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Vera Bradley, Inc. (NASDAQ:VRA)

F2Q13 Earnings Call

August 29, 2012 4:30 p.m. ET

Executives

Paul Blair - Investor Relations

Michael Ray - Chief Executive Officer and Director

Jeffrey Blade - Executive Vice President, Chief Financial and Administrative Officer

Roddy Mann - Executive Vice President, Strategy and Business Development

Analysts

Neely Tamminga - Piper Jaffray

Jennifer Davis - Lazard Capital Markets

Erika Maschmeyer - Robert W. Baird

Evren Kopelman - Wells Fargo

Amy Noblin - William Blair

Peter Wahlstrom - Morningstar

Oliver Chen - Citigroup

Steven Marotta - CL King & Associates

Ike Boruchow - JPMorgan

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Vera Bradley Fiscal 2013 Second Quarter Results Conference. 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. As a reminder today's conference is being recorded. I’d now like to turn the conference over to Paul Blair of Vera Bradley’s Investor Relations Department. Please go ahead, sir.

Paul Blair

Good afternoon and welcome. We would like to thank you for joining us this afternoon for Vera Bradley's fiscal 2013 second quarter results conference call.

Some of the statements made on the conference 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 January 28, 2012 filed with the SEC for a discussion of known risks and uncertainties. Investor's should not assume the statements made during the call will remain operative at a later time. The company undertakes no obligation to update any information disclosed on the call.

We understand that this is a busy period for reporting and intend to keep today's call to an hour in length. Therefore, during our question-and-answer session we ask that participants pose one question with one follow-up to allow as many callers as possible the opportunity to take part in today's call.

I will now turn the call over to the Vera Bradley's CEO, Mike Ray.

Michael Ray

Thank you, Paul. Good afternoon, everyone, and thank you for joining us today. With me are Jeff Blade, our Chief Financial and Administrative Officer; and Roddy Mann, our Executive Vice President of Strategy and Business Development. Today we will focus on three main topics; the highlights of our fiscal 2013 second quarter performance, a review of our initiatives and outlook for the remainder of fiscal 2013, and an update on the progress against our long term growth strategy.

Although there were many accomplishments during the quarter, we also fell short of our expectations. As we shared our during our previous call, our most significant challenge has been a product portfolio that has underperformed. While our spring and summer collections had a positive impact on the overall offering, they were not enough to overcome the weakness of prior season in the midst of a challenging consumer environment.

As a result, while we met our revenue expectations, we sacrificed gross margin in the quarter. We will provide more insight on this topic throughout the call. After a challenging May and June, business improved significantly in July with the successful launch of our fall back-to-campus collection. As we begin the third quarter, we’re encouraged by our current momentum, the strong sell-in of the winter collection to our specialty retail partners, and strengthening comparable store sales.

In the second quarter, consolidated net revenue grew 19% over the prior year to $123 million, in line with our guidance. Consolidated gross margin was 55.8%, a decline of 170 basis points to prior year, reflecting the impact of increased promotional activity to address lower than expected sales trends early in the quarter. As a result, net income decreased $200,000 to $13.4 million or $0.33 per share versus $13.6 million or $0.34 per share in the prior year.

In the indirect segment, revenue grew 2.6% in line with our expectations. As a result of the challenges I mentioned earlier, we experienced lower than anticipated reorders from our specialty retail partners during May and June. As we shared in our last call, we’ve been working closely with them by assisting in a variety of ways to support their in-store events and other marketing efforts to improve sell-through. The sales team also provided support to ensure that our partners had the proper merchandise assortment and marketing plans in place to capitalize on the highly anticipated fall back-to-campus launch.

As a result of these efforts, we believe that our specialty retail partners are now appropriately merchandised and are experiencing strong sell-through of our fall offerings as evidenced by the positive reorder activity we’ve experienced since mid-July. Also during the second quarter we continued to expand our presence in the department store channel by opening an additional 70 Dillard’s locations and embarking on a new relationship with Von Maur opening in their 27 stores.

In our direct segment, revenue grew 37%. During the quarter we opened eight new stores, achieved comparable store sales growth of 5.3% and grew our e-commerce business by 21%. In response to the challenges I mentioned previously we were increasingly promotional as the quarter progressed, primarily in outlet stores as well as on our website. The weakness in May and June was partially offset by the successful launch of the back-to-campus collection as well the continued strength of our new store openings.

During the quarter we continued to develop existing markets such as Nashville and Pittsburg and established a presence in new markets such as Oklahoma City and Phoenix. As we have discussed before, one of our key strategic initiatives has been to enhance our product development capabilities to ensure improved product assortments each season. This has included the creation of formalized merchandising chain as well as updates to our collaborative processes by which we plan each season.

Fall back-to-campus was the first season in which we could affect the better assortment through these improvements. The launch began on June 28 with the release of our highly anticipated new bedding and dorm collection in three patterns, Va Va Bloom, Indigo Pop and Paisley Meets Plaid. On July 10th we brought the remaining assortments to market that featured several new styles and updated categories including an expanded line of backpacks, cross-body silhouettes, and tech items. An integrated marketing campaign that included both in-store and digital activity supported the release across all channels.

Consumer response to these collections has been outstanding. Encouragingly, in the period since the launch, of the top ten selling styles in our stores consists of five new products such as the Campus backpack as well as five classics such as large duffel and the hipster.

For the remainder of the year we will continue to focus on bringing compelling collections to market. Tomorrow, we will launch our fall fashion collection which features three new patterns, including Provencal, Canyon and Portobello Road, as well as a fresh assortment of new styles including an expanded offering of baby bags.

On September 20th, we will launch Ribbons, the pattern supporting breast cancer awareness. Then on November 2 we will release our winter collection which features two new patterns Dogwood & English Rose and signature styles as well as an assortment of holiday gifts. These two collections were well received by our specialty retail partners as demonstrated by their commitment during the selling period. It’s important to note that we’ve historically launched winter in late September, marking the last release of new patterns for the calendar year.

We believe this year’s November launch of two new patterns will create positive momentum going into the holiday period. In general, the updated timing of our seasonal releases allows from natural marketing themes more in line with how and when our customer is shopping. For the remainder of the year, we are focused on executing our merchandising, sales and marketing plans across all channels to fully leverage these themes.

Moving on to our efforts in Japan, our objective this year has been focused on establishing relationships with major department stores and then leveraging those to build connections with consumers. Through the end of the second quarter, we’ve opened a total of eight locations in department stores. Since our entry into the Japanese market last year, we’ve learned that as in the U.S., the more the customer experiences the brand, the more it resonates with her.

This was demonstrated once again earlier this month when we were featured on The Stage at Isetan Shinjuku. The Stage is a temporary event space on the first floor of this iconic department store dedicated to showcasing the finest brands in the world. Over the course of six days, we greatly exceeded both our expectations and those of Isetan.

Our experiences in Japan to-date both in our permanent shop-in shops and through events at The Stage have given us the foundation by which we can map a future long-term vision for the market. We are actively developing that vision bearing in mind our successes and learnings to date, as well as our shorter term priorities here in the U.S.

As noted in our press release, we have lowered our guidance for the year. I’d like to provide some color around this change. Second quarter benefited from the strength of our fall product introductions and we are pleased with the current momentum we are seeing in the business. That said, when guiding for the back half of the year, we have taken into consideration our new released cadence and a challenging consumer environment, which results in limited visibility into the holiday season. Therefore, we are revising our outlook to take those factors into consideration. Jeff will provide more detail in his discussion on our outlook.

In conclusion, we have a strong brand heritage and a 30-year track record that enables us to enjoy tremendous brand loyalty and provide the foundation for our long-term growth strategies. Key of these strategies is our ability to consistently execute compelling seasonal assortments. While we need to continue to investment in the teams and processes that support how we go to market, we believe we have made significant progress in enhancing these capabilities. We are encouraged by what we are seeing in the success of the fall back-to-campus launch, the current momentum in the business, and a great lineup of product introductions for the remainder of the year.

I will now turn the call over to Jeff Blade, our Chief Financial and Administrative Officer, who will provide additional details regarding our second quarter financial results as well as guidance for our fiscal 2013 third quarter and full year.

Jeffrey Blade

Thanks, Mike, and good afternoon. I will begin my remarks with a review of our fiscal 2013 second quarter and then provide you with our outlook for the third quarter and full year.

As Mike mentioned, the second quarter was challenging in May and June as we managed the product portfolio that underperformed prior to the launch of the fall back-to-campus collection on June 28. We were able to overcome some of the sales challenges but required increased promotional activities that impacted gross margin and earnings per share.

Net revenues for the second quarter increased by 19% to $123 million from $103.8 million in the prior year. This performance was on top of revenue growth of 30% in the second quarter of last year. In the direct segment, net revenues increased 37.2% to $65.7 million, driven by increases across our full price and outlet stores as well as continued growth in ecommerce. The direct segment accounted for 53% of total net revenues in the second quarter versus 46% in the prior year.

In our stores, net revenues grew 51% during the quarter driven by the opening of 17 full price and four outlet stores during the past year, as well as an increase in comparable store sales of 5.3%. In the second quarter, we opened seven full price stores, one outlet store in both current and new markets. During the balance of the year we have six remaining stores to open for a total of 20 which is one more than originally planned. Overall, we’re encouraged with the performance of our new stores. We ended the quarter with 60 full price and 10 outlet stores.

Ecommerce net revenues grew 21% and represented 22% of total net revenues during the second quarter. This was due primarily to increased traffic from marketing of the fall back-to-campus selection through social media and increased keyword search spending, as well as targeted promotions. Indirect net revenues increased 2.6% to $57.3 million in line with our expectations for the quarter.

Despite the challenges with reorders in May and June, the fall back-to-campus release was well received, and as a result we have experienced steady reorder volume throughout July. We are also encouraged by the reorder volume we have experienced during August. I also want to mention that we believe the inventory issues at some of our specialty retailers discussed on our previous call, are largely resolved.

In the department store channel, we continue to build on our positive momentum at Dillard’s, launching in an additional 70 locations during the quarter. We are now represented in 176 Dillard’s locations and expect to launch in approximately 100 additional stores coinciding with our September and January launches. Our collaborative relationship with the Dillard’s team has enabled us to continue optimizing the product assortment, evolving the visual presentation and improving sales productivity.

Gross profit for the second quarter increased 15.1% to $68.6 million resulting in a gross margin of 55.8% compared to a gross margin of 57.5% in the prior year. The second quarter decline in gross margins was due to the increased promotional activity to drive sales, which was part of the (inaudible) positive channel mix as the direct segment becomes the larger portion of our overall business, as well as operational savings.

Total SG&A expense was $47.8 million for the second quarter compared to $39.1 million in the prior year. SG&A as a percentage of net revenue was unfavorable by 120 basis points compared to the prior year, due primarily to annualizing fiscal 2012 infrastructure investments made in the second half of last year and a higher occupancy cost driven by opening full price stores earlier than originally planned. As a result, operating income for the second quarter decreased 4.9% to $21.8 million or 17.7% of net revenues, compared to $22.9 million or 22.1% of net revenues in the prior year.

Operating income in our direct segment increased by 24.6% to $16.3 million, with operating margin of 24.7% in the second quarter of this year compared to 27.3% in last year’s second quarter. Operating income in our indirect segment declined by 1.6% to $23.7 million, compared to $24 million in the same period last year, with operating margins of 41.3% compared to 43% in the second quarter of last year.

The resulting net income for the second quarter was $13.4 million or $0.33 per diluted share compared to net income of $13.6 million or $0.34 per diluted share in the prior year. The second quarter results include an earnings per share investment of $0.02 per share for our Japan market expansion.

Key balance sheet and cash flow highlights as of July 28, 2012, include cash and cash equivalents of $7.6 million, accounts receivable of $49.3 million compared to $44.7 million in the prior year, days sales outstanding at 73.9 days compared to 67.5 days in the prior year, reflecting the timing of the fall back-to-campus selling. Inventory at the end of the second quarter was $117.9 million compared to $118.1 million in the prior year, essentially flat year-over-year despite revenue growth of 19% and the opening of eight new stores in the second quarter. The lower growth in inventory compared to revenue reflects improved inventory management.

We continue to be pleased with the progress we have made in evolving our supply chain and inventory management processes and feel confident that inventory will grow in line with revenue growth over the long term. Cash flow from operations during the second quarter totaled $25.5 million compared to a net use of cash of $11.8 million in the prior year, an improvement due to inventory management. Cash flow from the quarter was used to fund capital projects including the expansion of our distribution centers which is nearing completion as well as opening stores ahead of schedule.

I’d now like to review our outlook for fiscal 2013 third quarter as well as the full year. We have visibility into our third quarter based on demand in our indirect segment and we are experiencing positive momentum in comparable store sales in our direct segment. However, we have less visibility into fourth quarter sales with uncertainty around the challenging consumer environment and the potential effect of the changes we’ve made in our launch cadence. Therefore, we are adjusting our guidance for the remainder of the year.

In the third quarter of fiscal 2013, we expect net revenues to be in the range of $134 million to $136 million compared to $121 million in the prior year. This includes comparable store sales growth of mid-single digits. Indirect net revenue growth in the third quarter is expected to be flat to the prior year. As a result of the cadence change, we have orders received for the majority of indirect demand for the third quarter. As we shared on the first quarter call, there were events in the prior year related to the pull-forward of indirect sales for holiday build of approximately $3 million, and the opportunistic sales to the off-price channel of approximately $3.5 million.

Gross margin for the third quarter is expected to be expand over the prior year by approximately 200 basis points, of which approximately 120 of those basis points is attributable to the previously mentioned opportunistic sale to the off-price channel of $3.5 million in the same quarter of the prior year.

Although inventory growth in the first half of the year was below sales growth, inventory levels for the third quarter may grow above the rate of revenue due to the timing of the spring launch one week earlier than the prior year, as well as a concerted effort to ensure we are adequately prepared for a successful holiday season. For the full year, we expect inventory to grow in line with sales growth.

Diluted earnings per share are expected to be in a range of $0.37 to $0.39. Our earnings per share estimate assumes an effective tax rate of 39% and fully diluted weighted average shares outstanding of 14.5 million. For full year fiscal 2013, we expect net revenues to be in a range of $531 million to $536 million compared to our previous guidance of $535 million to $540 million. This includes indirect net revenue growth of low-single digits for the full year.

Comparable store sales are expected to be mid-single digits for the full year. We expect gross margin to improve by approximately 30 basis points for the full year. We expect diluted earnings per share for the full year to be in a range of $1.60 to $1.63. This estimate includes the previously mentioned net full year investment of approximately $0.06 per share to support our market entry into Japan. In addition, this estimate includes and effective tax rate of 39% and fully diluted weighted average shares outstanding of $40.6 million. Capital spending for the full year remains on track at approximately $36 million.

With that, I will turn the call back over to Mike for some closing remarks.

Michael Ray

Thank you, Jeff. In closing, I’d like to reiterate that while the second quarter was challenging, we are encouraged by the success of the fall back-to-campus launch, the current momentum of the business, and the lineup of great product introductions for the remainder of the year. We also remain optimistic about the long term prospects for Vera Bradley and the progress we continue to make in executing our growth strategies.

I’d also like to thank all of our team members and our retail partners for their hard work and dedication during a challenging period. Our optimism around the long-term prospects for Vera Bradley is based on the strength of our brand, our unique culture and the ongoing commitment to serve our loyal and passionate customers. Operator, we will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Neely Tamminga with Piper Jaffray.

Neely Tamminga - Piper Jaffray

I just wanted to follow-up a little bit on the momentum. You guys keep referring to the momentum post the back-to-college launch, and it sounds like it was more than just a modest improvement or rather more of a market improvement. But, Jeff, it seems to me that your comp guidance of being just mid-singles for Q3 relative to the number you set up for Q2, are you currently experiencing trends that are above that and you’re just baking in some conservatism? Just trying to get a sense of squaring all the comments that you’re making? Thanks.

Jeffrey Blade

Sure. Yeah. So as we mentioned with the fall back-to-campus launch at the end of June beginning of July, we did see very nice consumer response to that launch, and that helped drive our overall comps to 5.3% for Q2. We are seeing momentum into August, both in comparable store sales as well as reorders from our indirect retailers. So, while we have good momentum and we’re feeling good about it, we also want to make sure that we’re guiding in a way that’s reflective of the overall marketplace and the fact that we still have half a year to go.

Neely Tamminga - Piper Jaffray

So you’re trending better than that but there is conservatism? Is that how we’re supposed to interpret that?

Jeffrey Blade

You know, I can’t tell you. I can’t comment on that either way other than to say that we’re pleased with the way that August has trended. But it has been in a choppy environment this year.

Neely Tamminga - Piper Jaffray

All right. And then if I may, as a follow-up. Dare I ask if you have enough inventory at this point considering where we’ve been, but just you made a couple of comments as to what you’re expecting for Q3 and the full year. Are you feeling good about you have the appropriate level of inventory to feed into the momentum right now?

Jeffrey Blade

Yeah, I think we’re feeling good about overall inventory levels. So as we mentioned, we just finished the sell-in of winter to our specialty retail partners and that has been well-received. And I think overall inventory levels we’re feeling good about, both for winter and fall fashion, which launches tomorrow and Ribbons.

Operator

We will hear next from Jennifer Davis with Lazard Capital Markets.

Jennifer Davis - Lazard Capital Markets

I was wondering if you could comment maybe on the response that you’ve gotten from the indirect retailers regarding Fall 2. On your blog there was some commentary that seemed a little more negative, but it sounds like with guidance for the third quarter, you’re a little bit more optimistic?

Michael Ray

Jen, this is Mike. The sell-in of Fall 2, fall fashion, which launches tomorrow was very good. And that season tested very well. We’ve got a great degree of confidence in that offering. When we posted those images on the blog, I will have to say, it probably wasn’t our best foot forward in terms of images that we used. We quickly put up updated images. We also posted on Facebook I think earlier this week. All three of those patterns for Fall 2. And the responses that we’ve gotten since then with better imagery has been overwhelmingly positive for that collection. So, that said, I wouldn’t put too much emphasis on what you see on the blog. At the end, until the consumer sees it, it’s difficult to replicate the actual product. But we feel very good about Fall 2.

Operator

Moving on to Erika Maschmeyer with Robert W. Baird.

Erika Maschmeyer - Robert W. Baird

Could you talk a bit more about the cadence of your comp trends in Q2, how May and June looked versus July? I guess did things drop off dramatically after you gave guidance? Was June really the month that led the underperformance? And then does the guidance that you gave assume that July and August trends continue? Thanks.

Jeffrey Blade

This is Jeff. So to give you some complexion on the cadence for the quarter. So May started out fine, and at the time we guided May we had seen some choppiness but overall it was looking okay. Right at the end of May we did see a deceleration. June was a very tough month for us and we really didn’t see the consumer sort of bounce back until we launched fall back-to-campus on June 28. And then in regards to what we saw in the balance of July and into August, our guidance for Q3 does reflect the fact that we saw nice steady comps and a comp trend that’s continued through July and then into and through August.

Erika Maschmeyer - Robert W. Baird

And then just to kind of go forward with that. Can you talk a little bit more about what is giving you less confidence in Q4 and does the guidance take into account the shift in the launch timing? It seems like that should certainly be a positive for the holidays.

Jeffrey Blade

Yeah. I think if you go back to our prepared remarks, so again it has been a somewhat unpredictable and uncertain consumer environment. And with the current cadence change, while we feel very good about the cadence change, we think it’s the right thing to do for our consumers. We think it will play very well in our own retail stores in terms of opportunities for new news. And while our selling of winter to our independent retailers has been good, the reality is this is the first year we’ve done a cadence change so we still don’t know exactly how it’s going to play out. So a combination of those two things is the reason that we’re more cautious on the back half and especially Q4.

Operator

We will move on to Evren Kopelman with Wells Fargo.

Evren Kopelman - Wells Fargo

Can you talk a little bit more about -- you mentioned the reorders in May and June were weaker and then they picked up in July. Maybe give us a little bit more color on what is, I guess, product portfolio that your customers are reordering from? Did you get new products, is that why the reorder picked up? Or do you think there is a change in reorder patterns of your customers? If you can give a color a little bit more about that that’d be great?

Michael Ray

Evren, this is Mike. We discussed on the last call the challenges that we were having in the portfolio. We were also sharing the challenges that the independent retailers had just in terms of the assortment they had in our stores, the level of inventory they had. And we said that it’s going to really take us through the end of the second quarter to work through that. And so what we have seen, our sales consultants were in the field, we provided assistance just in terms of marketing tools. We helped the retailers move through that merchandise, again, primarily by supporting marketing efforts. And so now largely they’ve moved through a lot of that merchandise. The inventory challenges that existed early on are largely resolved and the launch of back-to-campus has been very strong. So what they are reordering right now is primarily the fall season that launched June 28th and July 7th.

Evren Kopelman - Wells Fargo

Okay. And then a follow-up is on your comments around the increased promotional activity. Is that primarily in your direct channels, ecommerce, on your owned stores? Because I believe you don’t do mark-down allowance type of things with your indirect customers, and also along with that, could you talk about why the indirect segment margin was down? Thanks.

Michael Ray

Sure. So because of the sales challenges that we saw especially early on in the quarter, we were more promotional than we normally would be and it was in both our indirect and direct segments. In the direct segment it was primarily in our outlet stores and ecommerce. So our full price stores were still largely full price other than our normal sale period in June. In the indirect segment we had some sales of retired products as well as expedited shipping to some of our indirect retail partners.

So, because a lot of our sales to them came in late in June, we wanted to make sure they have the products for the launch because a number of them were actually staging launch events. And as a result of that we wanted to make sure that they had the product to be able to have at those events. So we expedited shipping in a number of instances to make sure we were doing the right thing for our customers and ultimately their customers as well. So those were the things that drove the margin issues in the indirect channel.

Operator

Amy Noblin with William Blair has our next question.

Amy Noblin - William Blair

I was just curious if you could talk, I know it’s early, but what are some of your early learnings from the shifting of your delivery cadence? It sounds like you’re pleased with how you’re managing through the shifting cadence with your wholesale partners. And maybe if you could talk a little bit about the plans for spring and any adjustments you’re going to make there.

And I think a derivative question of that is, as you’re changing these cadences and gearing them more towards self purchasing, given the broad appeal of your product, how do you ensure that you have patterns that are relevant to everyone that will be purchasing, and this is really in reference to some of the comments that are on the blog about Fall 2 patterns. I view the blog as kind of a younger customer set. Are those necessarily who those patterns were geared for? So how do you manage that process given how broad in appeal your product is? Thank you.

Roddy Mann

Amy, this is Roddy. I’ll -- to start on the cadence change question. The feedback – the reasons for confidence around the cadence change as it relates to our specialty retail partners, to this point they’ve been pleased with what we’re doing. They completely understand that we’re shifting to the consumer schedule rather than to more a traditional wholesale schedule of launching. We’re also excited about shifting the winter release later into the season and closer to holiday. So it’s not such a big gap and time between our last calendar release of the year and the actual holiday period. So, we’ve gotten good feedback on that and it seems like winter has been -- to this point we’re pleased with how it’s selling in.

As it relates to the patterns themselves, again the blog, it may be a younger customer. I think there is as many younger customers on Facebook now positively commenting on it. So we do think that a lot of that was just how we featured those. The patterns themselves, the design team is actively working. They are looking out well in advance at the trends, reacting to what they believe is in fashion. Certainly bear in mind that we are marketing to a younger consumer increasingly and I think you’ll actually see over time, the evolution of patterns in that way. So we feel very good about the patterns in that they are the right blend for our customers across all the generations that we’re marketing to.

Amy Noblin - William Blair

Okay. Thanks. And are you in a position to give us any visibility into spring and how you’ll be shifting your pattern deliveries, if at all, after spring?

Jeffrey Blade

Yes. The spring will look like spring of this year. It will be more of a traditional release that we’ve had. So it will be apples-to-apples.

Operator

Moving on to Peter Wahlstrom with Morningstar Investment Research.

Peter Wahlstrom - Morningstar

I was hoping to get a bit more color behind the full year gross margin expectation for the year. Now you’re expecting 30 basis points expansion and you’d been assuming some channel mix benefits and potentially some tailwinds from lower cotton costs. Just trying to drill down a little bit, as how much do you attribute to a function of lower volumes, maybe some pricing pressure on newer product coming to market or discontinued outgoing patterns?

Jeffrey Blade

Sure. So the primary -- so we had originally -- when we gave guidance originally for the full year we had guided to positive 50 basis points. We had raised that to 90 when we gave Q2 guidance. So the reduction back to 30 is a function really of two things. It’s a function of the miss in the second quarter because of needing to meet more promotional and then secondly some of the uncertainty around the fourth quarter that we’ve reflected in our guidance. So, it’s really those two things. In terms of the cost of savings, we are fully realizing those and in terms of margins on any new products on an overall blended basis we are still in line.

Peter Wahlstrom - Morningstar

Okay. And quickly taking a look at the retail real estate landscape today. As you look at your pipeline for new stores and continue negotiations with some of the A mall landlords, how much is the discussion surrounding rents, length of lease, location within the mall and concessions changed within the last few months?

Roddy Mann

Pete, this is Roddy. It has not over the past few months. We have seen a general shift since the down turn off -- since the recessionary period and that we are having better tenant allowances at that point. Tenant allowances have ticked up a little bit but nothing meaningfully over the past few months. We do continue to get great locations offered to us in the malls and that’s been consistent over the past few years related a lot just to our performance.

Operator

Oliver Chen with Citi has our next question.

Oliver Chen - Citigroup

I had a question related to the patterns that had performed a little bit worse than expected in terms of the prior seasons. Going forward, do those still exist in your portfolio? Are there ones that you still have to clear through? And then my follow-up question is broadly related to your indirect line. It looks like it’s been trending more consistently than in the past. Do you feel like -- some your comments kind of led me to believe that you guys have a little bit better visibility into how that moves. Is that a true statement, if you could offer some commentary there I’d appreciate it? Thank you.

Michael Ray

I will take the first question. This is Mike. In terms of portfolio, we retired just recently about five patterns Deco Daisy, Watercolor, Viva La Vera, Plum Petals and Safari Sunset, and kind of collectively those patterns had underperformed. They might have performed well in season but the kind of life or the tail on those patterns dropped off. The encouraging news is that from the both the spring and summer seasons, we have strong patterns that continues to sell well. In addition, to the three we just launched in fall, Island Blooms and Lime’s Up are in the top tier of patterns. So, we continue to refresh the portfolio with stronger patterns. We’re parsing out some of the older underperforming patterns. So we feel good about the quality of portfolio and understanding what’s coming down the pike in terms of newness and freshness.

We’re pretty encouraged by what we’re seeing in the product performance and feel good about in the back half of the year. And with regards to the question about the indirect channel and visibility, as we mentioned in our prepared remarks, we’ve been working with our independent retailers during the year obviously as we work through and they manage through a weaker product portfolio. So, we work with them to ensure that they were able to work through inventory, to refresh their overall lineup. Work with them to make sure that as we launched the fall back-to-campus collection, which we long anticipated would be very strong, that they were properly inventoried.

Since then what we’ve seen is that they are seeing nice consumer traffic, nice sell-through that’s reflected in reorder volume. And then because of the cadence change in the timing of selling in the winter collection, we do have higher visibility than we normally would during a quarter like Q3 because that sell-in has ended. So, overall, we are feeling good about where we’re at from a visibility standpoint, with the one exception that as we go to the back half of the year we do have a little bit uncertainty around Q4.

Oliver Chen - Citigroup

Thank you. Thanks for all the detail and great work. I really like the back to school products. So, good luck.

Operator

We move on to Steven Marotta with CL King & Associates.

Steven Marotta - CL King & Associates

Quick question regarding new stores. Can you talk about the stores that have opened up in the last year and how productive they are versus the average of the chain? As well as the newer stores that have been added to the comp recently, so just over a year old, and how those are comping to the balance of the chain? Thank you.

Michael Ray

Yeah, we’ve talked for a number of quarters about the fact that what we’ve seen in the last two plus years is that the classes that we’ve been opening have been extremely productive, and we think that’s a combination of several factors. One, we continue to learn. So we opened our first retail store in 2007, so we’re still relatively new as a retailer and we continue to learn what it takes to open a successful store. As we become more successful we’re also getting much better real estate locations. So I think that’s continued to help us from an improvement standpoint. We continue to dial in the associate staffing of those stores and the overall experience.

So, all of that combined, our stores what we’ve seen in the last two plus classes and the stores that have opened thus far this year look like they are going to follow a similar trend. Is that those stores are opening very productive so they are opening at the high end or above our first year target store economics. In terms of stores rolling into the comp base, so the stores that are coming into the comp base this year, overall, some of the ones that are opening with very high productivity they’re coming into the comp base with more moderate comps as we’ve talked about in the past. And that’s a function of the fact that they’re already operating in many instances well above the sales per square foot of the mall average.

Steven Marotta - CL King & Associates

That’s helpful. And one quick follow-up, do you anticipate opening up roughly 20 doors again next year? Is that safe to assume?

Michael Ray

We haven’t guided for next year but our long-term guidance is 14 to 20 stores per year.

Operator

Randy Konik with Jefferies has our next question.

Unidentified Analyst

This is [Amanda Seguen] in for Randy. Just a question about the winter collection, you mentioned it’s been well received. Have you done any consumer testing around that and just curious how that compares to prior releases if you have. And then also on the new online outlet store, how does that fit into the overall strategy? Is this something you plan to use regularly going forward or more selectively? Thanks.

Roddy Mann

This is Roddy. Just beginning with the last question, the online outlet store. We are evaluating how we use that, so right now it’s on a selective basis. And what.…

Unidentified Analyst

I was just asking about the winter collection.

Roddy Mann

Yeah, the winter collection. Yes, we have tested winter and are pleased with how it has tested. Actually, we’re quite pleased with how Ribbons itself tested such that we were actually going to originally bring it in in a limited assortment of styles and have decided to bring in the full assortment of styles as a result.

Michael Ray

I think the other thing would be good to point out is that while we’re very kind of bullish on the patterns that are coming down the pipe, what is different about where we are today relative to history is we’re refreshing the assortment with patterns but also with great new styles. For the back-to-campus collection, we had bedding, had throw blankets, we had pillows, we had dorm rugs. We had a lot of things for decorating the dorm. And in other new styles we have an expanded backpack collection, a number of cross body styles that we launched on July 10. And those have invigorated portfolio as well. So we’re becoming over time less dependent on patterns which I think is an important thing for everybody to understand that this will be a style story as well as the merchant team starts to impact the overall assortment.

Operator

We move on to Ike Boruchow with JPMorgan.

Ike Boruchow - JPMorgan

I guess the question about the gross margins in the quarter. You guys were a little more promotional like you pointed out. I guess the question I have is, the momentum that kind of picked up mid-July and into August, was that a function of something within the portfolio, was that a function of that’s when you became more promotional, was it both? And then your outlook for the back half of the year, does that incorporate being incrementally able to do more promotional or not?

Michael Ray

What was driving the business in July, Ike, was the new products. And what continues to drive the business at the moment and we see right now is the new merchandise that we launched in late June and July, and we expect to see that continue. The nice thing about where we are right now is that we’re launching a new collection tomorrow. A year ago, there was a longer period of time between launches. So we expect to continue to build momentum as we go through the back half.

Roddy Mann

And we do not anticipate needing to operate in as promotional environment as was required during May and June.

Ike Boruchow - JPMorgan

Okay. Great. And just one quick follow-up. Jeff on the SG&A now that we are kind of annualizing a lot of those investments you made, how should we think about SG&A dollar growth and is it possible to get your SG&A guidance just for the third quarter?

Jeffrey Blade

I think if you do the math we have provided guidance on revenue margins and EPS, so I think SG&A should model out in line.

Operator

And we will go back to Jennifer Davis with Lazard.

Jennifer Davis - Lazard Capital Markets

I was wondering if you guys could talk about the release cadence for next year, will it be similar to this year, similar kind of anniversary some of this shifting? And then also wondering, if you could tell us what percent of your sales are new product and new patterns and how did this launch kind of compare to prior launches in terms of that? And then finally, did you or are you offering similar extended payment terms this holiday like you did last year? So will that be kind of apples-to-apples? Thanks.

Roddy Mann

Jen, this is Roddy. You can think of -- generally speaking think of a cadence next year as looking very similar to what it is this year. As far as the mix of new and old, I think the best representation of that, and we shared this in the prepared remarks, is that the top ten styles since the launch, half of them are new styles and half of them the classics. And this is a trend -- this is something we haven’t necessarily seen in a few seasons. So it’s a good sign that the styles we are bringing to market are performing well as well as the [line] of things we’ve had in line.

Jennifer Davis - Lazard Capital Markets

All right. I agree with that. What about patterns?

Roddy Mann

As we shift to -- Mike mentioned the Island Blooms, Lime’s Up, essentially the patterns that we have released this year are performing much better than some of the patterns from last year. Typically that’s -- naturally the case is patterns age and sort of tail off, but it’s a little bit more marked difference this year and that’s sort of why the portfolio of patterns earlier in the year was more challenging.

Jennifer Davis - Lazard Capital Markets

Okay. thanks.

Roddy Mann

Can you repeat your question on the date again?

Jennifer Davis - Lazard Capital Markets

I asked about the extended payment terms that you offered for holiday last year. Are you offering those again this year, so will that kind of be apples-to-apples?

Jeffrey Blade

Yeah, we’re not anticipating doing any extended dating terms in the back half in any material way.

Operator

And Mr. Ray, I’ll turn the conference back to you for closing remarks.

Michael Ray

Okay. We appreciate everybody’s time and thank you for joining us today and for your continued interest in Vera Bradley and our brand. We look forward to speaking with you during our third quarter conference call which will be held on December 5 at 4.30 pm. Thank you.

Operator

That concludes today’s conference. Thank you all for joining us.

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