Fort Wayne-based Vera Bradley Inc. (Nasdaq: VRA) is reporting a fiscal first quarter net loss of $4.1 million, compared to net income of $6.9 million during the same period the previous year. Chief Executive Officer Robert Wallstrom says the company remains committed to its long-term strategic plan, despite challenges attracting new customers to the brand.

June 3, 2015

News Release

Fort Wayne, Ind. — Vera Bradley, Inc. (Nasdaq:VRA) (“Vera Bradley” or the “Company”) today announced its financial results for the fiscal first quarter ended May 2, 2015.

Summary of Financial Performance

Net revenues from continuing operations totaled $101.1 million for the current year first quarter ended May 2, 2015, compared to $112.2 million in the prior year first quarter ended May 3, 2014.

For the current year first quarter, the Company posted a net loss from continuing operations of $4.1 million, or $0.10 per diluted share. Those results included net after-tax charges of $4.2 million comprised of:

–$2.1 million related to the planned closing of its Indiana manufacturing facility, primarily related to severance and lease termination charges;

–$1.5 million related to other severance and restructuring charges; and

–$0.6 million related to an income tax adjustment for an increase in income tax reserves for uncertain federal and state tax positions related to research and development tax credits.

Excluding these charges, the Company's net income from continuing operations totaled $0.1 million, or $0.00 per diluted share. In the prior year first quarter ended May 3, 2014, net income from continuing operations totaled $6.9 million, or $0.17 per diluted share.

Comments on the Quarter and Looking Ahead

Robert Wallstrom, Chief Executive Officer, noted, “Excluding the previously outlined charges, we achieved first quarter diluted EPS at the low end of our guidance. Reduced promotional activity led to better-than-planned gross margin rate performance while revenues fell below our expectations.”

Wallstrom continued, “The progress we continue to make on our key initiatives is not yet reflected in our current financial results. We are not attracting enough new customers to the brand, and traffic and sales are still very challenging.

“However, the management team remains fully committed to our long-term strategic plan. Key elements of the plan are specifically designed to drive traffic and bring new customers to Vera Bradley. We will continue to innovate and modernize our products, increase exposure to our brand and offerings by prudently growing our distribution points, and drive brand and product awareness through our elevated marketing efforts.”

Wallstrom concluded, “Growing Vera Bradley to a $1 billion company generating a high-teen operating margin remains our ultimate goal. However, until we begin to see recovery in the business, we cannot predict the timing of or provide additional updates on achieving those long-term financial targets.”

Discontinued Operations

In June 2014, the Company entered into a five-year agreement with Mitsubishi Corporation Fashion Company and Look Inc. to import and distribute Vera Bradley products in Japan. As a result of moving to this wholesale business model, the Company exited its direct business in Japan during the third quarter of fiscal 2015 and is accounting for it as a discontinued operation.

First Quarter Details

Income statement numbers referenced below reflect the Company's continuing operations and exclude the previously outlined charges related to its manufacturing facility closing, other severance and restructuring costs, and the income tax adjustment.

Current year first quarter net revenues of $101.1 million fell below the Company's guidance of $103 million to $109 million. Prior year first quarter revenues totaled $112.2 million.

Current year first quarter Direct segment revenues totaled $70.4 million, a 2.4% decrease from $72.2 million in the prior year first quarter. Comparable sales (including e-commerce) decreased 16.9% for the quarter (reflecting a 22.3% decline in comparable store sales and a 9.7% decrease in e-commerce sales), which was partially offset by new store growth (the Company opened 14 full-line and 18 factory outlet stores during the past 12 months). First quarter comparable sales were negatively impacted by year-over-year declines in store and e-commerce traffic as well as lower levels of on-line promotional activity.

Indirect segment revenues decreased 23.3% to $30.7 million from $40.0 million in the prior year first quarter, primarily due to lower re-orders from the Company's specialty retail accounts and the timing of the Company's summer product launch (which shifted approximately $3.7 million of revenues into the second quarter). In addition, there has been a modest reduction in the total number of specialty retail accounts.

Excluding the aforementioned charges, gross profit for the quarter totaled $55.1 million, or 54.5% of net revenues, compared to $59.8 million, or 53.3% of net revenues, in the prior year first quarter. The year-over-year gross margin rate improvement primarily related to increased sales of higher-margin made-for-outlet product in the Company's factory outlet stores, leverage of overhead costs due to fall 2014 cost reductions at the Company's domestic manufacturing facility, lower levels of liquidation sales, and reduced promotional activity. The gross margin rate exceeded guidance of 53.0% to 53.5% primarily due to reduced promotional activity relative to plan.

Excluding the aforementioned charges, SG&A expense totaled $55.1 million, or 54.5% of net revenues, in the current year first quarter, compared to $50.0 million, or 44.6% of net revenues, in the prior year first quarter. As expected, SG&A dollars increased over the prior year primarily due to strategic investments including incremental marketing, new store expenses, and e-commerce investments. The SG&A expense rate was at the high end of the Company's guidance of 51.9% to 54.5% due to lower than expected sales.

Excluding the aforementioned charges, operating income totaled $0.9 million, or 0.9% of net revenues, in the current year first quarter, compared to $11.3 million, or 10.1% of net revenues, in the prior year first quarter. By segment, Direct operating income was $11.5 million, or 16.3% of sales (which excluded $3.5 million of the aforementioned charges), compared to $13.8 million, or 19.1% of sales, in the prior year, and Indirect operating income was $11.1 million, or 36.0% of sales (which excluded $1.1 million of the aforementioned charges), compared to $15.4 million, or 38.6% of sales, in the prior year.

Cash and cash equivalents as of May 2, 2015 totaled $96.6 million compared to $81.5 million at the end of last year's first quarter. The Company had no debt outstanding at quarter end. Quarter-end inventory was $101.8 million, at the low end of guidance of $100 million to $110 million and compared to $126.6 million at the end of last year's first quarter. Net capital spending for the quarter totaled $7.5 million.

During the first quarter, the Company repurchased approximately $7.2 million shares of its common stock under its $40 million share repurchase plan (equating to approximately 425,000 shares at an average price of $16.90). This brings the total repurchases under the plan to approximately $20.1 million (equating to approximately 1,046,000 shares at an average price of $19.25).

Second Quarter and Fiscal Year 2016 Outlook

For the second quarter of fiscal 2016, the Company expects:

–Net revenues of $116 million to $120 million compared to prior year second quarter revenues of $119.0 million.

–A gross margin rate of 54.5% to 55.0% compared to 53.3% in the prior year second quarter.

–SG&A as a percent of sales of 48.3% to 49.3% compared to 42.6% in the prior year second quarter. The increase is p

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