Vera Bradley Announces Earnings, Recall

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Fort Wayne-based Vera Bradley Inc. (Nasdaq: VRA) is reporting fourth quarter net income of $19.4 million, compared to $25.1 million for the same period the previous year. The company says the lower profit is related to a write-down involving fabric patterns "no longer considered sustainable." The company has also announced a recall of some stuffed toys. Details about the recall are available on the Consumer Product Safety Commission website.

March 19, 2014

News Release

FORT WAYNE, Ind., March 19, 2014 -- Vera Bradley, Inc.

(Nasdaq:VRA) ("Vera Bradley" or the "Company") today announced its financial results for the fourth quarter and fiscal year ended February 1, 2014 ("fiscal 2014").

Net revenues totaled $157.5 million for the current year fourth quarter, compared to $162.6 million in the prior year fourth quarter ended February 2, 2013. 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 $3.0 million after tax, or $0.07 per share. The inventory write-down primarily related to fabrics in certain retired patterns no longer considered salable 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.

Net revenues totaled $536.0 million for fiscal 2014, compared to $541.1 million for the fiscal year ended February 2, 2013 ("fiscal 2013"). Net income totaled $58.8 million, or $1.45 per diluted share, for fiscal 2014, which included the aforementioned inventory write-down. Net income totaled $68.9 million, or $1.70 per share, for fiscal 2013.

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 of earnings per diluted share to both the fourth quarter and full year of fiscal 2013.

Robert Wallstrom, Chief Executive Officer, noted, "Even though our fourth quarter revenues and earnings were below last year's levels, the performance exceeded our previous guidance."

"We continue to face external headwinds and certain challenges within the business, and fiscal 2015 will be a year of transition for Vera Bradley," Wallstrom continued. "We have spent the last few months developing our comprehensive five-year strategic plan designed to drive improved 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. The strategic plan is our roadmap to achieve that vision and encompasses three key elements -- product, distribution channels, and marketing. We will modernize and elevate our product; evolve into a true multi-channel business as we grow our full-line store base, expand our factory outlet channel, further develop e-commerce, expand our department store presence, and stabilize our specialty/gift channel; and generate excitement for the aspirational Vera Bradley brand through our marketing efforts."

Wallstrom concluded, "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."

Fourth Quarter Details

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 in the Company's stores grew 14.5%. This growth reflected the opening of 19 full-price and four outlet stores during the past 12 months and was partially offset by a comparable-store sales decline of 10.2%. E-commerce revenues decreased 7.2% compared to the prior year. The decreases in comparable store and e-commerce sales 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.

Indirect segment revenues decreased 17.5% to $48.9 million from $59.2 million in the prior year, primarily due to lower orders from the Company's 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 aforementioned inventory write-down negatively affected the current year 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.

SG&A expense totaled $53.6 million, or 34.0% of net revenues, in the current year fourth quarter, compared to $55.8 million, or 34.3% of net revenues, in the prior year fourth quarter. SG&A expenses declined primarily as a result of tight expense management, as well as reductions in variable compensation expense 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 $40.0 million, or 24.6% of net revenues, in the prior year fourth quarter.

The effective tax rate was 36.7% for the quarter, compared to 36.9% in the same period last year.

Fiscal Year 2014 Details

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 21.0%. This growth reflected the opening of 19 full-price and four outlet stores during the past 12 months and was partially offset by a comparable-store sales decline of 5.7%.

E-commerce revenues decreased 0.3% compared to the prior year. The decreases in comparable store and e-commerce sales were due to year-over-year declines in traffic, a lower average transaction size, and underperformance of the product offering.

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 the Company's specialty retail accounts combined with closing approximately 400 wholesale accounts during the year.

Fiscal 2014 gross profit totaled $295.4 million, or 55.1% of net revenues, compared to $308.3 million, or 57.0% of net revenues, in fiscal 2013. The aforementioned inventory write-down negatively affected the current fiscal year gross margin rate by approximately 90 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.

Fiscal 2014 SG&A expense totaled $206.0 million, or 38.4% of net revenues, compared to $204.4 million, or 37.8% of net revenues, in fiscal 2013. The increase in SG&A expenses as a percent 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 headcount additions in the first half of fiscal 2014, partially offset by reductions in variable compensation expense 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.

The effective tax rate was 37.3%