Vera Bradley, Inc. (VRA) CEO Rob Wallstrom on Q1 2021 - Earnings Call Transcript
Vera Bradley, Inc. (NASDAQ:VRA) Q1 2021 Earnings Conference Call June 3, 2020 9:30 AM ET
Mark Dely - Chief Administrative Officer
Rob Wallstrom - Chief Executive Officer
John Enwright - Chief Financial Officer
Conference Call Participants
Eric Beder - SCC Research
Oliver Chen - Cowen
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley First Quarter Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded.
I would now like to turn the call over to Mark Dely. Please go ahead.
Good morning and welcome everyone. I would like to thank you for joining us for Vera Bradley's conference call. Some of the statements made 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 most recent Form 10-K 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. We undertake no obligation to update any information discussed on the call.
I will now turn the call over to Vera Bradley's CEO, Rob Wallstrom. Rob?
Thank you, Mark. Good morning everyone and thank you for joining us on today's call. John Enwright, our CFO also joins me today.
Let's start with what is on everyone's mind the COVID-19 pandemic. Undoubtedly, this has been one of the most disruptive and challenging periods in the company's history, but our strong culture and innovation are leading us through this period. We have worked to minimize the pandemic's impact on our associates, shareholders and other stakeholders. The well-being and safety of our associates and customers remain our top priorities in every decision we make. It will take time for consumer confidence, customer traffic and shopping activity to return to pre-pandemic levels. But I am confident, the actions we have taken will allow us to manage through this challenge and position us to emerge a stronger company and thrive over the long term.
With adversity comes opportunity. This crisis will have a lasting effect on consumers and transform the way they shop. Our 2019 acquisition of Pura Vida has resulted in e-commerce being a larger share of our total company revenues and the digital skills of both companies will be even more critical in this new environment. We are moving ahead with the innovation that will enhance the consumer experience and propel us forward, innovation in product, marketing and technology.
Many of our customers were anxious to shop, even as our stores were closed. Our Vera Bradley and Pura Vida e-commerce businesses combined, which represents about one-third of our total company revenues on a normalized basis was strong in the first quarter and continues to exceed last year's performance into the second quarter. At both Vera Bradley and Pura Vida, customers are responding to new product launches and our marketing initiatives. And at Vera Bradley, sales of cotton masks are also driving revenue.
We are grateful to our customers for their continued loyalty and especially thankful for our many distribution center e-commerce, customer service and other associates, who have tirelessly worked to keep our e-commerce business operating smoothly during this time.
Beginning in mid-March, we began taking several actions to navigate the COVID-19 crisis, protect our financial position, maximize liquidity and position us for a strong reopening in future. Some of the actions we took included, temporarily closing all our Vera Bradley store locations on March 19; temporarily furloughing approximately 80% of our workforce mid-quarter; temporarily reducing base compensation for remaining associates with reductions on a graduated scale ranging from 15% to 30% and 75% for me; temporarily suspending cash compensation for the Board of Directors; temporarily suspending our share buyback program; drawing $60 million from our previously unused $75 million revolving credit agreement; temporarily eliminating our 401(k) and associate charitable donation matches; tightly managing inventory levels through the cancellation of orders, delay of receipts or seeking price concessions where possible; actively working with landlords on addressing rent abatement payment terms, accelerating store closures and delaying or canceling certain planned new store openings; reducing non-payroll operating expenses including, but not limited to marketing and travel; and extending vendor payment terms. We will discuss some of these actions in more detail later in the call.
Now, I want to update you on Vision 2020 and how COVID-19 is impacting the strategy. Over two years ago, we embarked on Vision 2020, our aggressive three-year plan to restore the Vera Bradley brand and business to a healthy foundation and to return our company to solid growth.
Through fiscal 2020, we made tremendous progress on strengthening our foundation, growing our Vera Bradley brand business and accelerating our total company revenue and earnings growth with the acquisition of Pura Vida. Our fiscal 2021 goal was to drive more robust growth, but the COVID-19 crisis has significantly affected that goal. However, despite the COVID-19 situation, we remain focused on our core Vision 2020 strategies of enhancing our brands and long-term growth through heightened customer engagement, continued product innovation, while navigating through the crisis.
Now, let me turn the call over to John to review the financial results. John?
Thanks Rob and good morning. As a reminder, financial results have been consolidated to include Pura Vida beginning July 17, 2019 the first full day following the acquisition. Prior period numbers have not been restated. The current non-GAAP first quarter income statement numbers, I will discuss exclude the previously disclosed impairment charges, intangible asset amortization, expenses related to the re-platforming of our IT systems, adjustments of the Pura Vida earn-out liability and COVID-19-related charges all of which have been outlined in today's release.
Non-GAAP EPS also excludes the ASC 480 measurement adjustment described in today's release. The prior year first quarter non-GAAP income statement numbers exclude Pura Vida transaction charges. Consolidated net revenues totaled $69.3 million for the current year first quarter, a decrease of 23.9% over the prior year. Excluding Pura Vida Vera Bradley net revenues totaled $48.1 million a 47.2% decrease from $91 million in the prior year first quarter.
For the first quarter excluding charges, Vera Bradley Incorporated, non-GAAP consolidated net loss totaled $10.2 million or $0.31 per diluted share. For the prior year first quarter excluding charges, the company posted a non-GAAP net loss of $1.8 million or $0.05 per diluted share.
Vera Bradley Direct segment revenues totaled $36.8 million, a 48.2% decrease from $71.1 million in the prior year first quarter. The decline primarily resulted from the company stores that were temporarily closed as a result of COVID-19 for approximately half of the first quarter.
First quarter e-commerce sales included in the Direct segment revenues increased 20.5% over the last year. Vera Bradley Indirect segment revenues totaled $11.2 million, a 43.5% decrease from $19.9 million in the prior year first quarter. The decline was primarily due to a reduction in orders from both specialty and department stores, as well as other key accounts largely related to COVID-19 as well as a reduction in the number of specialty and department store accounts.
Pura Vida's segment revenues totaled $21.2 million in the first quarter. On a non-GAAP basis excluding charges for the cancellation of certain purchase orders resulting from COVID-19, gross profit totaled $35.5 million or 51.2% of net revenues compared to $50.5 million or 55.5% of net revenues in the prior year first quarter.
On a non-GAAP basis, excluding the previously outlined impairment charges, intangible asset amortization, information technology replatforming charges and adjustment to the Pura Vida earn-out liability and certain department store exit costs, consolidated SG&A expenses totaled $51.6 million or 74.5% of net revenues for the quarter.
On a non-GAAP basis, excluding Pura Vida transaction costs prior year first quarter consolidated SG&A expenses totaled $53.5 million or 58.7% of net revenues. On a non-GAAP basis excluding charges, the current year consolidated operating loss totaled $16.1 million or 23.2% of net revenues. On a non-GAAP basis excluding charges, the prior year first quarter operating loss totaled $2.8 million or 3.1% of net revenues.
The uncertainty surrounding COVID-19 makes fiscal 2021 financial performance extremely difficult to predict. As a result we are now providing forward-looking guidance.
Now let me turn to the balance sheet. Net capital spending for the first quarter totaled $2.2 million. We expect capital expenditures to total between $8 million to $10 million for the fiscal year, primarily related to new factory stores and technology and logistic enhancements.
During the first quarter, we repurchased approximately 2.9 million of common stock. At quarter end, we had approximately $32.9 million remaining under our $50 million share repurchase authorization. As a reminder, the Board of Directors has temporarily suspended repurchases under the plan.
Cash, cash equivalent and investments as of May 2, 2020 totaled $85.1 million compared to $144.2 million at the end of last year's first quarter. The reduction from prior year reflects the $95.2 million Pura Vida purchase price and earn-out payment netted against the $60 million drawn on our $75 million revolving credit facility during the quarter.
Quarter end inventory was $132.9 million which included $15.9 million of inventory related to Pura Vida. Inventory was $90.1 million at the end of the fiscal -- at the end of first quarter last year. We have canceled approximately 30% of our fall and winter inventory orders as a result of COVID-19 situation.
The good news is, that much of our inventory is not seasonal and does not have a shelf life of a fashion apparel. We will be rational and prudent as we clear inventory as we always try to be. Rob?
Thanks John. As I noted earlier, we remain focused on enhancing both the Vera Bradley and Pura Vida brands through innovation that will enhance consumer engagement and propel us forward; innovation in products, marketing and technology.
Let me start with Vera Bradley. Our products must remain authentic and true to our brand, but innovation is becoming more and more critical to our product assortment. We have developed an ongoing pipeline of fabric innovation to ensure market relevance, by offering cotton updates and cotton alternatives, both to retain existing customers and attract new customers to the brand.
We will continue to grow our newest offerings of Performance Twill and Re-Active and will launch more fabric innovation over the next 12 to 24 months. We will also continue to bring new styles and differentiated silhouettes to the market to meet all facets of our customer's lifestyles.
One focus is hands-free, as it is becoming increasingly important to our customers. Our long-term focus continues to be on building dominance in our key franchise areas of youth campus, travel and everyday. As a result of the current environment, we have ramped up our manufacturing and distribution of masks and other personal protective equipment. I will talk more about these initiatives in just a minute.
We are continuing with our collaborations and strategic alliances that excite and engage existing and new customers, expand our brand reach, increase brand awareness, generate media buzz, and provide opportunities for Vera Bradley to strategically test. And ultimately enter new product categories. These partnerships are truly a testament to the strength and wide appeal of our brand.
We launched our newest Disney collection on verabradley.com in March, are continuing with our Gillette Venus collaboration distribution through Target. And look forward to the second year of our collaboration with Crocs, which we'll launch in August. We are working with several other iconic internationally known brands, on exciting future product collaborations.
Most notably, we are thrilled about our collaboration with Warner Bros. Consumer Products to create a Vera Bradley, plus Harry Potter, Back to Campus and dorm line that we'll launch in July. This collaboration will not only appeal to our Vera Bradley fans, who are also Wizarding World devotees, but will also attract new customers to the Vera Bradley brand.
Under the umbrella of VB Cares, we will continue to strengthen our community support and charitable initiatives, identifying areas where we can make a real impact, particularly for women and children. We want to create positive change and often invite our customers to participate with calls to action.
We are doing all that we can to help in this unprecedented time, which includes utilizing our facilities and global supply chain to get critical and demand supplies to those in need nationwide.
Our approach is three pronged. Number one, through our Taking Care Together initiative we have tapped into our global supply chain to procure and distribute the most in-demand personal protective equipment, including millions of medical masks to support the nurses, doctors and first responders, variably taking care of all of us.
We have been able to get medical-grade surgical masks, in the hands of those who are having a difficult time maintaining appropriate supply of PPE, like smaller regional medical centers, doctors' offices retirement facilities and companies that provide critical support.
Number two, we have ramped up distribution of our Vera Bradley Healthcare Professional Collection which includes medical scrubs, other wearables and bags. And these items are available on verabradley.com.
Number three, we converted our Vera Bradley Fort Wayne selling facilities. And utilized on our global supply chain to manufacture and sell hundreds of thousands of cotton face masks, for the general public.
These masks along with filters are available on verabradley.com and in our stores. With the CDC's recommendation that everyone now use clothed, face coverings to help slow the spread of COVID-19, we are seeing a huge customer response for these items. We are supporting the nurses working tirelessly and bravely on the frontline of the COVID-19 crisis, by contributing a percentage of each cotton mask sold to the Coronavirus Response Fund, for nurses.
We are proud of our associates' commitment to and the execution of all of these efforts. And know that by working together we are making a difference. Vera Bradley has always been a brand about connecting people. And the team has really helped demonstrate that during these difficult times.
In our social media we have seen, increased strength in both new followers and customer engagement across social channels. We have also seen customers react very favourably to the amount of user-generated content that has been shared by both customers and our associates.
Earn media has been strong during the first quarter with 1.4 billion impressions. We had very good media coverage of our new and sustainable reactive fabrication, as well as the work we are doing and bringing customer face masks to the market. Our second annual collaboration with New Hope Girls for International Women's Day and our new partnership with Autism Speaks, not only generated financial support, but increased awareness through enormous media attention, for two very worthy causes.
Our mini capsule collection with Olympian Shawn Johnson East launched in May, which included a charitable tie-in with Blessings in the Backpack. While we have scaled back on media spend, we have been able to do much more with less. Our prior investments in data-driven marketing and data science to build a programmatic marketing platform helped our teams reach -- react to the uncertainty in real time.
We quickly adjusted brand speed away from categories such as, travel and beach and into areas such as, hands-free, washable, and health care products. This allowed us to drive significant double-digit improvements in paid media efficiency and revenue attributable to paid media, while lowering our overall marketing spend.
Our enhanced Voice of the Customer program is making a difference. Vera Bradley won the Verint Customer Engagement Award for providing excellence in customer service along with achieving outstanding success in customer engagement metrics including customer satisfaction and our Net Promoter Score.
Let me turn to stores and give you an update on our reopening time table. As you know many states are restarting their economies and we have begun to open Vera Bradley stores in locations where regulations allow. Following guidance from local governments and health authorities and after assessing consumer sentiment, store readiness, and our associates' willingness and ability to return to work, we are taking a prudent and measured approach to reopening our stores ensuring that we have taken necessary precautions to protect the health and safety of our associates customers and communities.
On March 5th, we began reopening our Vera Bradley full line and factory stores in a phased approach with 18 out of our 83 full-line stores and 40 out of 64 factory stores opened as of the end of May. We anticipate the majority of our store base will be opened by the end of June.
As the stores reopen, the company is implementing several procedures and precautions to keep customers and associates safe and secure. While we are making no assumptions of future performance based upon a limited number of days of sales data the 27 stores that have been opened for two weeks or more since May 5th have generated revenues in the aggregate of approximately 75% of the prior year sales while operating at reduced staffing and hours. This is better than we expected.
While traffic is typically down, conversion and units per transaction are up. We are excited to welcome back customers into our stores and we believe there is some degree of pent-up demand. As more retailers open and consumers feel more comfortable shopping, we believe Vera Bradley store traffic and sales will improve.
We are in active conversations with our landlords to address our rent obligations for the period the malls were closed. Most landlords have been open to deferrals, but are not quick to accept abatement for the close period. We hope to come to a solution that is fair to both sides for both the period in question and future periods.
During the negotiation period, we have not paid rent for the period that the malls were closed. We expect to permanently close at least 12 full-line stores during the year which will bring our total full-line closings to 38 since the beginning of fiscal 2018. We have closed five so far this year.
We will add five or six new factory stores this year; one opened in May, one is scheduled to open this month, and three are scheduled to open in July. We also just opened our expanded Myrtle Beach South Carolina factory store.
As you know we are implementing Project Novus, our new technology platform that will be flexible, streamlined, and efficient. Microsoft Dynamics 365 will be our new ERP, order management, and POS system, and Shopify Plus will be our new e-commerce platform.
The project should be complete by the end of this fiscal year and will not only lessen the complexity of our IT systems, but also will reduce ongoing expenses build a platform for the entire enterprise and enable the company to achieve our future objectives both in the short and long term. We believe it is more important than ever to make quick databased informed decisions and to further enhance our customer experience.
Now, let's talk about the innovation and excitement going on at Pura Vida. Now, more than ever we are confident in the potential of the Pura Vida business. More and more customers every day want to be part of the easy and fun Pura Vida lifestyle.
Even in the midst of the pandemic, Pura Vida's total revenues increased 8% over last year led by a 35% increase in e-commerce sales. Average order values and conversion rates continue to grow year-over-year.
Total revenue growth would have been even higher, but our distribution facility in Mexico was closed for several days and our El Salvador manufacturing facility was closed for several weeks due to the pandemic. Our distribution facility in Mexico has reopened and our El Salvador manufacturing facility has just begun to reopen.
In product, we continually introduce new styles of the Pura Vida signature core bracelets and style packs and our recent expansions into metal, mood, and semiprecious stone charms and jewelry have continued in popularity and are at higher price points than our traditional string bracelets.
Our spring launches were very successful with several key product introductions like our open heart bracelet selling out in less than a week. Hair accessories launched in May and are off to a strong start.
Personalization is a continuing popular trend. Customers can personalize their signature core bracelets by choosing the color combination special to them. Our patches, pins, and stickers are easy add-ons to sales and allow customers further -- to further customize their looks.
In January, we launched our engravable collection and we are selling hundreds of engravable bracelets, necklaces, and rings daily. We will expand this program over the next several quarters.
Pura Vida's signature charity bracelets continue to be an important element of the Pura Vida lifestyle and a big draw for our cause-minding customers. This year we have introduced charm bracelets that tied back to specific charities like save the dolphins, save the floss, save the butterflies, and save the elephants to name a few.
Several of these charity charm bracelets have been so popular that they are currently sold out that will be replenished soon. Be on the lookout for more charity charms to be added this year.
Another popular addition to the charity offering is our special charity style packs, like the clean water for all pack that benefits charity water and the breast cancer awareness pack that supports boarding for breast cancer. We even have a breast cancer awareness ring. The addition of charms and style packs to our charity component is not only enabling us to increase our price points, but increase our total donations to these great causes. We will continue to innovate and expand in this signature area of the business.
Pura Vida is expanding on the distribution front. Early in the second quarter, we launched Candid Shopify fulfillment capabilities. We have also signed an agreement with Hectic Europe known for its experienced warehouse and logistics team and established transportation network for the wholesale distribution of our products in Europe to complement our existing e-commerce business and third-party fulfillment there. We already have many Pura Vida fans around the world and this global expansion will allow us to not only serve those customers, but expand our reach to others.
Due to COVID-19, we have made the decision to postpone the opening of Pura Vida's first lab store that was scheduled to open in San Diego this fall. We are excited about this potential experiential location that will allow us to showcase existing products, get customer feedback on new product innovations and provide the backdrop for Instagramable moments and influencer events. The success of this location will help us determine the path for future Pura Vida store expansion.
Pura Vida is also expert at engaging customers and is always looking for new ways to enhance engagement as well as bring new customers into the Pura Vida lifestyle. Our popular monthly bracelet and jewelry clubs provide our members great value, monthly surprises and exclusive products and a continual connection to Pura Vida. We have launched a new loyalty program called The Shore Club. Customer gets -- get points for following us on Instagram and Facebook and of course, for buying products. Accumulated points earned can be redeemed for discounts and free merchandise.
We continually interact with our customers through social media and even ask our customers what should we make next. Our customers mean everything to us. And that's why we always want to hear what they have to say whether it's feedback about the brand a fun idea for our next product or a new cause they think we should support. In fact, some of our best-selling styles have been designed thanks to fan feedback.
On the marketing front, Pura Vida's social media engagement is strong. An army of brand ambassadors in close to 150,000 micro influencers are an active part of the brand and a key part of our marketing strategy. We will continue to build upon these very impactful programs particularly, focusing on those with the greatest number of followers. These passionate advocates help us spread the Pura Vida movement, showing their love for the brand while scoring perks along the way.
Pura Vida is one of the most highly engaged brands in the accessory space surpassing the 2 million market followers on Instagram and that number is growing monthly. Pura Vida is consistently looked at as the most -- as one of the most if not the most engaged jewelry brands on Instagram.
And we are excited that we have signed an agreement with dancer and TikTok star Charli D'Amelio to launch a Pura Vida bracelet influencer style pack this holiday season. With over 55 million followers, she is the most-followed personality on TikTok and was called the Reigning Queen of TikTok by the New York Times. Charli's target demographic fits perfect with the Pura Vida brand.
Before I close, I want to take a mention -- I wanted to mention that as a corporation, we are strengthening our stance as a sustainable purpose-driven company that delivers meaningful social impact and value for all stakeholders, our associates, our customers, our shareholders and our communities. Although our company has been purpose-driven throughout our history, we are enhancing that focus and increasing the visibility to our activities in this area.
In the first quarter, we published our comprehensive corporate responsibility and sustainability report, which was mailed with our proxy materials and is available on our website. This report outlines our ESG accomplishments and initiatives in detail.
I am so proud of how our organization has responded to this unprecedented crisis. Even while working remotely our teams have been collaborative and demonstrated focused and thoughtful decision-making innovation, tenacity and flexibility. Our extraordinary culture has allowed us to not only persevere through the prices, but has made us stronger. We look forward to fully reopening business and returning to our new normal.
Operator, we will now open up the call to questions.
Thank you. [Operator Instructions] And we can now take our first question from Eric Beder from SCC Research. Please go ahead. Your line is open.
Good morning, Eric.
Two questions. One is what was the response to Re-Active? And I know that you had some of it opened before you closed out. And are you seeing the younger customer that was the goal for that?
Yeah. The overall response to Re-Active has been extremely positive and across a couple of areas. First of all, we are seeing a younger customer really react to that. And I believe that's for two reasons. One is the sustainability aspect of it that they're reacting very strongly too. And the second is really the active influence in kind of a lifestyle of it.
In addition to that, we've had a lot of media coverage on it. Obviously, the environment and sustainability is so important that a lot of people are picking that up, because we're able to have a true impact there. And we really believe that that will be the first of many actions over the next few years as we continue to make our products more sustainable.
And then the rollout of stores you've done a significant number of outlets and a lesser number of full price stores. Is that by design or is that just kind of happen stance on what's opening up and how you can handle it?
It really is by design for a couple of reasons. One is that, our outlet stores are more outside, right? They're outdoor malls and we're finding the consumer seems to be responding and feeling more comfortable in the outdoor environment. So, we believe that's very important, as well as the volume levels in our outlet stores are higher. And therefore, even with the lower revenue as we begin to open up, they're still very positive for us.
So we thought, we would focus our energy where the consumer is responding more and where we have the best economic environment. And – but we're working hard to get our full line stores open. And we're targeting to have all of our stores open hopefully by the beginning of July, depending upon government regulations, how the health situation continues to evolve. But assuming all those liens go as expected, we would expect to have our stores open by the beginning of July.
And last question is the Harry Potter collection going to be in the outlets or the full-price stores or a combination of both? How is that going to flow out?
So it's going to be in our full line doors as well as on our website on verabradley.com.
And our partner stores too, and our Indirect channel too that will also have it.
Okay. Thank you.
And we can now take our next question from Oliver Chen from Cowen. Please go ahead.
Hi. Good morning. Thank you. The pent-up demand number impressive of that 75% productivity. What are your thoughts how that may trend with the other opening vintages? And were you – how are you prepared relative to competition as you thought about labor and inventory – regional differences?
Could you repeat the first part of your question? I think...
Yeah. Oliver, you're a little bit hard to hear, because we were – didn't quite get it.
The productivity the 75% positive number was impressive. So I just would love your thoughts on, how you plan inventories and labor? And also how that would trend with other new store openings and regional differences?
So let me try to answer it and Oliver please ask, if I missed part of it, because it still broke up a little bit. But overall, as we've opened our stores what we're finding is that our Southern and Midwestern stores are the ones that have been the strongest. You really see in certain communities really an aggressive pushback to kind of get back to a state of normal and those are the areas that have responded the quickest. We've seen in our Texas location that has started a little bit slower, but it's beginning to pick up momentum.
The amount of openings that we have in the Northeast right now right really, we're not really open in the Northeast. So we'll watch that. The areas that have been hit harder by the health crisis, we'll see how they return. We anticipate it might start off a little bit slower, but we've been very say positively – as we felt very good about how the sales have opened. We thought that they would open up much slow than they did. And so now the real next stage for us is not only getting the rest of the stores open, but just seeing that curve and how did that – does that continue to build week-after-week, month-after-month.
From an inventory standpoint, what we did is we did go ahead and reduced our inventory purchases when we entered into the crisis a lot of that reduction happens in the back half of the year. Just the way the pipeline works that's where a lot of the reductions happened. It's kind of in the back half of the year as well as the very beginning of next year. But we feel overall very good in terms of where our inventory position is going to be. Due to the nature of our product, which is less seasonal, we were able to take even some of the product that was produced for this year and bring it back next year or reposition it later in the year, which really allowed us to get our inventory back in line quicker.
So if we were stuck with a lot of seasonality, we would've had a really hard time making that. So we feel really good about that. And then obviously, we're just making sure that with each location as it opens up that we're just managing that inventory by geography right very different by area, and how the consumers reflected. So – but luckily, with all the tools we've been putting in place the technology, the data analytics, we're in a much better place to execute against that than we might have been just a year ago.
And the only thing I would add to that is in regards to labor, I think your question also asked about labor. We assume we open up in kind of a minimum staff position, but as our stores have performed, we've kind of ramped staffing up to support the levels of the customer demand so.
And the other thing, we've also been really happy in seeing the store volume response, because keep in mind that we're operating on reduced hours and reduced capacity. So, getting these numbers with reduced hours and reduced capacity has definitely been encouraging.
Yeah, that certainly is. On the real estate footprint, what are your thoughts now for your overall store base and the nature of lease renewal, as we really rethink physical state post-crisis and what might be necessary?
Yes, as we look at the physical real estate, two different things are happening, right? One, we have to make sure that we're very, very hyper-diligent on store location, and make sure that we're looking at each market and what is the right number. And I would agree that a number of locations we need tomorrow, will be less than we might have needed five years ago. So we're making sure that we're being very focused on that.
The second thing that's happening though, with what's happening in real estate and real estate costs, because I think that what we have seen happen over the last few years is that occupancy rates have been climbing and climbing, and making the brick-and-mortar environment highly, highly challenging.
What's been happening with this crisis is I think it's been forcing landlords to re-evaluate that cost structure. And some of those opportunities for reduced rents, all of a sudden make the economics of brick-and-mortar better than what we have been seeing in the last couple of years. So we're kind of navigating the balance of the two.
Because at the end of the day having the right economics, we know that customers still want a physical presence as well as the digital presence. We believe strength is in the combination of the two, but we need to make sure that the economics in the brick-and-mortar world work. And where we can get that right, we think we can provide an exceptional experience for our customer, and it really helps us engage and find new customers for the brand.
Thank you. And our last question is, you've been agile with product innovation and you have launches ahead. Overall, what will that do to your average unit retail and margin mix, if there are implications as you roll up on the decisions you're making?
And then also, do you expect merchandise margin to be down versus prior year, just given the environment and what you're seeing?
A couple of different things. So, as you talk about all the new product come in, we don't expect a huge difference in AUR. Some of the fabrics like Performance Twill obviously have a higher retail than our cotton product has had. But at the same time, we're also trying to remix the styles. So what we're finding is that the hands-free movement cross bodies, belt bags, are growing as a penetration to the total, which put some downward pressure on price.
At the same time, some of the fabric innovation might be putting some upward pressure on price. But we think that the equilibrium is pretty close. From a margin standpoint, I would say the same thing overall. When we introduce a product, it might be slightly less than the margin, but with time it gets better as we build up scale.
In terms of what we expect for the rest of the year, we do still expect some margin pressure as we go through the year. But so far, I would say, we've been encouraged that we haven't seen a kind of a massive run to the bottom shall, you say, in the retail environment how the stores are opening up. Obviously, we've seen more pressure in the seasonal apparel category. But in the Accessory category, we haven't seen a significant downward pressure on pricing, which is good to see.
Thanks, Rob. Thanks, John. Best regards.
There no further questions at this time. I would now like to turn the call back to Rob for any closing remarks.
Well, thank you very much for joining us on today's call. Vera Bradley Inc. is an authentic, iconic lifestyle company with two powerful brands and passionate emotionally connected customers. We are focused on continual innovation in product, customer engagement and technology.
We have a solid balance sheet and ample liquidity, are socially conscious and ESG-focused and our leadership team is entrepreneurial and agile. We will weather the storm and come out on the other side a stronger company.
Thank you for your interest and support, and we hope you can join us for our second quarter call on September 2.
Thank you. That concludes today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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