Vera Bradley(VRA) - 2021 Q3 - Quarterly Report

FORWARD-LOOKING STATEMENTS This section outlines statements regarding future expectations and projections, which are subject to various risks and uncertainties that may cause actual results to differ materially - Forward-looking statements are based on current expectations and projections, but actual results may differ due to risks and uncertainties[12][13] - Key risks include the COVID-19 pandemic, civil unrest, inability to implement Vision 20/20, declines in comparable sales, brand maintenance, multi-channel model failure, economic conditions, inability to predict consumer demand, store operations, loss of key talent, data security breaches, tariffs, and Pura Vida acquisition integration issues[15] PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations - The financial information is unaudited and prepared in accordance with SEC rules, condensing certain GAAP disclosures[42] - The COVID-19 pandemic had a material adverse impact on overall consumer demand, traffic, and sales, as well as the Company's operating results during the first nine months of fiscal 2021[43][163] ITEM 1. FINANCIAL STATEMENTS This item provides the unaudited condensed consolidated financial statements and comprehensive notes on accounting policies and key financial details Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity at specific points in time Condensed Consolidated Balance Sheets (in thousands) | Metric | Oct 31, 2020 | Feb 1, 2020 | Change | | :--------------------------------- | :----------- | :---------- | :----- | | Assets | | | | | Cash and cash equivalents | $75,765 | $49,917 | +$25,848 | | Short-term investments | $1,068 | $8,977 | -$7,909 | | Accounts receivable, net | $36,027 | $24,290 | +$11,737 | | Inventories | $141,588 | $123,606 | +$17,982 | | Total current assets | $271,852 | $218,789 | +$53,063 | | Total assets | $541,174 | $535,061 | +$6,113 | | Liabilities & Equity | | | | | Accounts payable | $27,136 | $20,235 | +$6,901 | | Earn-out liability | $— | $18,448 | -$18,448 | | Total current liabilities | $79,197 | $87,405 | -$8,208 | | Long-term debt | $30,000 | $— | +$30,000 | | Total liabilities | $207,200 | $201,242 | +$5,958 | | Total shareholders' equity | $304,828 | $303,770 | +$1,058 | Condensed Consolidated Statements of Operations This statement presents the company's revenues, expenses, and net income or loss over specific reporting periods Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | 13 Weeks Ended Oct 31, 2020 | 13 Weeks Ended Nov 2, 2019 | 39 Weeks Ended Oct 31, 2020 | 39 Weeks Ended Nov 2, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net revenues | $124,849 | $127,501 | $325,903 | $338,289 | | Cost of sales | $51,018 | $59,631 | $138,263 | $152,618 | | Gross profit | $73,831 | $67,870 | $187,640 | $185,671 | | Selling, general, and administrative expenses | $61,703 | $69,423 | $183,640 | $184,465 | | Operating income (loss) | $12,164 | $(1,476) | $4,089 | $2,227 | | Net income (loss) | $8,974 | $(982) | $1,764 | $2,331 | | Net income attributable to Vera Bradley, Inc. | $8,874 | $139 | $753 | $3,588 | | Basic net income per share | $0.27 | $0.00 | $0.02 | $0.11 | | Diluted net income per share | $0.26 | $0.00 | $0.02 | $0.10 | Condensed Consolidated Statements of Comprehensive Income This statement details the company's net income and other comprehensive income or loss, reflecting all changes in equity during the period except those resulting from investments by and distributions to owners Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | 13 Weeks Ended Oct 31, 2020 | 13 Weeks Ended Nov 2, 2019 | 39 Weeks Ended Oct 31, 2020 | 39 Weeks Ended Nov 2, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $8,974 | $(982) | $1,764 | $2,331 | | Unrealized (loss) gain on available-for-sale debt investments | $(1) | $(3) | $(172) | $121 | | Cumulative translation adjustment | $11 | $(22) | $22 | $(1) | | Comprehensive income (loss), net of tax | $8,984 | $(1,007) | $1,614 | $2,451 | | Less: Comprehensive income (loss) attributable to redeemable noncontrolling interest | $100 | $(1,121) | $1,011 | $(1,257) | | Comprehensive income attributable to Vera Bradley, Inc. | $8,884 | $114 | $603 | $3,708 | Condensed Consolidated Statements of Shareholders' Equity This statement outlines changes in the company's equity accounts, including common stock, retained earnings, and accumulated other comprehensive income, over specific periods Condensed Consolidated Statements of Shareholders' Equity (in thousands, except share data) | Metric | Balance at Feb 1, 2020 | Balance at Oct 31, 2020 | | :------------------------------------------ | :--------------------- | :--------------------- | | Common Stock (shares) | 33,503,249 | 33,414,490 | | Treasury Stock (shares) | 8,011,372 | 8,393,207 | | Additional Paid-in Capital | $100,357 | $103,282 | | Retained Earnings | $307,414 | $308,598 | | Accumulated Other Comprehensive Income | $158 | $8 | | Treasury Stock (value) | $(104,159) | $(107,060) | | Total Shareholders' Equity of Vera Bradley, Inc. | $303,770 | $304,828 | - The company repurchased 381,835 shares for $2.9 million during the thirty-nine weeks ended October 31, 2020[25] Condensed Consolidated Statements of Cash Flows This statement categorizes cash inflows and outflows into operating, investing, and financing activities, providing insight into the company's liquidity and solvency Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 39 Weeks Ended Oct 31, 2020 | 39 Weeks Ended Nov 2, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net cash provided by (used in) operating activities | $1,630 | $(9,235) | | Net cash provided by (used in) investing activities | $17,995 | $(67,010) | | Net cash provided by (used in) financing activities | $6,201 | $(11,248) | | Net increase (decrease) in cash and cash equivalents | $25,848 | $(87,494) | | Cash and cash equivalents, end of period | $75,765 | $25,999 | - Net cash provided by operating activities significantly increased to $1.6 million from a $9.2 million use, primarily due to changes in assets and liabilities, including deferred rent payments[239] - Net cash provided by investing activities was $18.0 million, a substantial shift from a $67.0 million use, mainly due to decreased capital expenditures and the absence of a large business acquisition (Pura Vida) in the current period[241] - Financing activities were positively impacted by $30.0 million in net borrowings under the credit agreement, partially offset by a $18.7 million contingent consideration payment for the Pura Vida acquisition[243] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and additional information regarding the accounting policies, significant transactions, and balances presented in the financial statements Note 1. Description of the Company and Basis of Presentation This note describes the company's business segments, the impact of the COVID-19 pandemic on operations, and the basis for financial statement presentation - Vera Bradley operates three reportable segments: VB Direct, VB Indirect, and Pura Vida (acquired July 2019)[41] - The COVID-19 pandemic caused material adverse impacts on consumer demand, traffic, and sales, leading to temporary store closures, furloughs, and cost reductions[43][44][45] - As of October 31, 2020, substantially all furloughed associates have returned, most base compensation reductions reinstated, and $30.0 million of the $60.0 million credit agreement borrowing has been repaid[47] - The company is leveraging CARES Act tax provisions for retention credits and payroll tax deferrals[48] Note 2. Revenue from Contracts with Customers This note details the company's revenue recognition policies and disaggregates net revenues by product category and operating segment Net Revenues by Product Category and Segment (Thirteen Weeks Ended October 31, 2020, in thousands) | Product Category | VB Direct Segment | VB Indirect Segment | Pura Vida Segment | Total Net Revenues | | :----------------- | :---------------- | :------------------ | :---------------- | :----------------- | | Bags | $28,536 | $8,453 | $— | $36,989 | | Apparel/Footwear | $11,055 | $4,406 | $744 | $16,205 | | Travel | $14,400 | $4,758 | $— | $19,158 | | Accessories | $14,352 | $2,607 | $22,676 | $39,635 | | Home | $8,067 | $839 | $— | $8,906 | | Other | $1,767 | $1,281 | $908 | $3,956 | | Total | $78,177 | $22,344 | $24,328 | $124,849 | Net Revenues by Product Category and Segment (Thirty-Nine Weeks Ended October 31, 2020, in thousands) | Product Category | VB Direct Segment | VB Indirect Segment | Pura Vida Segment | Total Net Revenues | | :----------------- | :---------------- | :------------------ | :---------------- | :----------------- | | Bags | $74,087 | $20,236 | $— | $94,323 | | Travel | $37,594 | $9,529 | $— | $47,123 | | Accessories | $34,626 | $6,167 | $74,295 | $115,088 | | Apparel/Footwear | $27,778 | $10,986 | $982 | $39,746 | | Home | $17,970 | $1,492 | $— | $19,462 | | Other | $4,192 | $2,893 | $3,076 | $10,161 | | Total | $196,247 | $51,303 | $78,353 | $325,903 | - Contract liabilities (unearned revenue) were $3.7 million as of October 31, 2020, down from $3.9 million at February 1, 2020[69] - Accounts receivable, net, increased to $31.6 million as of October 31, 2020, from $16.3 million at February 1, 2020[70] Note 3. Leases This note provides information on the company's lease arrangements, including lease costs and the impact of COVID-19 on rent payments - Temporary store closures due to COVID-19 resulted in deferred rent payments and immaterial rent abatements[73][75] Total Lease Cost (in thousands) | Lease Cost Type | 13 Weeks Ended Oct 31, 2020 | 13 Weeks Ended Nov 2, 2019 | 39 Weeks Ended Oct 31, 2020 | 39 Weeks Ended Nov 2, 2019 | | :------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Operating lease cost | $6,723 | $7,254 | $20,485 | $21,621 | | Variable lease cost | $1,730 | $2,189 | $4,283 | $6,954 | | Short-term lease cost | $117 | $114 | $262 | $447 | | Total lease cost | $8,570 | $9,557 | $25,030 | $29,022 | - The weighted-average remaining lease term as of October 31, 2020, was 5.6 years[78] Note 4. Earnings Per Share This note presents the calculation of basic and diluted earnings per share, including the impact of stock-based awards and redeemable noncontrolling interest Basic and Diluted Earnings Per Share (in thousands, except per share data) | Metric | 13 Weeks Ended Oct 31, 2020 | 13 Weeks Ended Nov 2, 2019 | 39 Weeks Ended Oct 31, 2020 | 39 Weeks Ended Nov 2, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to Vera Bradley, Inc. | $8,874 | $139 | $753 | $3,588 | | Weighted-average common shares (basic) | 33,411 | 33,907 | 33,382 | 34,104 | | Dilutive effect of stock-based awards | 566 | 207 | 407 | 251 | | Weighted-average common shares (diluted) | 33,977 | 34,114 | 33,789 | 34,355 | | Basic net income per share | $0.27 | $0.00 | $0.02 | $0.11 | | Diluted net income per share | $0.26 | $0.00 | $0.02 | $0.10 | - The redeemable noncontrolling interest is classified in temporary equity and adjusted each period for income/loss and to the higher of redemption or carrying value, impacting retained earnings and EPS calculations[83] Note 5. Fair Value of Financial Instruments This note describes the company's fair value measurements for financial instruments and discusses impairment charges related to store assets - Fair value measurements are categorized into Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[86] - The company recorded $3.8 million in impairment charges for store assets (property, plant, and equipment, and lease right-of-use assets) for the thirty-nine weeks ended October 31, 2020, driven by COVID-19 impacts[88][90] - Goodwill and intangible assets were not impaired, but future deterioration in economic conditions due to COVID-19 could lead to material impairment charges[91][92] Note 6. Debt This note details the company's credit agreement, including outstanding borrowings, availability, and compliance with covenants - The company has a $75.0 million asset-based revolving Credit Agreement, maturing September 7, 2023[93][100] Credit Agreement Status (in millions) | Metric | Oct 31, 2020 | Feb 1, 2020 | | :-------------------- | :----------- | :---------- | | Outstanding borrowings | $30.0 | $— | | Availability | $45.0 | $75.0 | - The Credit Agreement includes various affirmative and negative covenants, and the company was in compliance as of October 31, 2020[96][98] Note 7. Income Taxes This note provides information on the company's effective tax rates and the factors influencing changes in tax expense Effective Tax Rate | Period | Oct 31, 2020 | Nov 2, 2019 | | :-------------------- | :----------- | :---------- | | 13 Weeks Ended | 24.4% | 26.9% | | 39 Weeks Ended | 45.5% | 26.7% | - Changes in the effective tax rate were primarily due to the relative impact of permanent and discrete items, particularly stock-based compensation[102][103] Note 8. Stock-Based Compensation This note outlines the company's stock-based compensation plans, including restricted stock unit grants and unrecognized compensation costs - Stock-based compensation expense is recognized for restricted stock units (RSUs) at fair market value on the grant date[104] Restricted Stock Unit Grants (39 Weeks Ended October 31, 2020) | Period | Number of RSUs Granted | Aggregate Fair Value | | :-------------------- | :--------------------- | :------------------- | | 39 Weeks Ended Oct 31, 2020 | 1,460,130 | $6.1 million | | 39 Weeks Ended Nov 2, 2019 | 416,944 | $5.4 million | - As of October 31, 2020, $6.3 million of unrecognized compensation cost related to nonvested RSUs is expected to be recognized over a weighted-average period of 1.8 years[112] Note 9. Commitments and Contingencies This note discloses significant legal proceedings and other commitments that could potentially impact the company's financial position - The company faces a lawsuit from Vesi Incorporated alleging breach of fiduciary duty and other claims, seeking at least $10.0 million in damages[114] - A class-action lawsuit by Chidimma Igboakaeze alleges various California Labor Code violations related to wages, overtime, and breaks[115][117] - Management believes current claims will not have a material adverse effect and intends to vigorously defend itself[113][114][117] Note 10. Common Stock This note provides details on the company's common stock, including share repurchase programs and treasury stock holdings - The $50.0 million share repurchase program (2018) was temporarily suspended on March 20, 2020, due to COVID-19 and extended through December 11, 2021, but remains suspended[118][119] Share Repurchase Activity (39 Weeks Ended October 31, 2020) | Metric | Value | | :------------------------------------------ | :---------- | | Shares repurchased | 381,835 | | Aggregate amount | $2.9 million | | Remaining available under program | $32.9 million | - As of October 31, 2020, the company held 8,393,207 treasury shares with an aggregate carrying amount of $107.1 million[121] Note 11. Investments This note describes the composition of the company's cash equivalents, short-term, and long-term investments - Cash equivalents primarily consist of money market funds[122] Short-Term Investments (in thousands) | Type | Oct 31, 2020 | Feb 1, 2020 | | :-------------------------- | :----------- | :---------- | | U.S. corporate debt securities | $727 | $3,435 | | Non-U.S. corporate debt securities | $341 | $1,136 | | Commercial paper | $— | $2,489 | | Municipal securities | $— | $1,594 | | U.S. asset-backed securities | $— | $323 | | Total short-term investments | $1,068 | $8,977 | Long-Term Investments (in thousands) | Type | Oct 31, 2020 | Feb 1, 2020 | | :-------------------------- | :----------- | :---------- | | U.S. corporate debt securities | $151 | $5,613 | | Non-U.S. corporate debt securities | $327 | $2,409 | | U.S. asset-backed securities | $— | $5,498 | | Other foreign securities | $— | $810 | | Non-U.S. asset-backed securities | $— | $582 | | Total long-term investments | $478 | $14,912 | Note 12. Acquisition of Pura Vida This note details the acquisition of Pura Vida, including the purchase price, contingent payments, and the put/call agreement for the remaining interest - Vera Bradley acquired a 75% interest in Pura Vida on July 16, 2019, for approximately $75.0 million cash[128] - A contingent payment of $18.7 million was made in Q1 fiscal 2021 based on Pura Vida's 2019 adjusted EBITDA[129] - A Put/Call Agreement allows for the acquisition of the remaining 25% interest between the fifth and tenth anniversaries of the closing date[130] Pura Vida Acquisition Fair Value at Acquisition Date (in thousands) | Asset/Liability | Fair Value | | :------------------------------------------ | :--------- | | Total assets acquired | $146,285 | | Total liabilities assumed | $17,443 | | Contingent consideration related to earn-out provision | $(20,098) | | Redeemable noncontrolling interest | $(32,210) | | Cash acquired | $(1,495) | | Total closing consideration amount, net of cash acquired | $75,039 | Note 13. Redeemable Noncontrolling Interest This note explains the redeemable noncontrolling interest representing the portion of Pura Vida not owned by Vera Bradley and changes in its value - Redeemable noncontrolling interest represents the 25% ownership in Pura Vida not held by Vera Bradley[144] Changes in Redeemable Noncontrolling Interest (in thousands) | Metric | Balance at Feb 1, 2020 | Balance at Oct 31, 2020 | | :------------------------------------------ | :--------------------- | :--------------------- | | Balance at beginning of period | $30,049 | $29,654 (as of Aug 1, 2020) | | Net income (loss) attributable to redeemable noncontrolling interest | $(200) (Feb-May) | $1,111 (May-Aug) | | Distributions to redeemable noncontrolling interest | $(296) (Feb-May) | $(579) (May-Aug) | | Adjustment to redemption value | $9,305 (Feb-May) | $(9,736) (May-Aug) | | Balance at end of period | $38,858 (as of May 2, 2020) | $29,146 (as of Oct 31, 2020) | Note 14. Intangible Assets and Goodwill This note provides information on the carrying value and amortization of intangible assets and goodwill, including potential impairment risks Intangible Assets (excluding goodwill) Carrying Value (in thousands) | Asset Type | Oct 31, 2020 | Feb 1, 2020 | | :-------------------------- | :----------- | :---------- | | Customer Relationships | $12,065 | $18,934 | | Non-competition Agreements | $585 | $703 | | Pura Vida Brand | $36,668 | $36,668 | | Total intangible assets, excluding goodwill | $49,318 | $56,305 | - Goodwill related to the Pura Vida acquisition remained at $44.3 million as of October 31, 2020[150] - The weighted-average amortization period for definite-lived intangible assets is 3.6 years[150] - Future impacts of COVID-19 could lead to material impairment charges for goodwill and intangible assets[153] Note 15. Inventories This note details the composition of the company's inventories, including raw materials and finished goods Inventories (in thousands) | Component | Oct 31, 2020 | Feb 1, 2020 | | :-------------------------- | :----------- | :---------- | | Raw materials | $1,110 | $1,056 | | Finished goods | $140,478 | $122,550 | | Total inventories | $141,588 | $123,606 | Note 16. Segment Reporting This note presents financial information by the company's three reportable segments: VB Direct, VB Indirect, and Pura Vida - The company has three reportable segments: VB Direct, VB Indirect, and Pura Vida[155] Segment Net Revenues (in thousands) | Segment | 13 Weeks Ended Oct 31, 2020 | 13 Weeks Ended Nov 2, 2019 | 39 Weeks Ended Oct 31, 2020 | 39 Weeks Ended Nov 2, 2019 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | VB Direct | $78,177 | $78,397 | $196,247 | $243,913 | | VB Indirect | $22,344 | $24,087 | $51,303 | $63,971 | | Pura Vida | $24,328 | $25,017 | $78,353 | $30,405 | | Total | $124,849 | $127,501 | $325,903 | $338,289 | Segment Operating Income (Loss) (in thousands) | Segment | 13 Weeks Ended Oct 31, 2020 | 13 Weeks Ended Nov 2, 2019 | 39 Weeks Ended Oct 31, 2020 | 39 Weeks Ended Nov 2, 2019 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | VB Direct | $19,777 | $14,675 | $31,634 | $45,172 | | VB Indirect | $9,342 | $9,324 | $18,575 | $24,193 | | Pura Vida | $402 | $(4,483) | $4,046 | $(5,025) | | Corporate unallocated | $(17,357) | $(20,992) | $(50,166) | $(62,113) | | Total Operating Income (Loss) | $12,164 | $(1,476) | $4,089 | $2,227 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's analysis of financial performance, liquidity, and cash flows, detailing COVID-19 impacts and strategic responses - The COVID-19 pandemic significantly impacted operations, leading to store closures, reduced traffic, and sales declines, though e-commerce operations remained open[163] - The company implemented various actions to mitigate COVID-19 impacts, including temporary store closures, furloughs, compensation reductions, credit agreement drawdowns, and expense management[168] - As of October 31, 2020, most stores have reopened, furloughed associates returned, and $30.0 million of the credit agreement borrowing was repaid[164][166] COVID-19 This section details the significant operational and financial impacts of the COVID-19 pandemic and the company's strategic responses - COVID-19 led to widespread disruptions, including store and factory closures, reduced consumer demand, and adverse impacts on sales[163] - Company actions included temporary store closures, furloughing 80% of the workforce, reducing executive compensation, suspending share repurchases, drawing $60.0 million from the credit agreement, and cutting non-payroll expenses[168] - By October 31, 2020, nearly all stores reopened, most associates returned from furlough, and $30.0 million of the credit agreement was repaid[164][166] - The company leveraged CARES Act tax provisions for retention credits and payroll tax deferrals[167] Executive Summary This section provides a high-level overview of the company's strategic initiatives and key financial performance metrics for the quarter - Vera Bradley launched a new e-commerce site, migrated to cloud-based Microsoft D365 systems, expanded mask offerings, and introduced new collections/collaborations[169] - Pura Vida expanded its signature cord bracelets, metal, "mood," and semi-precious collections, launched a "celestial" collection, expanded "above the keyboard" offerings, and began European wholesale distribution[170] Q3 Fiscal 2021 Financial Summary (vs. Q3 Fiscal 2020) | Metric | Q3 FY21 (Oct 31, 2020) | Q3 FY20 (Nov 2, 2019) | Change | | :------------------------------------------ | :--------------------- | :-------------------- | :----- | | Net revenues | $124.8 million | $127.5 million | -2.1% | | VB Direct segment sales | $78.2 million | $78.4 million | -0.3% | | VB Indirect segment sales | $22.3 million | $24.1 million | -7.2% | | Pura Vida segment sales | $24.3 million | $25.0 million | -2.8% | | Gross profit | $73.8 million | $67.9 million | +8.8% | | Gross profit margin | 59.1% | 53.2% | +5.9 pp | | Operating income (loss) | $12.2 million | $(1.5) million | +$13.7 million | | Net income attributable to Vera Bradley, Inc. | $8.9 million | $0.1 million | +$8.8 million | | Cash and cash equivalents and investments | $77.3 million | N/A | N/A | How We Assess the Performance of Our Business This section explains the key financial metrics and operational factors used by management to evaluate the company's business performance - Net revenues include sales of merchandise, distribution, and shipping/handling fees, less returns and discounts, across VB Direct, VB Indirect, and Pura Vida segments[171][172] - Comparable sales are calculated for stores open at least 12 months and e-commerce operations, with Pura Vida e-commerce included from Q3 FY21. Year-to-date comparable sales for FY21 are not meaningful due to COVID-19 store closures[173][174] - Gross profit is net revenues minus cost of sales, influenced by volume, pricing, operational efficiencies, promotions, commodity prices, tariffs, and labor costs[175][176] - SG&A expenses encompass selling, advertising, marketing, product development, and administrative costs[177] Pura Vida Acquisition This section discusses the strategic rationale and financial implications of the Pura Vida acquisition, including its consolidation into the company's reporting segments - Vera Bradley acquired 75% of Pura Vida on July 16, 2019, for $75.0 million cash, with a subsequent $18.7 million contingent payment in Q1 FY21[184][185] - Pura Vida is a rapidly growing, digitally native lifestyle brand, and its acquisition aims to strengthen Vera Bradley through product diversification and growth[184] - Pura Vida has been fully consolidated since July 17, 2019, and is now a reportable segment[186] Impairment Charges This section details the impairment charges recognized for store assets, primarily driven by the adverse effects of the COVID-19 pandemic - Impairment charges of $3.8 million were recognized for property, plant, and equipment and lease right-of-use assets in underperforming Direct segment stores during the thirty-nine weeks ended October 31, 2020[187] - The COVID-19 pandemic, including temporary store closures, was the main driver of these impairment charges[188] - Future economic deterioration due to COVID-19 could result in additional material impairment charges[189] Results of Operations This section provides a comprehensive analysis of the company's consolidated financial performance, including net revenues, gross profit, and operating expenses Consolidated Results of Operations Summary (in thousands, except percentages) | Metric | 13 Weeks Ended Oct 31, 2020 | 13 Weeks Ended Nov 2, 2019 | 39 Weeks Ended Oct 31, 2020 | 39 Weeks Ended Nov 2, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net revenues | $124,849 (100.0%) | $127,501 (100.0%) | $325,903 (100.0%) | $338,289 (100.0%) | | Gross profit | $73,831 (59.1%) | $67,870 (53.2%) | $187,640 (57.6%) | $185,671 (54.9%) | | SG&A expenses | $61,703 (49.4%) | $69,423 (54.4%) | $183,640 (56.3%) | $184,465 (54.5%) | | Operating income (loss) | $12,164 (9.7%) | $(1,476) (-1.2%) | $4,089 (1.3%) | $2,227 (0.7%) | | Net income attributable to Vera Bradley, Inc. | $8,874 (7.1%) | $139 (0.1%) | $753 (0.2%) | $3,588 (1.1%) | Consolidated Results of Operations Summary This summary table presents key consolidated financial metrics and their percentages of net revenues for the current and prior periods Consolidated Results of Operations Summary (in thousands, except percentages) | Metric | 13 Weeks Ended Oct 31, 2020 | 13 Weeks Ended Nov 2, 2019 | 39 Weeks Ended Oct 31, 2020 | 39 Weeks Ended Nov 2, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net revenues | $124,849 (100.0%) | $127,501 (100.0%) | $325,903 (100.0%) | $338,289 (100.0%) | | Gross profit | $73,831 (59.1%) | $67,870 (53.2%) | $187,640 (57.6%) | $185,671 (54.9%) | | SG&A expenses | $61,703 (49.4%) | $69,423 (54.4%) | $183,640 (56.3%) | $184,465 (54.5%) | | Operating income (loss) | $12,164 (9.7%) | $(1,476) (-1.2%) | $4,089 (1.3%) | $2,227 (0.7%) | | Net income attributable to Vera Bradley, Inc. | $8,874 (7.1%) | $139 (0.1%) | $753 (0.2%) | $3,588 (1.1%) | Thirteen Weeks Ended October 31, 2020, Compared to Thirteen Weeks Ended November 2, 2019 This section analyzes the company's financial performance for the thirteen-week period, comparing key metrics and segment results to the prior year - Net revenues decreased 2.1% to $124.8 million, with mask sales representing approximately 10% of consolidated net revenues[195] - VB Direct net revenues decreased 0.3%, with e-commerce sales up 48.8% offset by a 19.1% decline in comparable store sales[196] - VB Indirect net revenues decreased 7.2% due to reduced orders and fewer accounts[197] - Pura Vida net revenues decreased 2.8%, with e-commerce sales up 17.2% offset by a decline in wholesale[198] - Gross profit margin increased to 59.1% from 53.2%, primarily due to the absence of $6.2 million Pura Vida inventory step-up amortization and cotton mask sales[199] - SG&A expenses decreased 11.1% due to COVID-19 cost reduction initiatives (compensation, non-payroll expenses), reduced depreciation, and lower lease expenses[200][201] - Operating income improved by $13.7 million to $12.2 million, and Net income attributable to Vera Bradley, Inc. increased by $8.8 million to $8.9 million[204][213] Thirty-Nine Weeks Ended October 31, 2020, Compared to Thirty-Nine Weeks Ended November 2, 2019 This section analyzes the company's financial performance for the thirty-nine-week period, comparing key metrics and segment results to the prior year - Net revenues decreased 3.7% to $325.9 million, with mask sales representing approximately 10% of consolidated net revenues[214] - VB Direct net revenues decreased 19.5% due to temporary store closures, lower traffic, and cancellation of the annual outlet sale, partially offset by a 59.0% increase in e-commerce sales[215] - VB Indirect net revenues decreased 19.8% due to reduced orders from specialty and department stores[216] - Pura Vida net revenues increased significantly to $78.4 million from $30.4 million in the partial prior-year period (due to acquisition timing)[217] - Gross profit margin increased to 57.6% from 54.9%, primarily due to the absence of $7.2 million Pura Vida inventory step-up amortization and mask sales, despite $1.3 million in purchase order cancellation charges[218] - SG&A expenses decreased 0.4% but increased as a percentage of net revenues to 56.3% (from 54.5%), due to sales de-leverage, incremental Pura Vida operating expenses ($21.0 million), Vera Bradley store impairment charges ($3.8 million), and increased intangible asset amortization ($4.1 million), partially offset by COVID-19 cost reductions[219][220][221] - Operating income increased by $1.9 million to $4.1 million, but Net income attributable to Vera Bradley, Inc. decreased by $2.8 million to $0.8 million[223][231] Liquidity and Capital Resources This section discusses the company's sources of liquidity, capital expenditures, and cash flow activities, including the impact of the credit agreement General Liquidity This section outlines the company's primary sources of liquidity and its ability to meet anticipated cash needs - Primary liquidity sources are cash on hand, cash equivalents, investments, and cash flow from operations, with access to a $75.0 million asset-based revolving credit agreement[232] - As of October 31, 2020, $30.0 million was outstanding under the credit agreement, with $45.0 million available[251] - Despite anticipated increased cash needs due to COVID-19, current liquidity sources are expected to be sufficient[233] Investments This section describes the company's investment portfolio, including cash equivalents, short-term, and long-term debt securities - Cash equivalents primarily consist of money market funds[234] - Short-term investments consist of U.S. and non-U.S. corporate debt securities with maturity within one year[235] - Long-term investments consist of U.S. and non-U.S. corporate debt securities with maturity greater than one year[236] Cash Flow Analysis This section provides a detailed analysis of cash flows from operating, investing, and financing activities for the reporting period Cash Flow Summary (in thousands) | Cash Flow Activity | 39 Weeks Ended Oct 31, 2020 | 39 Weeks Ended Nov 2, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net cash provided by (used in) operating activities | $1,630 | $(9,235) | | Net cash provided by (used in) investing activities | $17,995 | $(67,010) | | Net cash provided by (used in) financing activities | $6,201 | $(11,248) | - Net cash provided by operating activities significantly increased to $1.6 million from a $9.2 million use, primarily due to changes in assets and liabilities, including deferred rent[239] - Net cash provided by investing activities was $18.0 million, a substantial shift from a $67.0 million use, mainly due to decreased capital expenditures and the prior-year Pura Vida acquisition[241] - Net cash provided by financing activities was $6.2 million, compared to an $11.2 million use, primarily due to $30.0 million net borrowings under the Credit Agreement, partially offset by a $18.7 million contingent consideration payment for Pura Vida[243] Credit Agreement This section details the terms of the company's asset-based revolving credit agreement, including outstanding borrowings and compliance with covenants - The company has a $75.0 million asset-based revolving Credit Agreement, maturing September 7, 2023[244][251] - As of October 31, 2020, $30.0 million was outstanding, with $45.0 million availability, and the company was in compliance with all covenants[248][251] - The agreement includes various affirmative and negative covenants, such as restrictions on debt, liens, investments, and a minimum fixed charge coverage ratio[247][249] Off-Balance-Sheet Arrangements This section confirms the absence of off-balance-sheet financing or unconsolidated special-purpose entities - The company has no off-balance-sheet financing or unconsolidated special-purpose entities[252] Critical Accounting Policies and Estimates This section refers to the company's critical accounting policies and estimates as detailed in its Annual Report on Form 10-K - No significant changes were made to the critical accounting policies and estimates as of October 31, 2020, which are detailed in the Annual Report on Form 10-K[254] Recently Issued Accounting Pronouncements This section directs readers to Note 1 for information on recently issued accounting pronouncements - Refer to Note 1 for details on recently issued accounting pronouncements[255] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section confirms no material changes to market risks as of October 31, 2020, compared to the prior Annual Report on Form 10-K - No material changes to market risks were reported as of October 31, 2020, compared to the prior Annual Report on Form 10-K[257] ITEM 4. CONTROLS AND PROCEDURES This section confirms the effectiveness of disclosure controls and procedures, detailing the integration of Pura Vida and changes from new ERP and e-commerce platforms - Disclosure controls and procedures were effective as of October 31, 2020[258] - The Pura Vida business, representing approximately 25% of total assets and 20-24% of net revenues, was integrated into internal control over financial reporting as of August 1, 2020[259] - A new ERP system and e-commerce platform were implemented during the quarter, leading to certain changes in internal control over financial reporting[260] PART II. OTHER INFORMATION This part provides additional information including legal proceedings, risk factors, unregistered sales of equity securities, and a list of exhibits - The section includes information on legal proceedings, risk factors, equity sales, and exhibits[261][264][274][277] ITEM 1. LEGAL PROCEEDINGS This section details two significant legal proceedings, including a lawsuit seeking at least $10.0 million and a class-action lawsuit, with the company denying liability - Vesi Incorporated filed a lawsuit against the company seeking at least $10.0 million for alleged breach of fiduciary duty, unfair competition, defamation, and tortious interference[261] - Chidimma Igboakaeze filed a class-action lawsuit alleging various California Labor Code violations related to wages, overtime, and breaks[262] - The company denies liability and intends to vigorously defend itself, not currently able to estimate a material adverse loss[261][262] ITEM 1A. RISK FACTORS This section updates risk factors, focusing on the ongoing adverse impacts of the COVID-19 pandemic on revenue, operations, and supply chain, alongside the importance of brand strength - The COVID-19 pandemic continues to cause significant disruptions to revenue streams, operations, and the global supply chain, potentially leading to further adverse impacts on financial results and share price[265][267][268] - Specific impacts include reduced traffic and sales despite store reopenings, potential for additional closures, production and logistics constraints (China production ~20% in FY21), and increased shipping costs[265][266] - Mitigation efforts, such as temporary furloughs, compensation reductions, and credit agreement drawdowns, may introduce additional risks (e.g., increased interest costs) or be ineffectual[269][270][271] - The business relies on strong brands and effective digital marketing, and failure in these areas could adversely impact results[272][273] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the temporary suspension of the company's $50.0 million share repurchase program due to COVID-19, with no activity during the quarter and remaining available funds - The $50.0 million share repurchase program (2018) was temporarily suspended on March 20, 2020, due to COVID-19 and remains suspended, though extended to December 11, 2021[274] - No shares were repurchased under the program during the thirteen weeks ended October 31, 2020[275][276] - As of October 31, 2020, $32.9 million remained available for repurchases under the program[276] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including the 2020 Equity and Incentive Plan, CEO and CFO certifications, and Inline XBRL documents - Exhibits include the 2020 Equity and Incentive Plan, CEO and CFO certifications (Section 302 and 906), and Inline XBRL documents[277]