Vera Bradley, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this report, particularly under the headings “Risk Factors” and “Business.” This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity, and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See “Forward-Looking Statements.” These forward-looking statements are subject to numerous risks and uncertainties, including those described under “Risk Factors.” Our actual results could differ materially from those suggested or implied by any forward-looking statements. The COVID-19 Pandemic During fiscal 2021, the COVID-19 pandemic resulted in global travel restrictions, quarantines, and certain factory closures or reduced operations, as well as mall closures and reduced mall operating hours. Although the Vera Bradley and Pura Vida e-commerce operations remained open during this time, the aforementioned items had a material adverse impact on overall consumer demand, traffic, and sales during the period. We took various actions to navigate the pandemic which included, but were not limited to, temporarily closing all Vera Bradley store locations on March 19, 2020; temporarily furloughing 80% of our workforce during the middle of the first quarter; temporarily reducing base compensation for certain associates; preserving cash by drawing on our Credit Agreement, which was repaid during the fourth quarter of the 2021 fiscal year; and managing inventory, rent, and other expenses. During the second quarter of fiscal 2021, we brought back substantially all associates from furlough and began to reinstate portions of the base compensation reductions. On May 5, 2020, we began to open our Vera Bradley retail stores in a phased approach. All factory and full line stores were opened as of the end of the prior-year, although with reduced hours, lower staffing levels, reduced foot traffic, and greatly enhanced safety protocols. Our retail stores remained open during fiscal 2022; however, guidance and mandates from governments and public health officials may necessitate closures to some, or all, of our retail stores which we cannot predict. We have also experienced certain global supply chain disruptions due in part to the COVID-19 pandemic further discussed under Supply Chain Disruptions below. The sales of cotton face masks, coupled with a full year of Pura Vida operations, helped to offset sales declines otherwise associated with Vera Bradley in fiscal 2021. Net revenues from masks represented approximately 2% and 10% of consolidated net revenues for fiscals 2022 and 2021, respectively. We cannot predict the impact that the COVID-19 pandemic could have on our future liquidity, operating results, and financial condition, but it could have a significant adverse effect on these metrics. Supply Chain Disruptions During fiscal 2022 for the Vera Bradley brand, we faced supply chain disruptions that caused delivery delays. We are working diligently to mitigate the situation, but expect shipping delays and inbound and outbound freight expense increases to continue for the near future. We have also been impacted by higher tariffs from previously duty-free countries, where we source products, as a result of the Generalized System of Preferences (“GSP”) duty-free status expiring at the end of calendar year 2020. We cannot guarantee if or when the GSP duty-free status will be reinstated and retro-actively applied by Congress. These matters could have a material adverse effect on our liquidity, operating results, and financial condition. In the fourth quarter of fiscal 2022, we began initiating strategic price increases across both of our brands to mitigate some of these inflationary and supply chain pressures, and we will continue to implement price increases throughout fiscal 2023. Executive Summary Some of our major achievements for fiscal 2022 are as follows: • In the Vera Bradley product area: • We accelerated our robust fabric innovation pipeline to develop new fabric offerings and continued to build on our platform of sustainable fabrics. We expanded our full-line Performance Twill and recycled Re-Active collections and our Factory Ultralight fabrication and launched our Cotton ReIMAGINED Collection crafted from 50% recycled and 50% conventional cotton. We are constantly researching and innovating to bring our 36 Table of Contents customers more eco-friendly options, with a goal of updating 100% of our fabrics to more sustainable alternatives by 2025. • We continued another year of high-profile product collaborations with several iconic brands, including Disney, Harry Potter, and Crocs to create and sell limited-edition product collections and launched our collaboration with Classic Accessories for a first-ever outdoor collection. • We expanded our apparel collection, adding graphic tees, puffer jackets, vests, leggings, and a larger selection of pajamas to our already popular cozy collection of sleepwear and robes. • In the Vera Bradley distribution area: • We continued to strengthen and rationalize our store base. We opened six new factory stores and closed five underperforming full-line stores, ending the fiscal year with 70 full-line and 75 factory locations. • We continued to focus on enhancing and reinventing the customer experience in our full-line stores, and certain digital shopping additions that gained popularity during the pandemic have remained popular, like appointment selling, buy-online/pick-up in-store, and curbside pickup. • We continued to expand our options for customers to shop . • We launched our Canadian website as our first international, localized website experience which is managed internally. • We continue to be excited about alternative payments such as AfterPay, which is driving higher units per transaction and increased sales. • As sustainability and resale continue to gain traction, so does our partnership with ThredUp, which was launched in early fiscal 2022. • We added Chewy.com as a new distribution partner for our line of pet products. • We opened a Vera Bradley store in the LAX airport as part of our travel expansion focus. • In the Vera Bradley marketing area: • Our investments in customer data science and business analytics have continued to position us well, allowing us to collect and analyze data and respond to customer changes and adjust marketing spend in an agile way. • We continue to engage, diversify, and grow our customer base through analytics, targeted marketing, and VB Cares efforts. Vera Bradley’s customer count grew by nearly 15% over last year essentially bringing us back to pre-pandemic levels, and social media followers continue to grow, with Facebook at nearly 2 million, Instagram approaching 600,000, and TikTok climbing. • Our targeted digital media, traditional media, and public relations efforts drove increased brand awareness and improved earned media, with total media impressions up approximately 140% to slightly over 22 billion for the year. • Our customer service model and voice of the customer program continued to drive industry-leading customer satisfaction scores. • Regarding Pura Vida's infrastructure: • We completed Pura Vida’s ERP integration, so that our entire enterprise is now on a unified technology platform, allowing for enhanced capabilities in sourcing, customer service, CRM, and data analytics. • We strengthened key merchandising, inventory planning, and customer analytics’ functions at Pura Vida. • In the Pura Vida Product area: • We continued to show strength as a lifestyle brand by successfully expanding into new product categories, including shirts, hoodies, and backpacks. This lifestyle appeal will continue to be a key driver of growth. • We entered into several high-profile product collaborations, including Hello Kitty, Disney, and Harry Potter, bringing new customers to our brand. In addition, we launched our first jewelry collection with Outer Banks star and influencer Madison Bailey, which is appealing to a more diverse customer. • In the Pura Vida Distribution area: • Pura Vida opened its first retail store in San Diego’s Westfield UTC Mall in August. Since opening, sales have far surpassed expectations in our San Diego e-commerce business relative to the rest of the country demonstrating the power a retail presence has in driving digital sales, omni-channel loyalty, and spending. • We continued to add new wholesale partnerships, adding over 400 new accounts in fiscal 2022, exceeding our expectations. In addition, Dillard’s joined Nordstrom as a Pura Vida department store distributor. 37 Table of Contents • We added Pura Vida shop-in-shops to 23 full-line Vera Bradley stores and completed our roll out of the Pura Vida charity bracelet program to all Vera Bradley full-line and factory locations. • In the Pura Vida Marketing area: • Pura Vida’s social media engagement remains exceptional, as one of the most highly-engaged brands in the accessories space on social media, with over 2.0 million Instagram followers and over 450,000 TikTok followers, a little more than a year after launch. • Pura Vida continued to rank at the top of the industry for our net promoter and customer satisfaction scores. • We reinforced our commitment to be a Purpose- and ESG-driven organization. • In fiscal 2022, Pura Vida completed its B-Corp Impact Assessment, and in February 2022 was awarded the B Corporation Certification. • We continued to strengthen our community support and charitable efforts under the umbrella of VB Cares, particularly through organizations that can profoundly improve the lives of women and children, including raising $1.5 million to the Vera Bradley Foundation Center for Breast Cancer Research, bringing total contributions to date to $37.5 million, and entering the third consecutive year of partnership with Blessings in a Backpack, raising and donating approximately $750,000 to date, with the help of our customers, to the organization. • Charity bracelets and other products continued to be an important element of the Pura Vida lifestyle and an important draw for our cause-minded customers. To date, Pura Vida has raised and donated over $4.0 million to a myriad of special causes. • We amplified our Company-wide diversity and inclusion initiative, Project Quilt, to continue to enhance diversity, equality, and inclusion, focusing on three key areas – the Associate Experience, the Customer Experience, and the Community Experience. • We further strengthened and diversified our Board of Directors with the addition of Nancy Twine, bringing our female board representation to 60%, making us one of only 8% of the Russell 3000 Index companies with gender-balanced boards according to the 50/50 Women on Boards Gender Diversity Directory™. Financial Summary Refer to “The COVID-19 Pandemic” for additional information regarding the impacts of the pandemic on fiscal 2021 financial results. • Net revenues were $540.5 million in fiscal 2022 compared to $468.3 million in fiscal 2021. • Vera Bradley Direct (“VB Direct”) segment sales were $354.9 million in fiscal 2022 compared to $289.3 million in fiscal 2021. • Vera Bradley Indirect (“VB Indirect”) segment sales were $66.0 million in fiscal 2022 compared to $66.5 million in fiscal 2021. • Pura Vida segment sales were $119.6 million in fiscal 2022 compared to $112.5 million in fiscal 2021. • Gross profit was $287.9 million (53.3% of net revenue) in fiscal 2022 compared to $265.5 million (56.7% of net revenue) in fiscal 2021. COVID-19-related purchase order cancellations totaled $1.3 million (0.3% of net revenue) during fiscal 2021. • SG&A expenses were $262.0 million (48.5% of net revenue) in fiscal 2022 compared to $252.6 million (53.9% of net revenue) in fiscal 2021. • During fiscal 2022, SG&A expenses included $3.1 million of Pura Vida intangible asset amortization and $0.1 million of store asset impairment charges. • During fiscal 2021, SG&A expenses included $9.2 million of Pura Vida intangible asset amortization and other purchase-related charges; $7.4 million of store asset impairment charges; $2.7 million of charges related to Project Novus; and $0.2 million of COVID-19-related charges. • Operating income was $26.9 million (5.0% of net revenue) in fiscal 2022 compared to $13.1 million (2.8% of net revenue) in fiscal 2021. • During fiscal 2022, operating income included $3.1 million of Pura Vida intangible asset amortization and $0.1 million of store asset impairment charges. 38 Table of Contents • During fiscal 2021, operating income included $9.2 million of Pura Vida intangible amortization and other purchase-related charges; $7.4 million of store asset impairment charges; $2.7 million of charges related to Project Novus; and $1.5 million of COVID-19-related charges. • Net income attributable to Vera Bradley, Inc. was $17.8 million in fiscal 2022 compared to $8.7 million in fiscal 2021. • During fiscal 2022, net income attributable to Vera Bradley, Inc. included $1.8 million of Pura Vida intangible asset amortization and store impairment charges. • During fiscal 2021, net income attributable to Vera Bradley, Inc. included $5.0 million of Pura Vida intangible asset amortization and purchase-related charges; $4.5 million of store asset impairment charges; $2.1 million of charges related to Project Novus; and $1.1 million of COVID-19-related charges. • Diluted net income per share was $0.52 in fiscal 2022 compared to $0.26 in fiscal 2021. The aforementioned charges impacted net income per share by $0.05 and $0.38 in fiscal 2022 and 2021, respectively. • Cash, cash equivalents, and investments were $88.4 million at January 29, 2022 compared to $65.5 million at January 30, 2021. • Capital expenditures for fiscal 2022 totaled $5.5 million compared to $5.7 million for fiscal 2021. • Repurchases of common stock for fiscal 2022 totaled $7.7 million, or 0.9 million shares, compared to $2.9 million, or 0.4 million shares, in fiscal 2021. How We Assess the Performance of Our Business In assessing the performance of our business, we consider a variety of performance and financial measures. Net Revenues Net revenues reflect sales of our merchandise and revenue from distribution and shipping and handling fees, less returns and discounts. Revenues for the VB Direct segment reflect sales through Vera Bradley full-line and factory outlet stores; the Vera Bradley websites verabradley.com and verabradley.ca; and our Vera Bradley online outlet site. There were no sales from our Vera Bradley annual outlet sale in Fort Wayne, Indiana for the past two years as it was cancelled due to the COVID-19 pandemic. Revenues for the VB Indirect segment reflect sales of Vera Bradley-branded products to specialty retail partners; department stores; national accounts; third-party e-commerce sites; third-party inventory liquidators; and royalties recognized through licensing agreements related to the Vera Bradley brand. Revenues for the Pura Vida segment reflect revenues generated through the Pura Vida websites, www.puravidabracelets.com, www.puravidabracelets.eu, and www.puravidabracelets.ca, through the distribution of Pura Vida-branded products to wholesale retailers, and through Pura Vida's first retail store opened in August 2021. Comparable Sales Typically, comparable sales are calculated based upon our stores that have been open for at least 12 full fiscal months and net revenues from our Vera Bradley e-commerce operations. Pura Vida e-commerce operations are included within the Company's comparable sales beginning with the fiscal 2021 third quarter. Pura Vida e-commerce operations include sales from the subscription club. Comparable store sales are calculated based solely upon stores that have been open for at least 12 full fiscal months. Remodeled stores are included in both comparable sales and comparable store sales unless the store was closed for more than one week of the current or comparable prior period, in which case the non-comparable temporary closure periods are not included, or the remodel resulted in a significant change in square footage. Some of our competitors and other retailers calculate comparable or “same store” sales differently than we do. As a result, data in this report regarding our comparable sales and comparable store sales may not be comparable to similar data made available by other companies. Non-comparable sales include sales from stores not included in comparable sales or comparable store sales. As a result of the temporary closure of all Vera Bradley stores due to COVID-19 during portions of the first and second quarters of fiscal 2021, the Company's fiscal 2022 and fiscal 2021 comparable store sales and comparable sales calculations are not meaningful and therefore are not provided. Typically, measuring the change in year-over-year comparable sales allows us and our investors to evaluate how our store base and e-commerce operations are performing. Various factors affect our comparable sales, including: • Overall economic trends; • Consumer preferences and fashion trends; • Competition; 39 Table of Contents • The timing of our releases of new patterns and collections; • Changes in our product mix; • Pricing and level of promotions; • Amount of store, mall, and e-commerce traffic; • The level of customer service that we provide in stores and to our on-line customers; • Our ability to source and distribute products efficiently; • The number of stores we open and close in any period; and • The timing and success of promotional and marketing efforts. Gross Profit Gross profit is equal to our net revenues less our cost of sales. Cost of sales includes the direct cost of purchased merchandise, distribution center costs, operations overhead, duty, and all inbound freight costs incurred. The components of our reported cost of sales may not be comparable to those of other retail and wholesale companies. Gross profit can be impacted by changes in volume; fluctuations in sales price; operational efficiencies, such as leveraging of fixed costs; promotional activities, including free shipping; commodity prices, such as for cotton; tariffs; and labor costs. Selling, General, and Administrative Expenses (“SG&A”) SG&A expenses include selling; advertising, marketing, and product development; and administrative expenses. Selling expenses include: • VB Direct business expenses, such as store expenses, employee compensation, and store occupancy and supply costs; • VB Indirect business expenses consisting primarily of employee compensation and other expenses associated with sales to Indirect retailers; and • Pura Vida business expenses primarily related to employee compensation. Advertising, marketing, and product development expenses include employee compensation, media costs, creative production expenses, marketing agency fees, new product design costs, public relations expenses, and market research expenses. A portion of our advertising expenses may be reimbursed by Indirect retailers, and such amount is classified as other income. Administrative expenses include employee compensation for corporate functions, corporate headquarters occupancy costs, consulting and software expenses, and charitable donations. SG&A expenses include intangible asset amortization and store impairment charges. Other Income, Net Other income, net primarily includes certain legal settlements and sales tax credits received for timely filings. Fiscal year 2020 included proceeds from the sales of tickets to our annual outlet sale. Operating Income Operating income is equal to gross profit less SG&A expenses plus net other income. Operating income excludes interest income, interest expense, and income taxes. Income Before Income Taxes Income before income taxes is equal to operating income plus interest income less interest expense. Net Income Net income is equal to income before income taxes less income tax expense. Net Income (Loss) Attributable to Redeemable Noncontrolling Interest Net income (loss) attributable to redeemable noncontrolling interest represents the operating results of Pura Vida that are not attributable to Vera Bradley, Inc. 40 Table of Contents Net Income Attributable to Vera Bradley, Inc. Net income attributable to Vera Bradley, Inc. is equal to net income less net income (loss) attributable to redeemable noncontrolling interest. Pura Vida Acquisition On July 16, 2019, the Company completed its acquisition of a seventy-five percent (75%) ownership interest in Creative Genius, Inc. or Pura Vida (the “Transaction”) in exchange for total cash consideration of approximately $75.0 million. During the third quarter of fiscal 2020, the Company provided additional cash consideration of approximately $3.0 million for a working capital adjustment. The Company also received a working capital reimbursement of $1.0 million during the first quarter of fiscal 2021. Additional measurement period adjustments were recorded for conditions that existed as of the acquisition date. Pura Vida, based in La Jolla, California, is a growing, digitally native, and highly engaging lifestyle brand that deeply resonates with its loyal consumer following. The Pura Vida brand has a differentiated and expanding offering of bracelets, jewelry, and other lifestyle accessories. The Company believes that the acquisition strengthened the Company by providing increased product diversification and future growth opportunities partially as a result of resource and knowledge-sharing. In accordance with the Interest Purchase Agreement, the Company also agreed to a contingent payment of up to $22.5 million payable during the first quarter of calendar year 2020 based on calendar year 2019 adjusted EBITDA of Pura Vida, as defined in the Interest Purchase Agreement. This contingent payment was made during the first quarter of fiscal 2021 totaling $18.7 million. The Company’s existing available cash, cash equivalents, and investments funded the purchase price due at the closing of the Transaction and subsequent to the closing. There were no transaction costs during fiscals 2022 and 2021. Pre-tax transaction costs totaled $2.7 million for fiscal 2020. These costs are recorded within selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations and within corporate unallocated expenses. Pura Vida has been fully consolidated within our financial statements beginning on July 17, 2019, the first full day following the acquisition. Pura Vida was also added as a reportable segment as a result of the acquisi tion. Refer to Note 14 to the No tes to the Consolidated Financial Statements herein for additional information regarding the Pura Vida acquisition. Impairment Charges Property, plant, and equipment and lease right-of-use assets (the “asset group” for store-related assets) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. The reviews are conducted at the lowest identifiable level of cash flows. If the estimated undiscounted future cash flows related to the asset group are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, as further defined in Note 2 to the Notes to the Consolidated Financial Statements herein. Impairment charges of $0.1 million and $7.4 million were recognized in the fiscal years ended January 29, 2022 and January 30, 2021, respectively, for property, plant, and equipment assets and lease right-of-use assets related to underperforming stores and are included in SG&A expenses in the Consolidated Statements of Operations and in impairment charges in the Consolidated Statements of Cash Flows. The impairment charges are included in the VB Direct segment. There were no impairment charges recorded during the fiscal year ended February 1, 2020. The COVID-19 pandemic, including the temporary closure of Vera Bradley retail stores beginning in mid-March of fiscal 2021, significantly impacted the Company's operations and cash flows which was the main driver of the impairment charges in fiscal 2021. We are unable to predict the extent of the impact that the COVID-19 pandemic will have on our operations, the economy, or other factors; therefore, it is possible additional impairments could be identified in future periods, and such amounts could be material. 41 Table of Contents Results of Operations The following tables summarize key components of our consolidated results of operations for the last three fiscal years, both in dollars and as a percentage of our net revenues. Fiscal 2020 includes Pura Vida operations beginning on July 17, 2019, the first full business day following the acquisition. Refer to Note 14 to the Notes to Consolidated Financial Statements herein for additional information. Fiscal Year Ended (1) ($ in thousands) January 29, 2022 January 30, 2021 February 1, 2020 Statement of Income Data: Net revenues $ 540,453 $ 468,272 $ 495,212 Cost of sales 252,510 202,754 223,411 Gross profit 287,943 265,518 271,801 Selling, general, and administrative expenses (2) 261,993 252,588 253,425 Other income 961 135 1,098 Operating income 26,911 13,065 19,474 Interest expense (income), net 263 1,203 (1,085) Income before income taxes 26,648 11,862 20,559 Income tax expense (3) 6,430 1,173 5,315 Net income 20,218 10,689 15,244 Less: Net income (loss) attributable to redeemable noncontrolling interest 2,380 2,008 (803) Net income attributable to Vera Bradley, Inc. $ 17,838 $ 8,681 $ 16,047 Percentage of Net Revenues: Net revenues 100.0 % 100.0 % 100.0 % Cost of sales 46.7 % 43.3 % 45.1 % Gross profit 53.3 % 56.7 % 54.9 % Selling, general, and administrative expenses 48.5 % 53.9 % 51.2 % Other income 0.2 % — % 0.2 % Operating income 5.0 % 2.8 % 3.9 % Interest expense (income), net — % 0.3 % (0.2) % Income before income taxes 4.9 % 2.5 % 4.2 % Income tax expense 1.2 % 0.3 % 1.1 % Net income 3.7 % 2.3 % 3.1 % Less: Net income (loss) attributable to redeemable noncontrolling interest 0.4 % 0.4 % (0.2) % Net income attributable to Vera Bradley, Inc. 3.3 % 1.9 % 3.2 % 42 Table of Contents The following tables present net revenues by operating segment, both in dollars and as a percentage of our net revenues, and Vera Bradley full-line and factory outlet store data for the last three fiscal years: Fiscal Year Ended (1) ($ in thousands, except as otherwise indicated) January 29, 2022 January 30, 2021 February 1, 2020 Net Revenues by Segment: VB Direct $ 354,875 $ 289,274 $ 347,484 VB Indirect 66,001 66,517 81,811 Pura Vida 119,577 112,481 65,917 Total $ 540,453 $ 468,272 $ 495,212 Percentage of Net Revenues by Segment: VB Direct 65.7 % 61.8 % 70.2 % VB Indirect 12.2 % 14.2 % 16.5 % Pura Vida 22.1 % 24.0 % 13.3 % Total 100.0 % 100.0 % 100.0 % Fiscal Year Ended January 29, 2022 January 30, 2021 February 1, 2020 Vera Bradley Store Data (4) : Total stores opened during period 6 6 6 Total stores closed during period (5) (13) (11) Total stores open at end of period 145 144 151 Comparable sales (including e-commerce) increase (5) NM NM 3.4 % Total gross square footage at end of period 397,037 380,100 386,028 Average net revenues per gross square foot (6) $ 633 NM $ 652 (1) The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to January 31. Fiscal years 2022, 2021, and 2020 consisted of 52 weeks. (2) Impairment charges, related to underperforming stores, totaled $0.1 million and $7.4 million during the fiscal years ended January 29, 2022 and January 30, 2021, respectively. There were no impairment charges recorded during the fiscal year ended February 1, 2020. (3) Includes a $2.8 million tax benefit related to the net operating loss carryback provisions of the CARES Act in fiscal 2021. (4) Includes Vera Bradley full-line and factory outlet stores. (5) Comparable sales are calculated based upon stores that have been open for at least 12 full fiscal months and net revenues from e-commerce operations. Increase is reported as a percentage of the comparable sales for the same period in the prior fiscal year. Remodeled stores are included in comparable sales unless the store was closed for a portion of the current or comparable prior period, in which case the non-comparable temporary closure periods are not included, or the remodel resulted in a significant change in square footage. As a result of Vera Bradley retail stores being temporarily closed for approximately half of the first and second quarters of fiscal 2021, comparable sales were not meaningful and were therefore not provided for fiscal years 2022 and 2021. (6) Dollars not in thousands. Average net revenues per gross square foot are calculated by dividing total net revenues for our stores that have been open at least 12 full fiscal months as of the end of the period by total gross square footage for those stores. Remodeled stores are included in average net revenues per gross square foot unless the store was closed for a portion of the period. As a result of Vera Bradley retail stores being temporarily closed for approximately half of the first and second quarters of fiscal 2021, average net revenues per gross square foot were not meaningful and were therefore not provided for fiscal year 2021. Fiscal 2022 Compared to Fiscal 2021 Net Revenues For fiscal 2022, net revenues increased $72.2 million, or 15.4%, to $540.5 million, from $468.3 million for fiscal 2021. VB Direct. For fiscal 2022, net revenues increased $65.6 million, or 22.7%, to $354.9 million, from $289.3 million for fiscal 2021. The increase primarily resulted from higher store sales in the current-year since in the prior-year the Company’s stores 43 Table of Contents temporarily closed, as a result of COVID-19, beginning on March 19, 2020. The stores began to re-open on May 5, 2020 of the prior-year. The increase was partially offset by a decline in mask sales compared to the prior-year period. We also opened six Vera Bradley factory outlet stores over the past 12 months. VB Indirect. For fiscal 2022, net revenues decreased $0.5 million, or 0.8%, to $66.0 million, from $66.5 million for fiscal 2021. The decline was primarily due to a reduction in mask sales compared to the prior-year period, partially offset by an increase in orders from specialty and certain key accounts in other product categories, largely related to the impacts of COVID-19 in the prior-year period. Pura Vida . For fiscal 2022, net revenues increased $7.1 million, or 6.3%, to $119.6 million, from $112.5 million for fiscal 2021. Pura Vida wholesale sales increased over the prior-year period, which was impacted by the COVID-19 pandemic. Our marketing effectiveness for the e-commerce channel was negatively impacted by the Apple IDFA update in the current-year period resulting in a decline in e-commerce sales. This update impacted Facebook and Instagram, which have been our primary marketing vehicles. Gross Profit For fiscal 2022, gross profit increased $22.4 million, or 8.4%, to $287.9 million, from $265.5 million for fiscal 2021. As a percentage of net revenues, gross profit decreased to 53.3% for fiscal 2022, from 56.7% for fiscal 2021. Increased shipping expense and incremental expense from the expiration of the GSP duty-free status negatively impacted the gross profit as a percentage of net revenues for the current-year by approximately 145 basis points and 70 basis points, respectively. Higher-margin mask sales benefited the prior-year gross profit as a percentage of net revenues by approximately 200 basis points, which did not recur in the current-year. The prior-year period also included charges for the cancellation of certain purchase orders due to COVID-19, which totaled $1.3 million and negatively impacted gross margin as a percentage of net revenues by 30 basis points. Selling, G eneral, and Administrative Expenses (“SG&A”) For fiscal 2022, SG&A expenses increased $9.4 million, or 3.7%, to $262.0 million, from $252.6 million for fiscal 2021. As a percentage of net revenues, SG&A expenses were 48.5% and 53.9% for fiscal 2022 and fiscal 2021, respectively. SG&A expenses related to Vera Bradley and corporate unallocated were $205.8 million compared to $194.7 million in the comparable prior-year period. SG&A expenses related to Pura Vida were $56.2 million compared to $57.9 million in the comparable prior-year period. The increase in consolidated SG&A expenses for fiscal 2022 was primarily due to: • Vera Bradley initiatives in the prior-year period to reduce expenses in light of COVID-19 including the temporary furlough of certain associates; temporarily reducing the base compensation for all other salaried associates; certain expense reductions associated with the CARES Act retention credit; and reducing other non-payroll expenses including marketing that did not recur in the current-year period; and • Amortization expense of certain cloud computing costs associated with Project Novus technology enhancements. The aforementioned increases in SG&A expenses were partially offset by: • A reduction of $7.3 million of Vera Bradley store impairment charges; • A $5.9 million reduction of intangible asset amortization associated with the Pura Vida acquisition; and • A reduction in depreciation expense primarily as a result of legacy software depreciation from the prior-year. SG&A expenses as a percentage of net revenues decreased primarily due to the aforementioned items, as well as SG&A expense leverage associated with increased sales. Other Income, Net For fiscal 2022, net other income increased $0.9 million to $1.0 million, from $0.1 million for fiscal 2021. The increase in net other income was primarily due to legal settlements in the current-year period. Operating Income For fiscal 2022, operating income increased $13.8 million, or 106.0%, to $26.9 million from $13.1 million for fiscal 2021. As a percentage of net revenues, operating income was 5.0% and 2.8% for fiscal 2022 and fiscal 2021, respectively. Operating income increased due to the factors described above. The following table provides additional information about our operating income (in thousands). 44 Table of Contents Fiscal Year Ended $ Change % Change January 29, 2022 January 30, 2021 Operating Income: VB Direct $ 73,506 $ 48,524 $ 24,982 51.5 % VB Indirect 20,323 24,502 (4,179) (17.1) % Pura Vida 9,519 8,031 1,488 18.5 % Less: Unallocated corporate expenses (76,437) (67,992) (8,445) 12.4 % Operating income $ 26,911 $ 13,065 $ 13,846 106.0 % VB Direct . For fiscal 2022, operating income increased $25.0 million, or 51.5%. As a percentage of VB Direct segment net revenues, operating income in the VB Direct segment was 20.7% and 16.8% for fiscals 2022 and 2021, respectively. The increase in operating income as a percentage of VB Direct segment net revenues was primarily due to SG&A expense leverage associated with increased sales, partially offset by a decrease in gross margin as a percentage of net revenues as described above and COVID-19-related expense savings from the prior-year period that did not recur. The increase in SG&A expenses caused by the COVID-19-related savings from the prior-year period that did not recur were partially offset by a reduction in store impairment charges and depreciation expense. VB Indirect . For fiscal 2022, operating income decreased $4.2 million, or 17.1%. As a percentage of VB Indirect segment net revenues, operating income in the VB Indirect segment was 30.8% and 36.8% for fiscals 2022 and 2021, respectively. The decrease in operating income as a percentage of VB Indirect segment net revenues was primarily due to a decrease in gross margin as a percentage of net revenues as described above, partially offset by a decrease in the bad debt provision compared to the prior-year period. Pura Vida. For fiscal 2022, operating income increased $1.5 million, or 18.5%. As a percentage of Pura Vida segment net revenues, operating income in the Pura Vida segment was 8.0% and 7.1% for fiscals 2022 and 2021, respectively. The increase in operating income as a percentage of Pura Vida net revenues was primarily due to SG&A expense leverage associated with increased sales and a decrease in the intangible asset amortization expense compared to the prior-year period, partially offset by a decrease in gross margin as a percentage of net revenues partly due to channel mix changes as a result of the impact of the COVID-19 pandemic on wholesale sales in the prior-year period. Corporate Unallocated . For fiscal 2022, unallocated expenses increased $8.4 million, or 12.4% to $76.4 million from $68.0 million in the prior-year period. The increase in unallocated expenses was primarily due to prior-year period initiatives to reduce expenses in light of COVID-19 that did not recur in the current-year including the temporary furlough of certain associates; temporarily reducing the base compensation for all other salaried associates; and reducing other non-payroll expenses including marketing, as well as amortization expense associated with certain cloud computing costs for Project Novus technology enhancements. These increases in SG&A expense were partially offset by a decrease in depreciation expense, as described above. Interest Expense, Net For fiscal 2022, net interest expense totaled $0.3 million compared to net interest expense of $1.2 million in fiscal 2021. Interest expense decreased primarily due to borrowings under the Company's credit agreement during the prior-year period that did not recur in the current-year period. Income Tax Expense For fiscal 2022, we recorded income tax expense of $6.4 million at an effective tax rate of 24.1%, compared to income tax expense of $1.2 million at an effective tax rate of 9.9% for fiscal 2021. The effective tax rate increased primarily due to the relative impact of permanent and discrete items in the current-year period compared to the prior-year period, primarily as a result of stock-based compensation, and the relative impact of a $2.8 million tax benefit related to the net operating loss carryback provisions of the CARES Act in the prior-year that did not recur. Net Income For fiscal 2022, net income increased $9.5 million, or 89.1%, to $20.2 million from $10.7 million in fiscal 2021 due to the factors described above. 45 Table of Contents Net Income Attributable to Redeemable Noncontrolling Interest For fiscal 2022, net income attributable to redeemable noncontrolling interest was $2.4 million compared to $2.0 million in the prior-year period. This represents the allocation of the Pura Vida net income to the noncontrolling interest. The change in net income was due to the factors described above in the Pura Vida operating segment. Net Income Attributable to Vera Bradley, Inc. For fiscal 2022, net income attributable to Vera Bradley, Inc. increased $9.1 million to $17.8 million from $8.7 million in fiscal 2021 due to the factors described in the captions above. Fiscal 2021 Compared to Fiscal 2020 Refer to the Company's Annual Report on Form 10-K filed with the SEC on March 30, 2021, for a comparison of fiscal 2021 to fiscal 2020 operating results. Liquidity and Capital Resources General Our primary sources of liquidity are cash on hand and cash equivalents, investments, and cash flow from operations. We also have access to additional liquidity, if needed, through borrowings under our $75.0 million asset-based revolving credit agreement (the “Credit Agreement”) which was entered into on September 7, 2018. There was no debt outstanding as of January 29, 2022. Historically, our primary cash needs have been for merchandise inventories; payroll; store rent; capital expenditures associated with operational equipment, buildings, information technology, and opening new stores; and share repurchases. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts receivable, accounts payable, and other current liabilities. We believe that cash on hand and cash equivalents, cash flows from operating activities, and the availability of borrowings under our Credit Agreement or other financing arrangements will be sufficient to meet working capital requirements and anticipated capital expenditures, and other strategic uses of cash, if any, for the foreseeable future. Cash Flow Analysis A summary of operating, investing, and financing activities is shown in the following table (in thousands): Fiscal Year Ended January 29, 2022 January 30, 2021 February 1, 2020 Net cash provided by operating activities $ 39,861 $ 20,702 $ 20,624 Net cash (used in) provided by investing activities (4,154) 17,680 (69,966) Net cash used in financing activities (11,413) (24,146) (14,285) Net Cash Provided by Operating Activities Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation, amortization, impairment charges, deferred taxes, and stock-based compensation; and the effect of changes in assets and liabilities. Net cash provided by operating activities was $39.9 million during fiscal 2022, as compared to $20.7 million during fiscal 2021. The increase in cash provided by operating activities was primarily related to the change in assets and liabilities. The increase in net income of $9.5 million was offset by the change in non-cash items. Changes in assets and liabilities resulting in a source of cash were primarily related to: • An increase in trade accounts receivable collections, mostly due to the impact of COVID-19 on the prior-year period, partially offset by an increase in Pura Vida accounts receivable as a result of increased wholesale sales; • A decrease in inventory receipts compared to the prior-year, partially offset by an increase in in-transit inventory due to industry-wide shipping delays; • Lower prepaid deposits related to Pura Vida inventory purchases and lower payments related to Project Novus expenditures compared to the prior-year; and 46 Table of Contents • A change in the income tax receivable due to timing of payments and income compared to the prior-year, which included a benefit associated with the net operating loss carryback provisions of the CARES Act. Changes in assets and liabilities resulting in a use of cash primarily related to operating leases mostly as a result of payment deferrals in the prior-year, timing of payments, a decrease in rent abatements compared to the prior-year, and store closures. Net Cash (Used in) Provided by Investing Activities Investing activities consisted primarily of investments and capital expenditures related to new store openings, buildings, operational equipment, and information technology investments, as well as the Pura Vida acquisition. Net cash used in investing activities was $4.2 million in fiscal 2022, compared to net cash provided by investing activities of $17.7 million in fiscal 2021. The increase in cash used in investing activities was primarily a result of proceeds from investment activity in the prior-year period that did not recur in the current-year period. Capital expenditures for fiscal 2023 are expected to be approximately $10.0 million to $12.0 million related to planned investments associated with new Vera Bradley factory and Pura Vida store locations and technology and logistics enhancements. Net Cash Used in Financing Activities Net cash used in financing activities was $11.4 million in fiscal 2022 compared to $24.1 million in fiscal 2021. The decrease in cash used in financing activities was primarily due to the $18.7 million payment of contingent consideration associated with the July 2019 acquisition of Pura Vida in the prior-year, partially offset by incremental common stock repurchases of $4.7 million. Refer to the Company's Annual Report on Form 10-K filed with the SEC on March 30, 2021, for a comparison of fiscal 2021 to fiscal 2020 cash flow activity. Credit Agreement On September 7, 2018, Vera Bradley Designs, Inc. (“VBD”), a wholly-owned subsidiary of the Company, entered into an asset-based revolving Credit Agreement (the “Credit Agreement”) among VBD, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto. The Credit Agreement provides for certain credit facilities to VBD in an aggregate principal amount not to initially exceed the lesser of $75.0 million or the amount of borrowing availability determined in accordance with a borrowing base of certain assets. Any proceeds of the credit facilities will be used to finance general corporate purposes of VBD and its subsidiaries, including but not limited to Vera Bradley International, LLC and Vera Bradley Sales, LLC (collectively, the “Named Subsidiaries”). The Credit Agreement also contains an option for VBD to arrange with lenders to increase the aggregate principal amount by up to $25.0 million. Amounts outstanding under the Credit Agreement bear interest at a per annum rate equal to either (i) for CBFR borrowings (including swingline loans), the CB Floating Rate, where the CB Floating Rate is the prime rate which shall never be less than the adjusted one month LIBOR rate on such day, plus the Applicable Rate, where the Applicable Rate is a percentage spread ranging from -1.00% to -1.50% or (ii) for each eurodollar borrowing, the Adjusted LIBO Rate, where the Adjusted LIBO Rate is the LIBO rate for such interest period multiplied by the statutory reserve rate, for the interest period in effect for such borrowing, plus the Applicable Rate, where the Applicable Rate is a percentage ranging from 1.00% to 1.30%. The applicable CB Floating Rate, Adjusted LIBO Rate, or LIBO Rate shall be determined by the administrative agent. The Credit Agreement also requires VBD to pay a commitment fee for the unused portion of the revolving facility of up to 0.20% per annum. VBD’s obligations under the Credit Agreement are guaranteed by the Company and the Named Subsidiaries. The obligations of VBD under the Credit Agreement are secured by substantially all of the respective assets of VBD, the Company, and the Named Subsidiaries and are further secured by the equity interests in VBD and the Named Subsidiaries. The Credit Agreement contains various affirmative and negative covenants, including restrictions on the Company's ability to incur debt or liens; engage in mergers or consolidations; make certain investments, acquisitions, loans, and advances; sell assets; enter into certain swap agreements; pay dividends or make distributions or make other restricted payments; engage in certain transactions with affiliates; and amend, modify, or waive any of its rights related to subordinated indebtedness and certain charter and other organizational, governing, and material agreements. The Company may avoid certain of such restrictions by meeting payment conditions defined in the Credit Agreement. The Company was in compliance with these covenants as of January 29, 2022. The Credit Agreement also requires the loan parties, as defined in the Credit Agreement, to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 during periods when borrowing availability is less than the greater of (A) $7.5 million, and (B) 47 Table of Contents 10% of the lesser of (i) the aggregate revolving commitment, and (ii) the borrowing base. The fixed charge coverage ratio, availability, aggregate revolving commitment, and the borrowing base are further defined in the Credit Agreement. The Credit Agreement contains customary events of default, including, among other things: (i) the failure to pay any principal, interest, or other fees under the Credit Agreement; (ii) the making of any materially incorrect representation or warranty; (iii) the failure to observe or perform any covenant, condition, or agreement in the Credit Agreement or related agreements; (iv) a cross default with respect to other material indebtedness; (v) bankruptcy and insolvency events; (vi) unsatisfied material final judgments; (vii) Employee Retirement Income Security Act of 1974 (“ERISA”) events that could reasonably be expected to have a material adverse effect; and (viii) a change in control (as defined in the Credit Agreement). Any commitments made under the Credit Agreement mature on September 7, 2023. Material Cash Requirements Our material cash requirements from known contractual and other obligations include the following: • The Put/Call Agreement associated with the July 2019 acquisition of Pura Vida, further described in Note 2 to the Notes to the Consolidated Financial Statements herein; • Operating lease obligations as disclosed further in Note 4 to the Notes to the Consolidated Financial Statements herein; • Purchase order commitments primarily related to inventory purchases; • Salaries, cash incentives, benefits, and other employee-related costs; • Planned capital expenditures; • Income tax payments; and • Other supply and service agreements entered into as part of our normal operations. We may be subject to additional material cash requirements that are contingent upon certain events that have not yet occurred. Off-Balance Sheet Arrangements We do not have any off-balance sheet financing or unconsolidated special purpose entities. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues, and expenses, as well as the disclosures relating to contingent assets and liabilities at the date of the consolidated financial statements. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. We evaluate the development and selection of our critical accounting policies and estimates and believe that the following policies and estimates involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. Our historical results for the periods presented in the consolidated financial statements, however, have not been materially impacted by such variances. More information on all of our significant accounting policies can be found in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method. Appropriate consideration is given to obsolescence, excess quantities, and other factors, including the popularity of a pattern or product, in evaluating net realizable value. We record valuation adjustments to our inventories, which are reflected in cost of sales, if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. This adjustment calculation requires us to make assumptions and estimates, which are based on factors such as merchandise seasonality, historical trends, and estimated sales and inventory levels, including sell-through of remaining units. In addition, as part of inventory adjustments, we provide for inventory shrinkage based on historical trends from our physical inventory counts. We perform physical inventory counts throughout the year and adjust the shrinkage provision accordingly. 48 Table of Contents The balance of inventory adjustments was $0.6 million and $0.7 million for these matters as of the fiscal years ended January 29, 2022, and January 30, 2021, respectively. The balance related primarily to certain collections being discontinued or currently discontinued by the Vera Bradley brand and retired patterns. We have the ability to move retired finished goods through a number of channels, including our Vera Bradley websites and online outlet site, factory outlet stores, and through third-party liquidators as needed. Valuation of Long-lived Assets Property, plant, and equipment and operating right-of-use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. In evaluating an asset group for recoverability, we estimate the future cash flows expected to result from the use of the asset group at the store level, the lowest identifiable level of cash flow, if applicable. If the sum of the estimated undiscounted future cash flows related to the asset group is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by an estimated discounted cash flow analysis of the asset. Factors used in the valuation of long-lived assets include, but are not limited to, our plans for future operations, brand initiatives, recent operating results, and projected future cash flows. With respect to our stores, we analyze store economics, location within the shopping center, the size and shape of the space, and desirable co-tenancies in our selection process. Impairment charges are classified in SG&A expenses and were $0.1 million and $7.4 million for the periods ended January 29, 2022 and January 30, 2021, respectively. There were no impairment charges recorded for the period ended February 1, 2020. The discounted cash flow models used to estimate the applicable fair values involve numerous estimates and assumptions that are highly subjective. Changes to these estimates and assumptions could materially impact the fair value estimates. The estimates and assumptions critical to the overall fair value estimates include: (1) estimated future cash flow generated at the store level; (2) discount rates used to derive the present value factors used in determining the fair values; and (3) market rentals at the retail store. These and other estimates and assumptions are impacted by economic conditions and our expectations and may change in the future based on period-specific facts and circumstances. If economic conditions were to deteriorate, future impairment charges may be required. Goodwill and Other Intangible Assets The Company tests goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. The Company may first use a qualitative analysis to assess whether it is more-likely-than-not that the fair value of the reporting unit (including goodwill) is less than its carrying value. This qualitative analysis may include, but is not limited to: macroeconomic factors; industry and market considerations; cost factors that have a negative effect on earnings and cash flows; entity specific factors; a change in the composition or carrying amount of the reporting unit’s net assets; and a sustained decrease in stock price. If it is determined that it is more-likely-than-not that the fair value is less than the carrying value after this analysis, a quantitative impairment test is performed. If we elect to bypass the qualitative assessment for the reporting unit, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value of the reporting unit exceeds its fair value, we perform a quantitative goodwill impairment test. Under the quantitative test, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. The fair value of the reporting unit is determined using an income-based approach and a market-based approach. The income approach estimates fair value of the reporting unit using a discounted cash flow model that involves subjective estimates and assumptions such as projected revenue growth, operating profit, and the discount rate. Under the market approach, the Company may use the guideline public company method and/or the guideline transaction method to estimate fair value of the reporting unit. The guideline public company method uses market multiples derived from market prices of stocks of companies that are engaged in the same or similar lines of business as the reporting unit. The guideline transaction method employs transaction multiples derived from the acquisition of controlling interests in stocks of companies that are engaged in the same or similar lines of business as the reporting unit. As of January 29, 2022, the Company had recorded $44.3 million of goodwill which was allocated to the Pura Vida reporting unit. For the annual goodwill impairment analysis performed during fiscal 2022, we performed a quantitative analysis. No impairment was recorded for goodwill during fiscal 2022. Our indefinite-lived intangible asset represents the Pura Vida brand. We test the Pura Vida brand for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Our annual impairment test may be completed through a qualitative assessment to determine if the fair value of the Pura Vida brand is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value, we test for impairment using a quantitative process. Our quantitative process includes comparing the carrying value to the fair value of the Pura Vida brand, with any 49 Table of Contents excess recognized as an impairment loss. Fair value is estimated using a relief-from-royalty method. The estimates and assumptions used in the determination of the fair value of the Pura Vida brand include the projected revenue growth, long-term growth rate, the royalty rate, and discount rate. As of January 29, 2022, the carrying value of the Pura Vida brand was $36.7 million. For the annual impairment analysis performed during fiscal 2022, we performed a quantitative analysis. No impairment was recorded for the Pura Vida brand during fiscal 2022. The estimated fair values of our Pura Vida reporting unit and the Pura Vida brand are subject to change as a result of many factors including changing economic conditions. Should actual cash flows and our future estimates deteriorate from the estimates we used, impairment charges may be necessary in future years. Transactions with Related Parties See Item 13, “Certain Relationships and Related Transactions, and Director Independence,” of this report for information regarding transactions with related parties. 50 Table of Contents