessories business, we still own a narrow percentage of the total market in these categories when all fabrications are included. Demand for existing product is declining, as evidenced by our recent comp store and ecommerce sales performance, and I believe that we have over-saturated our existing customer base with (indiscernible).

As Sue will describe and continuing into the future, we will work to become more relevant by modernizing and elevating our product to appeal to a wider range of customers. For example, we are very focused on creating product and an environment that will appeal to the career professional. As Kevin noted, however, we expect that our fiscal 2015 performance will be challenged as we work through our existing product and prudently work to evolve our product offering.

Let me ask Sue to provide more details on our product strategies. Sue?

Sue Fuller

Thanks Rob. First of all, I feel very privileged and honored to be part of such a great company. I’m inspired by the level of knowledge, talent and creativity within the organization. Our associates have such passion and a sense of pride in Vera Bradley, and we are really committed to working together to make our business even better.

Over the last couple of months, I have received feedback directly from many of our retail partners and customers and have worked closely with Barbara Baekgaard and the rest of the design team. Together, we have developed a comprehensive product strategy that we believe will update and elevate our assortment. These action steps are not only intended to stabilize the business in the short term but I believe they will expand our customer base, drive sales, generate gross margin improvement, and dramatically simplify the way we run our business over the long term.

Our product strategy is four-pronged and includes: an elevated product assortment, a focused product assortment and one that is narrow in the short term, brand extensions, and gross margin expansion. Allow me to go into a bit more detail on each of these.

First, we will elevate our product assortment beginning later this year. We will extend our price offering, which is currently very narrow, and build aspiration by creating halo product in new fabrications, particularly in the handbag category, while maintaining a solid opening price strategy. We are not walking away from the core but building on it. We will work to stabilize the business by majoring in the majors, making a bigger impact in the classifications Vera Bradley is known for and what we do best, like travel, backpacks, bags and accessories. We will also invest in emerging growth and brand-enhancing opportunities that will strengthen the core of the future, such as scarves and jewelry.

Second, we will focus our assortment and narrow it in the short term. We believe that we have too many styles and patterns available today. By early next year, we will reduce our SKUs by 30 to 40% and our signature patterns by approximately 20 to 30%. While this sounds like a lot, these SKUs and patterns only represent a little over 5% of our sales volume. This assortment editing will make our remaining signature patterns more special. In the recent past, we have introduced approximately 18 quilted cotton patterns annually. This year, we are paring back to 14 and beginning in fiscal 2016 we plan to launch only 10 to 12 signature patterns each year.

In conjunction with pattern editing, we will add more solids to the assortment to showcase our signature patterns even more. By the end of this year, we expect solids to represent approximately 15% of our assortment, moving to 30 to 40% over time. For the fourth quarter, black was our number one color in both our full line stores and in our ecommerce channel. Solids in particular will help us modernize our collections and add career elements into the assortment, which we believe will expand our customer base.

We are creating what I am calling franchise businesses – more cohesive collections that tie together both visually and functionally with stripes, solids and other modern patterns coordinating to signature patterns and all relating to each other. We will begin introducing these collections by the end of this fiscal year. In addition, we will minimize the creation of one-off styles and items unrelated to the core.

Later this year, we will introduce strategic lifecycle planning. Every product launch will not be treated equally as they generally are today and will have a predetermined life cycle. In the future, our patterns and solids will be broken down into four categories: trends, aspirational products with limited channel-specific quantities designed to sell through quickly, usually one pattern with a three-month life; seasonal, creating newness with a spring-summer or fall-winter esthetic which may not be in all channels or geographies, typically two to four patterns with a six-month cycle; emerging core, available in most channels at any time with potential to become core, generally one or two patterns with a six to nine-month life; and core, items that are seasonless and available in most channels at any time, two to four signature patterns at any one time with a 12 to 18-month life.

We will at least temporarily discontinue non-core categories. For example, beginning this fall we will discontinue offering baby clothing and gifts and refocus our assortment on baby bags.

Third, over the long term we will pursue brand extensions that will enhance our position as a lifestyle brand via a structured approach. We may look for the right strategic partners and licensees that can augment the brand and provide established distribution networks. Examples could include tech accessories, stationary, eyewear or fragrance.

Finally, we are also in the early stages of thoroughly evaluating several other aspects of our business, determining if we can make other changes to improve our gross margin rate over time. Specifically we are reviewing our product pricing model, determining if there is upward elasticity on certain products; determining how we can make our supply chain more efficient and cost effective, exploring low cost manufacturing facilities and countries while maintaining our high quality standards; assessing how we can shorten the design cycle, examining our distribution and other overhead costs for possible savings, adding more discipline to our overall merchandise and planning and allocations processes, and working to better align the order and manufacturing cycles for the indirect segment of our business, particularly within our top accounts. Currently, our designs are created and produced and then orders are taken. We need to produce what is ordered rather than try to sell what is produced.

All of these changes will take time, but hopefully these refined assortments and improved disciplines will begin to positively impact sales, gross margin, and inventory turns by next year.

Rob?

Robert Wallstrom

Thanks, Sue. Let me now talk about the second key component of our strategic plan – our multi-channel distribution opportunity. Our objective is to shape Vera Bradley into a tightly integrated multi-channel business. Our distribution channels must support our overarching goal to expand our customer reach and our customer base. We will grow our direct distribution channel, including full line stores, factory outlet stores and ecommerce, right-size and work to strengthen the performance in our gift channel, and further develop our department store and other indirect channel relationships.

We continue to have a long-term vision of around 300 full line Vera Bradley stores. Since we only have 84 full line stores today after adding 19 stores last year, there are a myriad of essentially untapped geographies for Vera Bradley, like the west coast. We plan to add 13 new full line stores in fiscal 2015 and believe we can accelerate that pace beginning in fiscal 2016 to add approximately 20 to 25 new stores per year. I’m especially excited about our plans to introduce a new prototype store design in fiscal 2016 which will make our locations more modern to align with our new product strategies and showcase the lifestyle aspects of the brand. In the meantime, we are working to further refine and de-clutter the visual presentation of merchandise in our existing stores.

Managed prudently, the outlet channel is a huge opportunity for us. All of our peers employ factory outlet stores to a much greater degree than we do. We will continue to use our outlet stores as a clearance vehicle for merchandise from our full line stores, but the cornerstone of our outlet strategy will become products specifically manufactured for the outlet, which is not done today. Within three years, we expect approximately 40% of the produce in the outlet channel to be made specifically for our outlets, growing to approximately 70% in the five-year time frame. We believe this (indiscernible) strategy is a profitable financial model which should drive both sales and gross margins.

The factory outlet stores offer value and will help us reach a new demographic, as research indicates less than 10% overlap between our full line shoppers and outlet shoppers. We opened four outlet stores last year, bringing our current total to 15, and we expect to add at least seven more in fiscal 2015. We believe that we can accelerate this growth rate going forward for approximately 10 to 15 new stores per year and think there is an opportunity to have well over 100 factory outlet stores in the long run. We expect to have a ratio of two to three full line stores to every one factory outlet store in the long term.

I am confident there is enormous growth opportunity in our ecommerce business, which comprises between 20 to 25% of our total revenues. Ecommerce will be a key part of the foundation to support our brand and marketing strategies. Our eventual goal is for the ecommerce experience to mirror the in-store shopping experience by segregating our full line and factory outlet products onto different sites. In the meantime, we are continuing to make enhancements to the look, feel and features of the site to improve the shopping experience. We are also improving and streamlining our search capabilities and increasing segmentation of our emails between our full price and outlet customers with more targeted messaging.

All of these efforts are designed to improve full price selling and long term conversion rates. We have a database of over 2.7 million customers and over 69 million people visited VeraBradley.com last year. We are proud that we consistently rank among the top in the number of annual website visits compared to our most closely related peer companies.

As we work towards improving the productivity in our indirect segment, we are placing greater focus on our department store relationships and have realigned our internal resources accordingly. We have a presence in all 280 Dillard’s stores and have a relationship with Von Maur in the Midwest. We believe there are immediate opportunities to improve our brand presentation and productivity within our existing department store distribution. We will have a mixture of hard shops and less branded spaces within the department stores. Most importantly, we will continue to explore other expansion opportunities in the department store space, especially since this is a number one destination for career handbag purchasing, which is a key focus of our product strategy.

The indirect specialty gift channel is the heritage of our business and remains very important to us. Deep customer engagement with the brand has been built and continues to be built in this channel; however as you know, this channel is in a state of declining sales and margins due to over-assortment of patterns and styles. Consequently, we reduced this distribution by a net of approximately 400 retailers in fiscal 2014 through a combination of remediation, natural attrition, and more selective approach to opening new specialty gift stores. Our current specialty gift distribution stands at around 3,100 stores.

We will continue to add select accounts while discontinuing unproductive accounts. About 30% of our accounts make up about 70% of our specialty gift channel revenue. We are updating our service and support model to make these top accounts in particular even more productive by reducing SKU counts and maximizing the retailers’ margins.

While the specialty gift business is rapidly becoming a much smaller percentage of our total revenue base, it is still an important piece of our business and we are working hard to stabilize this channel by narrowing our product assortments, changing the order cycle, and doing a better job of segmenting our assortment by door.

Turning quickly to Japan, our experience in Japan over the past three years has proven to us that there is a lot of opportunity there. We believe we are at a point in our market-building efforts where we can now turn our attention towards establishing a business model focused on long-term profitability. We will be exploring options during fiscal 2015 which may include working with an outside partner to capitalize on our potential there. While we believe there is opportunity for additional international expansion in the long term, improving and growing our domestic business remains our primary focus.

Last, let me touch on the third strategic component – marketing. Our marketing goal will be to generate excitement and desire for the aspirational Vera Bradley brand, attracting new customers while continuing to foster strong connections with our loyal fan base. We have under-invested in marketing compared to our peers, and we will be increasing our spend beginning later this year, which is reflected in our guidance. We plan to build a cohesive brand story that connects with our target customers and more of our spend will be allocated towards the halo brand-enhancing assortments and less to what is already well known. We will advertise the brand in relevant national magazines and leverage our database and insights to conduct more segmented and even personalized digital and direct mail marketing.

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

Question and Answer Session

Operator

Thank you. [Operator instructions]

Our first question comes from Edward Yruma with Keybanc Capital Markets.

Edward Yruma – Keybanc Capital Markets

Good morning, and thanks for taking my question. First, you indicated that there will be some additional inventory liquidation in 1Q. How should we think of the medium term inventory liquidation picture, particularly as you wind out of some categories and maybe (indiscernible) yourself and look to license?

Robert Wallstrom

Yes, it’s a good question, Ed. I think with regards to liquidation, we plan for $12 million this year and that planning is to put us in a better position as we exit the year, and it’s also to help us with our MFO strategy that Sue can touch on. But that’s why we’re planning for that liquidation. We have done this in the past. We didn’t have much in the prior year, so if you think about it from a comp perspective, it’s mostly additional this year compared to last year.

Edward Yruma – Keybanc Capital Markets

Got it, and how should we think about—you know, you’ve talked about some of the new products you’re introducing, some new patterns. How do we think about product flow for the back half of the year, I guess your comfort level with products that are already in the pipeline, and the kind of flow as you progress through the year? Thanks.

Sue Fuller

Yeah, it’s a great question. Thanks. We believe that for the back half of the year is where we are going to be—for the first time, we effected our assortment utilizing our biometrics, and where we actually did in fact make a change to the assortment using a more scientific approach. However, we realized it also a blend of art and science from a pattern perspective.

Secondly, we also are in the process of currently introducing a few new fabrications such as faux leather and leather into assortments that touch upon the elevation of our product assortment. And last but not least, we are continuing to increase our solid penetration. We mentioned earlier that black is our number one color, and we believe that this represents very much an opportunity for us on the back half of the year as well, and we plan on increasing our penetration.

Robert Wallstrom

Just a couple things I would add and comment on the product standpoint. I think what you’ll begin to see happen in fall is that Sue and the team have really been able to start editing significantly. We believe that this over-saturation was our number one issue, and so the team took quick action as soon as they could in the lifecycle of the product to start pulling the assortment back. You will see that in fall. You will see the introduction of the new fabrics that Sue spoke about, and also the introduction of some more graphic patterns in terms of utilizing some of the smaller patterns that have been inside the bag and bringing it outside the bag. All of those actions, we think will help kind of focus the assortment and modernize the assortment and begin this repositioning, but it just will be the first steps, we would say, along that path. We still have a lot of excitement coming out even as we go into next year, but you will begin to see some early changes in fall.

Kevin Sierks

And then, Ed, the other reminder that back to campus is kind of our second biggest time during the year and we’re introducing four new styles this year. We had two new styles last year, so we’re very excited about that. One of those styles is water resistant, and not very many companies compete with us in terms of colorful backpacks, so we’re excited about back-to-campus as well.

Edward Yruma – Keybanc Capital Markets

Great. Thanks so much, guys.

Operator

Our next question comes from Mark Altschwager with Robert W. Baird.

Mark Altschwager – Robert W. Baird

Hey, good morning and thanks for taking the questions. First, I appreciate all the detail – it’s great. Rob, just following up, what do you see as the optimal mix of direct-to-consumer versus indirect over time, and then could you talk a little bit more about where international growth fits into that five-year plan?

Robert Wallstrom

Yeah, we definitely—as we look at our five-year plan, we definitely see the direct penetration continuing to grow, as we laid out. We see significant growth in both our full price and outlet channels. In regards to the indirect channel, what we see is a stabilization of our gift channel which still we think will be shrinking and contracting slightly as we go through the five years, but then offset with an expansion in the department store world. So we believe we’ll see some small expansion in the indirect world, but the majority of our growth will be coming out of the direct world.

In terms of international, like we said, we believe that Japan is the first area that we’ve been able to grow internationally. It’s been very encouraging. I was over there this year to really look at how we were positioned in the market. I was impressed by our productivity in our current spaces, even though I was not necessarily happy with our current real estate, so that’s why we’re looking for an opportunity to strengthen our positioning from a real estate perspective and potentially work with an outside partner to really even leverage the brand further. I think we have significant opportunity, but we want to make sure in the short term that we’re really focused here in the U.S. getting the product right, and then we’ll expand internationally after that. But we don’t have a lot of international growth in our current five-year plan and how we’ve built out the revenue line.

Mark Altschwager – Robert W. Baird

Okay. And then you talked about plans to modernize and elevate the product. As you move more into solids and potentially more premium materials, how will you differentiate the Vera Bradley brand in an increasingly competitive handbag marketplace? What do you want the brand to represent to that career customer?

Robert Wallstrom

Yeah, I think a few things. I think one, as we look at the Vera Bradley brand, we believe that there’s quite a brand DNA in terms of our—you know, we really connect with the consumer. It’s a fun brand. It’s a brand that is not overly serious, and so as we do career introductions, we think we can keep some of that spirit – it can be a little bit more fun. So as we look at some of these products on the outside, it would still be very appropriate for the office, whether that’s leather, whether that’s faux leather, obviously much more solid driven. By inside, there’s still going to be kind of that surprise and delight of happy Vera Bradley patterns, and we think there’s a real opportunity in the entry price point in this leather and faux leather business that we think Vera Bradley can have a very strong market position in.

So as we talk about aspiration, we’re looking at our current cotton bag business as around $100 price point. We think that our faux business can probably be in the $200 price point and the leather business up to the $300 price point, so that’s kind of how we’re thinking about the business today.

Sue Fuller

I would say the other major differentiator is our functionality that our bags provide, and that is a key component of our DNA that we are continuing to make sure that we build into every new program that we’re introducing, as well as every major classification as well as every new material that we introduce.

Mark Altschwager – Robert W. Baird

Great, thank you.

Robert Wallstrom

Thanks Mark.

Operator

We’ll go next to Randy Konik with Jefferies.

Randy Konik – Jefferies

Great, thanks a lot. I guess my first question is along the lines of how the consumer visualizes the brand. I guess right now if you ask a woman what she thinks of Vera Bradley, what she thinks in her head, it’s a paisley-type bag, and I’ve asked this question when we had the sell-side event. We saw something similar with Deckers where the top-of-mind thought process with the woman was that major kind of boot that they have, and the company expanded their product offering and diversified so the consumer would think of more than just the core boot from Uggs. Do you see similarities or differences in what you’re trying to do with the product here at Vera Bradley in terms of the consumer mindset of what they think of—what the brand stands for? That’s my first question. Thanks.

Robert Wallstrom

Well, I think there’s a couple things to, I guess, talk about there. One, I think that Uggs is an interesting analogy, but I do think that we’re slightly different because I think Uggs was so dominant and a very focused one item type of boot that as they expanded, they did a nice job; but I do think with Vera Bradley, what we’re finding from our consumer is that she’s not limited to our printed cotton quilted business. We’re already seeing such strong response to our solid, microfiber bag which is different. We’ve introduced a few more in terms of the other fabrications into the line, whether it’s straw or some of the other things, that we know our customer will go beyond the printed cotton quilted already. So that gives us some confidence, and we believe that really will allow us to launch these other businesses.

Right now as we look at our five-year plan, though, we still believe the majority of our business will remain in the cotton quilted business and we really feel that this faux leather and leather business is the halo product for us that will allow our customers to engage with the brand when she goes to the office, because what we’ve found right now is that she’s not taking Vera Bradley with her to the office, and we think there’s an opportunity from our customer research to be able to do that to keep that relationship going.

Randy Konik – Jefferies

That’s super helpful. When you think about your distribution, let’s say west of the Mississippi, do you think of any channel differences about the western part of the United States versus the eastern part of the United States regarding retail versus potentially department stores? I guess in the comment in your commentary and in the press release, it sounds like there’s potential more department store distribution beyond Dillard’s that you could foresee on the horizon. Could you comment on that?

Lastly, can you just reconfirm – did you say that 30 accounts in the specialty channel account for 70% of that channel? I just want to clarify that. Thanks.

Kevin Sierks

Yeah, let me clarify that and then Rob will take your first question, Randy. It is 30% of our accounts, of our customers make up 70% of the revenue, and that’s just related to the gift channel, so just think about those specialty accounts. It doesn’t account for the key accounts like Dillard’s and Disney and QVC, et cetera.

Randy Konik – Jefferies

Understood.

Robert Wallstrom

So as we talk about the west coast, I think one, your first statement is right – we do believe on the west coast that the gift channel will not represent a significant portion of the west coast strategy and that the department stores will represent a larger part of that strategy. We do believe, though, that there is a significant retail, direct retail opportunity in the west coast. Part of the reason that we’ve been looking at—you hear us keep talking about modernizing the brand, whether it’s through the assortment or also through this new store prototype design. We feel that part of becoming stronger on the west coast is communicating the Vera Bradley message in a store environment that’s a little bit more applicable to the west coast.

So we are not looking at revolution but we are looking at evolution and moving from what I would call a much more classic brand to a modern classic brand. We’re not trying to move to contemporary but we are trying to move to a more modern classic brand, as I think you’ve seen some other retailers do. One that I’ve always admired is how Ralph Lauren managed that transition over the years, and we think there’s a real opportunity for us to follow a similar path.

Randy Konik – Jefferies

Got it. Just one last question, if I may – at the sell side event, you talked about the issues of executive communication with various headquarter buildings or different buildings on a campus. Can you just describe to the buy side what you currently have from an office location set-up, what was the communication like or not like, lack of communication in the past, and what you’re moving towards and the time line of consolidating offices? That’s my last question. Thanks.

Robert Wallstrom

Yes, so currently in Fort Wayne we have five different buildings—

Kevin Sierks

Five buildings in four locations.

Robert Wallstrom

Yeah. As you think about the executive team, what we really had is we had our one of our north buildings where we had a lot of our finance, operations, (indiscernible) had up here kind of the northern part of Fort Wayne, and then the creative team was down in our VBD design center, so there was really kind of a separation between the creative design group and more the operational-administrative part of the company.

What we’ve done in the short term is to make sure that we really start integrating a lot more. I moved my office down to the design center. We have our executive meetings down in the design center most of the time to really make sure we have strong alignment amongst the teams. I think we’ve already started to make some nice headway there, but it’s not perfect.

So our campus consolidation will be happening. It’s being built as we speak, and we will move in about this time next year, so that will make that process even more seamless and more fully integrated. But I wouldn’t want to mislead anybody that we think that that alignment is going to take until next year to get to. We’re working on that right now in just how we’re changing our practices on a daily basis, and I think we’ve made significant headway in aligning everybody.

Randy Konik – Jefferies

Super helpful. Thank you.

Operator

Our next question comes from Neely Tamminga with Piper Jaffray.

Neely Tamminga – Piper Jaffray

Great, good morning. I want to say welcome to Sue and congrats to Kevin and the team on their promotions. So if I may, Sue, it sounds like exactly what we need to hear here, right, in terms of the process change going on, in terms of your role and how you’re getting everybody functioning on the same page. Do you actually have the tools that you need to do what you need to do – like, do you have the PLM software that you need, et cetera, or is that kind of a future stage? And then related to this, and you guys are referencing this five-year plan, strategic plan, are we thinking with the SKU rationalization we could actually get beyond prior peak gross margin levels in five years? Thank you.

Sue Fuller

I’ll answer the first part of the question, which is do we have the tools necessary to ensure success, and what I am pleasantly surprised about, actually, in working with the IT team is that there has been a large investment made in our software over the years to enable our success, which is fantastic. We actually have—as of May, we’ll have upgrades that we’ve been making to the PLM systems to continue to streamline the processes and to improve two-way communication, not only internally but also to our partners overseas, which make a huge difference in streamlining our supply chain and also increase and enhance our speed to market, which will lead to more product relevancy at a faster rate. So I feel confident that the platforms that have been put into place over time will enable us to be successful.

Kevin Sierks

And then Neely, with regards to gross margin, we do believe we can improve our gross margin over the five year strategic plan. We think SKU rationalization plays into that, modernizing and elevating, and a focused assortment obviously will play into that. We’re obviously as we’re going through the SKU rationalization, we’re taking out the unproductive or the lower productive SKUs, so that will help as well.

Obviously we’re not able to leverage our overhead costs right now either, so in the back half of this past year we really slowed down our inventory ordering, which is the right thing for the business but nevertheless you have less units to spread that cost over. So we’ll naturally be able to get more leverage over time as well as we work through our inventory, and we think by the end of this year we’ll really be in a better inventory position than we are as we exited this year. Our retired inventory levels will go down about 10% over the course of this year, which will put us in a really good place from our perspective as we exit the year.

There is also some supply chain efficiencies we think we can do as well. We’re looking at lower cost manufacturing locations over in Asia, we’re looking at the use of our facility here in town that manufactures about 6 or 7% of our product, looking at exactly what we produce there and how we can run that more efficiently. So there’s a long list of things we’re looking at currently. Most of this will obviously impact next year, not the current year we’re in right now, only because we have to work through our inventory position and we also have to make some headway on our MFO strategy.

Neely Tamminga – Piper Jaffray

Thank you so much, guys.

Robert Wallstrom

The only thing I would add to that is I agree with everything that’s been said, that we do believe that there is—you know, the gross margin long term is going to be moving in the right direction and get back in the historic levels. The one thing to keep in mind, though, is as we build the factory business, it definitely improves the margin over the current outlet structure, but it’s still slightly dilutive in terms of the overall gross margin on the top line. So we are making significant improvements in our full price margin and how that margin is flowing through our department store channel, and then the mix is holding it back slightly; but we still believe with the mix of that, we can get up above historical levels.

Neely Tamminga – Piper Jaffray

Thank you, good luck.

Kevin Sierks

Thanks Neely.

Operator

We’ll take our next question from Oliver Chen with Citigroup.

Nancy Hilliker – Citigroup

Hi everyone, thanks for taking my question. This is Nancy filling in for Oliver. I was wondering if you could just talk a little bit about the made-for-factory. As that ramps up as a percentage of the factory mix, how does that play into SKU rationalization? Will it mirror the launches in the full price? And then also could you just comment on your thoughts on promotional cadence going into this year and what your expectations are so far seeing the trends so far this year?

Robert Wallstrom

Yeah, a couple things. I think one, from a promotional standpoint, we’re basically planning that we think the environment is going to be similar to last year, so that’s how we’re approaching the promotional planning at this point. As we look at the MFO, we do believe that the MFO assortments are going to be similar to what we’re doing in full price, but part of the MFO strategy is that the product will be different and we do believe that that’s a critical part of the strategy. It’s currently one of our problems in our current outlet strategy is that we’re putting retired product in the outlets right on the heels of it being in our full price channel, and so our indirect channel in some cases is holding the same product that were in outlets. We’re trying to move that apart so that will not happen in the future – we’ll have much more MFO product, but one thing about the factory channel that is so advantageous is that we believe we can keep a very, very tight SKU assortment. We basically can take best-selling styles from our full price business. We don’t have to do as much experimentation and R&D, so we can take the lessons learned from our full price and monetize it in our factories, so it will be a very, very tight assortment in our factory channel.

Nancy Hilliker – Citigroup

Thank you guys so much.

Operator

We’ll go next to Evren Kopelman with Wells Fargo.

Evren Kopelman – Wells Fargo

Thank you. Two questions. One is can you talk a little bit about how you plan to kind of manage the risk of alienating that core loyal customer with all the product changes that you’re planning on making and changes to stores? The second question is, I’m not sure if this was mentioned earlier, but do you plan to reduce the number of—that 3,100 indirect doors further in this fiscal year? Thanks.

Robert Wallstrom

Yeah Evren, thank you. A couple things – one, in terms of the overall store count, we do believe that our gift channel will end up with a similar store count by the end of the year. There’s always accounts that we’re editing out of, but we’ll add a few, so roughly the same count if not just slightly lower.

I think your question about alienating our core customer is something that we have spent a lot of time talking about, and obviously watching a lot of brands over the years handle this transition, I’ve seen some do it very well and some do it poorly. I think that what we’re talking about with Vera Bradley is we really are talking about broadening and expanding our customer reach, not replacing our customer reach. You know, our core quilted cotton bag is still going to be the core of our business. That’s our heritage, that’s our signature. We have every intention of keeping that; we’re just adding to it. And when you talk about the store design, again what we’re just trying to do is modernize it. We’re not going to make it a revolutionary change. We’re just going to bring it forward

I’ve used the example even internally going back to Ralph Lauren – I just watched over the years how it went from a very strong kind of mahogany, very polo mallet, (indiscernible) inspired turning to introduce white lacquer and chrome and just keeping the whole feel of the brand a little bit more modern and a little bit more current. So we’re looking at that same concept in our stores. It’s just how do we bring it forward, how do we keep it current and modern, not how do we revolutionize it.

So we believe that these changes will allow us to attract a new customer without alienating our core customer. It is a delicate balance. It’s something that we’ll be managing and watching every step of the way, but we feel pretty good about the plan that we’ve laid out right now and we believe that it will get us to where we need to be.

Evren Kopelman – Wells Fargo

Thank you.

Operator

We’ll go next to Dana Telsey with Telsey Advisory Group.

Dana Telsey – Telsey Advisory Group

Hi, good morning everyone. You talked at the event about new people and adding some new people to the team. Where are you in that process? And as you think about the appropriate mix of prints, patterns and solids and what the margin potential is, how do you see that evolving and should that be 2015, 2016 as we look out? Thank you.

Robert Wallstrom

So I will talk about the people, and then I’ll turn it over to Sue to talk a little bit about the margins and patterns. So from a people standpoint, one, the number one thing I was working quick on was obviously getting Sue on board. Sue has also been working on building out her team and so we’ve been looking at talent there and made some nice progress there. I have also been simultaneously out—we have been talking and looking at chief marketing officer candidates and head of sales candidates and head of ecommerce candidates, and moving through that process. What’s been exciting is we’ve had very good response from the market in terms of people being attracted to the Vera Bradley brand, and we’re just making sure that we are diligent and making sure that we really get the top talent.

So hopefully in the next few months, we’ll continue to add to the team, but we are right in the midst of those interviews and that process right now.

Sue Fuller

Then as we think about our print, patterns and obviously the margin opportunity there, and as we mentioned in the script, our first point of action was actually to look at reducing the number of patterns that we’re offering; so again, normally we would have offered 18, we’ll immediately be going down to 14 and then down to 10 to 12 by early next year. The biggest opportunity that we see, obviously, is enhancing that brand assortment with solids. We’re really excited – it’s something she’s already responding to, and so we know that there’s incremental opportunity there, which will obviously lead to margin enhancement for us as well.

Dana Telsey – Telsey Advisory Group

Thank you.

Operator

Our next question comes from Ike Boruchow with Sterne Agee.

Ike Boruchow – Sterne Agee

Hi everyone. Morning, and thanks for taking my question. I guess the first question I wanted to ask is in regards to the guidance for the year that kind of implies a bit of a ramp in the SG&A spend and also in the CAPEX spend. I guess, Kevin, if you could just help walk us through—I guess Rob talked about increased marketing, but is there anything else we should be thinking about as you invest to try to grow the business?

Kevin Sierks

Yeah, a lot of the investment is the headcount that Rob mentioned in terms of the executive team, and then an increase in marketing which we believe we’ve under-invested in over the years. The other large item, Ike, to keep in mind, though, is that $8 million is a really big number as you convert that to an EPS number, and that’s related to the incentive that didn’t hit last year because we didn’t hit our financial metrics internally. So those are the large items that are impacting SG&A.

Obviously we still are focused on cost containment. We’ve got an initiative that will intensify this year. We’ll keep you updated along the way. To the extent we realize more savings, we’ll make the decision on whether or not we invest those savings. Currently, we obviously want to invest to make sure we set ourselves up to meet our strategic goals, but that will be the focus. But those are the three major items from an S&GA perspective.

Then as you look at COGS, cost of sales, Rob mentioned the promotional environment. We plan to be fairly equal to this past year, but we have to get through some of those overhead costs due to ordering inventory levels more appropriate with our sales levels, so that does impact us this year as well, and the liquidation impacts us as well, so a little bit accretive to the bottom line but nevertheless impacts our gross margin percentage.

Ike Boruchow – Sterne Agee

And then any comment—

Kevin Sierks

Oh, and then you mentioned—yeah Ike, you mentioned capital. Capital is really relatively flat year-over-year except for the campus expansion or consolidation, so that’s about $20 million. Our normalized CAPEX each year, as you know Ike, is about $20 million, and of that $20 million about $10 million to $11 million relates to stores. There’s around $6 million that relates to IT, and then the rest is kind of what I’d call other in terms of manufacturing and distribution spend.

Ike Boruchow – Sterne Agee

Okay, thanks. That’s helpful, Kevin. And I guess one more for Rob – I guess, Rob, you talked about the store base, and it sounds like the thought process is maybe even to ramp the new stores, the 20 to 25 once we get into 2015 and beyond. Just curious – I mean, obviously the retail environment is tough and the store comps are negative. Right now, was there never a thought to maybe slow down the expansion and just try to work on productivity and getting the traffic back before you re-accelerate the store growth? I’m just kind of curious the puts and takes that you think about when you think about expanding the footage.

Robert Wallstrom

Yeah, great question. As we went through this strategic process, we did think about whether we should maintain or slow or go forward more aggressively, and one thing is we looked at our direct channel – you know, our stores are profitable, even though we’ve had some challenging comp environments. We believe that the number one driver of the negative comp environment is some of the product conversations that we’ve been having. There’s a lot of feedback from customers and customer research that we were introducing too many patterns and that we needed to slow that process down, and the customer was really looking for something newer. In the past, it used to be that you could just introduce a new pattern and the new pattern felt new and exciting, but because we’ve had such a hyper pattern introduction, the customer no longer saw that as new.

So we believe that the comp issue is really primarily a product relevancy issue, and we feel pretty good about our strategy to improve that. Since our stores are so profitable and our store base is still so small, we felt it was important to continue to build up our store base to really control our brand positioning in the market, and we felt that there was a lot of opportunity. You know, if we had a base of 300 stores already, we might be thinking about this differently; but with only 84 full price stores and 15 outlet stores, we just have really begun the retail expansion and we feel there’s really an opportunity to do it, and we really wanted to wait on that expansion until next year to get the product right and at the same time get this new store design right. Those are the two dependencies on the store growth.

Ike Boruchow – Sterne Agee

Okay great, thanks. Good luck.

Operator

We’ll go next to Janet Kloppenburg with JJK Research.

Janet Kloppenburg – JJK Research

Hi everybody, and congratulations to Kevin. I wanted to ask about the growth of the majors – Dillard’s, Disney, QVC, what percentage that is of your direct business, Rob, and what percentage you see it becoming. And if you could talk a little bit about the margin attributes of that business – do they help overall margins, or if that business is to grow, could it pressure overall margin performance?

And for Sue, I was wondering if you could talk a little bit about your lead times, what they are now, what opportunity you see for those lead times coming down, and also if you’ll be testing any of your new product this year to lower your risk as you launch these new introductions for next year. I was just wondering as you did your research, whether you thought that the appeal of Vera Bradley on what I call a trans-generational basis continues, and if you’ll play into that appeal going forward. Thank you.

Kevin Sierks

Janet, maybe I’ll start with the sales question. You asked about QVC specifically. So if you look at last year—

Janet Kloppenburg – JJK Research

Well Kevin, QVC and Dillard’s and Disney, all three together, what those three businesses—I call them the majors. What do they represent, and what that should that be in the indirect business?

Kevin Sierks

No, that’s exactly where I was going, Janet. We don’t give those numbers out specifically on what percentage they make up. I can tell you last year, though, as the gift channel was obviously declining, all three of theses – QVC, Disney and Dillard’s – helped us offset some of that decline in the gift channel. We expect to see that happen this year as well in our numbers, but we don’t give the numbers specifically. I can tell you Disney has been a huge success, though, and I know Sue and Rob have spent a lot of time with Disney even since they’ve been here, and we do expect that business to grow in the current year.

Robert Wallstrom

Yeah, and I think your other question was related to margins in majors versus everything else. Really it’s about building the strategic partnerships with the majors, and what’s been really great is that with these relationships, we can really work together to work on maintaining margins. And even though maybe there is a slight pressure on the margin with your major account, there’s also some benefits from an SG&A standpoint. So really from a profitability standpoint, we feel very good about where we are with the major accounts.

Janet Kloppenburg – JJK Research

Okay, great. Thank you.

Sue Fuller

Yeah Janet, as you have indicated, will we begin to test products, and actually I’m happy to report that we actually have already started that process, so we have tested our MFO product. In addition, we are currently in the process of testing some new faux leather product. We will have additional tests that will begin to flow in from March all the way through October, and just about every month or every other month, we’re going to be testing the resonance of the new product introductions that we will be having in order to ensure that we are mitigating the risk, as you had indicated.

From a lead time perspective, what I can tell you is that we’re very focused on this, and a few ways that we are looking to take time out of the supply chain, one is we’re looking at streamlining processes, and actually we have started that initiative internally. We’ve met with some of our strategic partners domestically as well as we will be headed overseas in order to understand how we can continue to collaborate more efficiently to take time line out. Additionally, I mentioned that we will have an upgrade to our systems that will allow two-way communication that will enable streamlining. And then last but not least, the corporate proximity of some of the teams coming together on the campus will certainly help that effort as well.

Janet Kloppenburg – JJK Research

Good luck. Thanks so much.

Sue Fuller

Thank you.

Kevin Sierks

Thanks Janet.

Operator

Our next question comes from Steve Marotta with CL King & Associates.

Steve Marotta – CL King & Associates

Good morning everybody. With the exception of the upcoming need for outlet product, are there other opportunities to segment product by channel, offering either exclusives to specific retailers or to channels of distribution?

Robert Wallstrom

Yeah, the answer is absolutely yes. We have that underway. I think one of the great examples of that has been even in Disney. What’s been really interesting to watch with Disney as we’ve gone exclusive with them to deepen the bidding up between—in the secondary market, right, in terms of that Disney has gone on eBay and how the prices keep going up as they go on eBay. We believe that exclusivity and scarcity is really going to be key to this brand going forward because we really want patterns to be much more limited, and so we’ve already begun some of those conversations with some of our key partners of how we can do some exclusive and unique things with them. We believe that will become a larger part of the business going forward.

Steve Marotta – CL King & Associates

That’s great. Last question – as it pertains to marketing, can you quantify what the expense is expected to be this year versus last year?

Kevin Sierks

You know, our marketing spend in fiscal ’15 is approximately $18 million to $20 million in total, depending on how you look at that number, and it’s going up only slightly this year.

Steve Marotta – CL King & Associates

All right, thank you.

Operator

At this time, there are no further questions in the queue. I’ll turn the call back to our speakers.

Robert Wallstrom

Thank you. In closing, I continue to be extremely optimistic about the future for Vera Bradley. Fiscal 2015 undoubtedly will be a year of transition for the company, but we are taking the right actions to position the company for the long term. I believe we are assembling the right team and have the right product distribution and marketing strategies in place to drive improved performance and to enhance shareholder value over the next five years. I look forward to updating you on our progress in the quarters ahead and thank you so much for your interest and time.

Operator

Ladies and gentlemen, that does conclude today’s presentation. We thank you for your participation.

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