Item 7. Management’s Discussion and Analysis
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.
Macroeconomic Environment
We continue to experience challenges associated with the unpredictable macroeconomic environment in which we operate our businesses. The COVID-19 pandemic caused supply chain disruptions that have resulted in delivery delays and increased inbound and outbound shipping costs; however, these s upply chain disruptions began to stabilize towards the end of fiscal 2023. We cannot predict the future impacts of the COVID-19 pandemic and its associated factors, which may necessitate temporary closures to some, or all, of our retail stores due to guidance and mandates from governments and public health officials, or require other Company action that may impact our operations.
We have also been impacted by higher tariffs from previously duty-free countries, where we source products, as a result of the expiration of the Generalized System of Preferences (“GSP”) duty-free status at the end of calendar year 2020. In addition, the macroeconomic environment has been further challenged by inflationary pressures, including high gas prices, and other related factors that have impacted consumer discretionary spending, primarily customers with lower household incomes. We have also seen a trend of increasing digital media costs.
We implemented strategic price increases across both of our brands to mitigate some of these inflationary and supply chain pressures in late fiscal 2022 and early fiscal 2023. We will continue to monitor our pricing as it relates to the current macroeconomic trends.
We also continued the implementation of our targeted cost reductions, which are expected to be fully realized in fiscal 2024. Expense savings are being derived across various areas of the Company, including retail store efficiencies, marketing expenses, information technology contracts, professional services, logistics and operational costs, and corporate payroll. We will continue to review our expense structure in future years for additional cost reduction opportunities.
While we continue to actively monitor this rapidly evolving macroeconomic environment and are working to mitigate the situation, these matters could have a material adverse effect on our liquidity, operating results, and financial condition.
Executive Summary
Some of our major achievements for fiscal 2023 are as follows:
• At the Vera Bradley brand:
• We expanded our robust product innovation pipeline, including launching our Featherweight Collection; continued another year of product collaborations with brands such as Disney, Harry Potter, and Crocs; and expanded our cozy, sleep, and outerwear collections.
• We continued to strengthen and rationalize our store base. We opened five new factory outlet stores and closed 19 underperforming full-line stores and one factory outlet store, ending the fiscal year with 51 full-line and 79 factory outlet locations. We also continued to expand options for customers to shop, including enhancing our presence in third-party marketplaces and adding boutiques in select high-traffic airports.
• At the Pura Vida brand:
• We entered into several high-profile product collaborations, with brands such as Hello Kitty, Disney, and Harry Potter, and expanded our product offerings by launching our demi-fine collection and expanding our assortment of engravable jewelry, all designed to bring new customers to our brand.
• We focused on building a more diverse, innovative, effective, and performance-based marketing program to drive Pura Vida e-commerce sales. We began the process of implementing a comprehensive customer data platform to build a single, coherent, complete view of each Pura Vida customer so that we can better target and personalize marketing and become less reliant on third-party marketing. This project is scheduled for
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completion in the spring of fiscal 2024. We continued to engage our micro influencers, significantly expanded our TikTok presence, launched impactful ads on connected TV, optimized SMS, and aggressively explored other methods to effectively reach our customers.
• We opened three new Pura Vida full-line stores during the year, bringing our full-line store count to four, which collectively exceeded our expectations. These four full-line stores are playing a role in driving new customer acquisition as we continue to diversify our marketing platforms, and they demonstrate the power a retail presence can have in driving digital sales, omni-channel loyalty, and spending.
In addition, we further streamlined our corporate structure by eliminating the positions of Vera Bradley Brand President, Chief Creative Officer, and Chief Revenue Officer, and by adding the position of Chief Marketing Officer, all designed to drive additional annual cost savings of approximately $2.0 million, add more focus on marketing and merchandising, and position the Company to deliver steady top-line and bottom-line growth. These decisions were made in order to right-size our leadership team and cost structure for the size of our business, to address the continuing challenging macroeconomic environment, and to best position us to achieve our long-term strategic plans. We also continued to make investments in customer data science, business analytics, and pricing optimization, allowing us to collect and analyze data and make fact-based decisions to more efficiently run our business.
Fiscal 2023 was a challenging year as we saw significant declines in our consolidated net revenues compared to the prior year, largely due to inflationary pressures impacting consumer spending and traffic at our Vera Bradley factory stores and a decline in social and digital media effectiveness which we believe significantly impacted our Pura Vida e-commerce channel. We also experienced a reduction in our gross margin as a percentage of net revenues compared to the prior year, which reflected charges of approximately $16.7 million in inventory adjustments related to excess Pura Vida inventory, excess mask products, the exit of certain technology products, valuation adjustments to write discounted inventory down to its net realizable value, concept brand exit costs, and $1.6 million for certain purchase order cancellation fees.
Fiscal 2023 SG&A expenses were impacted by approximately $15.0 million of charges primarily related to the change in our leadership and our cost-saving initiatives, which we do not expect to recur in future periods, as well as $3.3 million in intangible asset amortization and impairment charges of $1.4 million for Vera Bradley store assets and a corporate lease-right-of-use asset.
Largely due to lower projected net revenues and operating profits, as well as a change in certain strategies in the Pura Vida segment, we recorded goodwill and Pura Vida brand indefinite-lived asset impairment charges of $69.3 million in the fiscal year. Refer to Impairment Charges herein and Note 15 to the Notes to the Consolidated Financial Statements herein for additional information.
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 three 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 retail stores.
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. 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.
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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;
• 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, all inbound freight costs incurred, and inventory adjustments including adjustments described in Note 16 to the Notes to the Consolidated Financial Statements herein. 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 and store expenses.
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, as well as severance charges and consulting fees associated with cost savings initiatives and the CEO search disclosed in Note 16 to the Notes to the Consolidated Financial Statements herein.
Other Income, Net
Other income, net primarily includes certain legal settlements and sales tax credits received for timely filings, and sublease income.
Operating (Loss) Income
Operating (loss) income is equal to gross profit less SG&A expenses plus net other income. Operating (loss) income excludes interest income, interest expense, and income taxes.
(Loss) Income Before Income Taxes
(Loss) income before income taxes is equal to operating (loss) income plus interest income less interest expense.
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Net (Loss) Income
Net (loss) income is equal to (loss) income before income taxes less income tax expense.
Net (Loss) Income Attributable to Redeemable Noncontrolling Interest
Net (loss) income attributable to redeemable noncontrolling interest represents the operating results of Pura Vida that are not attributable to Vera Bradley, Inc.
Net (Loss) Income Attributable to Vera Bradley, Inc.
Net (loss) income attributable to Vera Bradley, Inc. is equal to net (loss) income less net (loss) income attributable to redeemable noncontrolling interest.
Impairment Charges
Goodwill and Other Intangible Assets
We perform our annual impairment test over goodwill and the indefinite-lived Pura Vida brand during the second quarter of each fiscal year. We have experienced significantly lower sales from our Pura Vida e-commerce channel due to a decline in social and digital media effectiveness, as well as lower wholesale sales. These lower sales volumes had a negative impact on the fair value determination of the aforementioned assets.
During the assessment for the fiscal 2023 annual test, it was determined that the fair values of the Pura Vida reporting unit and the Pura Vida brand were less than their carrying values. As a result, we recorded an impairment charge of $9.9 million and $19.4 million for the Pura Vida brand and goodwill, respectively, during the second quarter of fiscal 2023 within the Pura Vida segment.
We identified triggering events during the subsequent quarters of fiscal 2023, due to lower operating profit compared to previous forecasts, as well as changes in the long-range plan such as a pause on the opening of new Pura Vida retail stores. We performed further testing on the Pura Vida reporting unit and Pura Vida brand as a result. These analyses caused additional impairment charges to be recorded in the fourth quarter of fiscal 2023 of $15.1 million and $24.9 million for the Pura Vida brand and goodwill, respectively, which reflects a full goodwill impairment. Collectively, impairment charges for the Pura Vida brand and goodwill during fiscal 2023 totaled $69.3 million.
Refer to Note 15 to the Notes to the Consolidated Financial Statements herein for additional information regarding the goodwill and indefinite-lived intangible assets impairment tests.
Long-lived Assets
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 $1.4 million, $0.1 million, and $7.4 million were recognized in the fiscal years ended January 28, 2023, 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 a corporate right-of-use asset and are included in SG&A expenses in the Consolidated Statements of Operations and in impairment charges in the Consolidated Statements of Cash Flows. Impairment charges of $0.6 million were recorded within corporate unallocated during fiscal 2023. The remaining impairment charges were included in the VB Direct segment. The COVID-19 pandemic, including the temporary closure of Vera Bradley retail stores beginning in mid-March of fiscal 2021, significantly impacted the Company's operations and cash flows which was the main driver of the impairment charges in fiscal 2021. We are unable to predict the extent of the impact that the inflationary environment, or other macroeconomic factors, will have on our operations, the economy, or other factors; therefore, it is possible additional impairments could be identified in future periods, and such amounts could be material.
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Cost Savings Initiatives and Other Charges
During fiscal 2023, the Company began implementation of its targeted cost reductions, which are expected to be fully realized in fiscal 2024. Expense savings are being derived across various areas of the Company, including retail store efficiencies, marketing expenses, information technology contracts, professional services, logistics and operational costs, and corporate payroll. Refer to Note 16 to the Notes to the Consolidated Financial Statements herein for additional information regarding charges for cost savings initiatives and remaining liabilities, as well as other charges not comparable with the prior year.
Results of Operations
The following tables summarize key components of our consolidated results of operations for the last three fiscal years, both in dollars and as a percentage of our net revenues.
Fiscal Year Ended (1)
($ in thousands) January 28,
2023 January 29,
2022 January 30,
2021
Statement of (Loss) Income Data:
Net revenues $ 499,961 $ 540,453 $ 468,272
Cost of sales 261,017 252,510 202,754
Gross profit 238,944 287,943 265,518
Selling, general, and administrative expenses (2)
265,016 261,993 252,588
Impairment of goodwill and intangible assets 69,256 — —
Other income, net 457 961 135
Operating (loss) income (94,871) 26,911 13,065
Interest expense, net 153 263 1,203
(Loss) income before income taxes (95,024) 26,648 11,862
Income tax (benefit) expense (3)
(15,640) 6,430 1,173
Net (loss) income (79,384) 20,218 10,689
Less: Net (loss) income attributable to redeemable noncontrolling interest (19,649) 2,380 2,008
Net (loss) income attributable to Vera Bradley, Inc. $ (59,735) $ 17,838 $ 8,681
Percentage of Net Revenues:
Net revenues 100.0 % 100.0 % 100.0 %
Cost of sales 52.2 % 46.7 % 43.3 %
Gross profit 47.8 % 53.3 % 56.7 %
Selling, general, and administrative expenses 53.0 % 48.5 % 53.9 %
Impairment of goodwill and intangible assets 13.9 % — % — %
Other income, net 0.1 % 0.2 % — %
Operating (loss) income (19.0) % 5.0 % 2.8 %
Interest expense, net — % — % 0.3 %
(Loss) income before income taxes (19.0) % 4.9 % 2.5 %
Income tax (benefit) expense (3.1) % 1.2 % 0.3 %
Net (loss) income (15.9) % 3.7 % 2.3 %
Less: Net (loss) income attributable to redeemable noncontrolling interest (3.9) % 0.4 % 0.4 %
Net (loss) income attributable to Vera Bradley, Inc. (11.9) % 3.3 % 1.9 %
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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 28,
2023 January 29,
2022 January 30,
2021
Net Revenues by Segment:
VB Direct $ 328,231 $ 354,875 $ 289,274
VB Indirect 73,316 66,001 66,517
Pura Vida 98,414 119,577 112,481
Total $ 499,961 $ 540,453 $ 468,272
Percentage of Net Revenues by Segment:
VB Direct 65.6 % 65.7 % 61.8 %
VB Indirect 14.7 % 12.2 % 14.2 %
Pura Vida 19.7 % 22.1 % 24.0 %
Total 100.0 % 100.0 % 100.0 %
Fiscal Year Ended
January 28,
2023 January 29,
2022 January 30,
2021
Vera Bradley Store Data (4) :
Total stores opened during period 5 6 6
Total stores closed during period (20) (5) (13)
Total stores open at end of period 130 145 144
Comparable sales (including e-commerce) decrease (5)
(9.5) % NM NM
Total gross square footage at end of period 381,664 397,037 380,100
Average net revenues per gross square foot (6)
$ 555 $ 633 NM
(1) The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to January 31. Fiscal years 2023, 2022, and 2021 consisted of 52 weeks.
(2) Impairment charges, related primarily to underperforming stores, totaled $1.4 million, $0.1 million, and $7.4 million during the fiscal years ended January 28, 2023, January 29, 2022, and January 30, 2021, respectively.
(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. Decrease 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 2023 Compared to Fiscal 2022
Net Revenues
For fiscal 2023, net revenues decreased $40.5 million, or 7.5%, to $500.0 million, from $540.5 million for fiscal 2022.
VB Direct. For fiscal 2023, net revenues decreased $26.7 million, or 7.5%, to $328.2 million, from $354.9 million for fiscal 2022. Vera Bradley comparable sales decreased $33.3 million, or 9.5%, which includes a 14.6% decrease in comparable store sales partially offset by a 1.5% increase in e-commerce sales. This comparable sales decrease was partially offset by sales from
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our stores with non-comparable periods, including our five factory outlet stores that opened in the current fiscal year, which contributed $6.5 million of revenue. The decrease in comparable sales and comparable store sales was impacted by reduced traffic, conversion, and units sold primarily in the factory outlet channel. These decreases were partially offset by price increases on certain merchandise in the current-year.
VB Indirect. For fiscal 2023, net revenues increased $7.3 million, or 11.1%, to $73.3 million, from $66.0 million for fiscal 2022. The increase was primarily due to an increase in orders from certain key accounts.
Pura Vida . For fiscal 2023, net revenues decreased $21.2 million, or 17.7%, to $98.4 million, from $119.6 million for fiscal 2022. The decrease was primarily due to a decline of $16.2 million in e-commerce sales due to a decline in social and digital media effectiveness and lower marketing spending, as well as a decline of $7.0 million in wholesale orders. These decreases were partially offset by sales from our new store openings. We are working to evolve our Pura Vida business model from one that is largely dependent on e-commerce and digital marketing to one that is a true omni-channel business with a more diversified marketing program.
Gross Profit
For fiscal 2023, gross profit decreased $48.9 million, or 17.0%, to $239.0 million, from $287.9 million for fiscal 2022. As a percentage of net revenues, gross profit decreased to 47.8% for fiscal 2023, from 53.3% for fiscal 2022. Gross profit as a percentage of net revenues was negatively impacted by approximately 330 basis points for inventory adjustments related to excess inventory in the Pura Vida business and excess mask products, the exit of certain technology products, valuation adjustments to write discounted inventory down to its net realizable value, and concept brand exit costs, as well as approximately 30 basis points for purchase order cancellation fees related to certain spring 2023 products and certain raw materials. In addition, gross profit as a percentage of net revenues was negatively impacted by inbound and outbound freight and shipping costs, deleverage of overhead costs, channel mix changes, and increased promotional activity, partially offset by price increases on certain merchandise in the current-year.
Selling, G eneral, and Administrative Expenses (“SG&A”)
For fiscal 2023, SG&A expenses increased $3.0 million, or 1.2%, to $265.0 million, from $262.0 million for fiscal 2022. As a percentage of net revenues, SG&A expenses were 53.0% and 48.5% for fiscal 2023 and fiscal 2022, respectively. SG&A expenses related to Vera Bradley and corporate unallocated were $211.6 million compared to $205.8 million in the comparable prior-year period. SG&A expenses related to Pura Vida were $53.4 million compared to $56.2 million in the comparable prior-year period. The increase in consolidated SG&A expenses for fiscal 2023 was primarily due to:
• severance charges of $9.2 million including for CEO retirement severance and Vera Bradley brand executive severance;
• $4.4 million of consulting fees related to our cost saving and strategic initiatives, CEO search, and other Pura Vida and Vera Bradley professional fees that did not occur in the prior year;
• $1.3 million for incremental Vera Bradley store impairment charges and a corporate lease right-of-use asset impairment charge;
• new CEO sign-on bonus and relocation expenses of $1.0 million; and
• $0.4 million of former CEO November and December salary expense and stock-based compensation expense associated with retirement.
The aforementioned increases in SG&A expenses were partially offset by a $6.9 million reduction in advertising and marketing expenses, primarily related to the Pura Vida brand; a $4.1 million reduction in expense associated with incentive compensation due to company performance estimates and forfeitures compared to the prior-year period; a $1.7 million reduction in lease expense due to contingent rental payments associated with lower store sales and store closures, which was partially offset by new store openings for both brands; and a $1.0 million reduction in employee-related and other costs due primarily to headcount reductions, including closed Vera Bradley stores, partially offset by an increase in travel expenses.
SG&A expenses as a percentage of net revenues increased primarily due to the aforementioned items, as well as SG&A expense deleverage associated with decreased sales.
Impairment of Goodwill and Intangible Assets
Fiscal 2023 included a $69.3 million charge for impairment of goodwill and intangible assets related to Pura Vida goodwill and the indefinite-lived Pura Vida brand asset, which is reflected within the Pura Vida segment. For additional information, refer to Goodwill and Other Intangible Assets herein. There were no similar charges in the comparable prior-year period.
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Other Income, Net
For fiscal 2023, net other income decreased $0.5 million to $0.5 million, from $1.0 million for fiscal 2022. The decrease in net other income was primarily due to legal settlements in the prior-year period that did not recur.
Operating (Loss) Income
For fiscal 2023, operating loss increased $121.8 million, or 452.5%, to $(94.9) million from operating income of $26.9 million for fiscal 2022. As a percentage of net revenues, operating (loss) income was (19.0)% and 5.0% for fiscal 2023 and fiscal 2022, respectively. Operating loss increased due to the factors described above.
The following table provides additional information about our operating (loss) income (in thousands).
Fiscal Year Ended $
Change %
Change
January 28,
2023 January 29,
2022
Operating (Loss) Income:
VB Direct $ 51,097 $ 73,506 $ (22,409) (30.5) %
VB Indirect 22,965 20,323 2,642 13.0 %
Pura Vida (78,591) 9,519 (88,110) (925.6) %
Less: Unallocated corporate expenses (90,342) (76,437) (13,905) 18.2 %
Operating (loss) income $ (94,871) $ 26,911 $ (121,782) (452.5) %
VB Direct . For fiscal 2023, operating income decreased $22.4 million, or 30.5%. As a percentage of VB Direct segment net revenues, operating income in the VB Direct segment was 15.6% and 20.7% for fiscals 2023 and 2022, respectively. The decrease in operating income as a percentage of VB Direct segment net revenues was primarily due to a decrease in gross margin as a percentage of net revenues as described above, including approximately 190 basis points related to inventory adjustments for the exit of certain technology products, excess mask products, and concept brand exit costs, as well as certain purchase order cancellation fees; SG&A expense deleverage associated with decreased sales; and a decrease in advertising expense, employee-related costs including incentive compensation expense, and lease expense. These decreases in SG&A expenses were partially offset by $0.8 million in incremental store impairment charges.
VB Indirect . For fiscal 2023, operating income increased $2.6 million, or 13.0%. As a percentage of VB Indirect segment net revenues, operating income in the VB Indirect segment was 31.3% and 30.8% for fiscals 2023 and 2022, respectively. The increase in operating income as a percentage of VB Indirect segment net revenues was primarily due to SG&A leverage associated with increased sales, partially offset by a decrease in gross margin as a percentage of net revenues as described above, including approximately 230 basis points related to inventory adjustments for the exit of certain technology products, excess mask products, and valuation adjustments to write discounted inventory down to its net realizable value, as well as certain purchase order cancellation fees.
Pura Vida. For fiscal 2023, operating loss increased $88.1 million. As a percentage of Pura Vida segment net revenues, operating (loss) income in the Pura Vida segment was (79.9)% and 8.0% for fiscals 2023 and 2022, respectively. The increase in operating loss as a percentage of Pura Vida net revenues was primarily due to goodwill and indefinite-lived Pura Vida brand impairment charges in the current-year period of $44.3 million and $25.0 million, respectively. In addition, there was expense deleverage associated with a decrease in sales, inventory adjustments for excess inventory and valuation adjustments to write discounted inventory down to its net realizable value which impacted the operating loss as a percentage of net revenues by approximately 1,000 basis points in the current year, and new store expenses. These decreases to operating income were partially offset by reductions in advertising expense compared to the prior-year period.
Corporate Unallocated . For fiscal 2023, corporate unallocated expenses increased $13.9 million, or 18.2% to $90.3 million from $76.4 million in the prior-year period. The increase in corporate unallocated expenses was primarily due to severance charges of $8.7 million, including CEO retirement severance and Vera Bradley brand executive severance; consulting fees of $4.2 million associated with cost savings, strategic initiatives, and CEO search; $2.4 million increase in corporate advertising expense; $1.0 million for new CEO sign-on bonus and relocation expenses; $0.7 million primarily related to legal settlements in the prior-year period that did not recur; $0.6 million related to a lease right-of-use asset impairment charge in the current-year period; and $0.4 million related to former CEO November and December salary payments and stock compensation expense associated with retirement. These increases were partially offset by a $3.6 million decrease in employee-related expenses, primarily related to a decline in incentive compensation expense as a result of company performance estimates and forfeitures along with reduced headcount.
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Interest Expense, Net
For fiscal 2023, net interest expense totaled $0.2 million compared to $0.3 million in fiscal 2022, consistent with the prior year.
Income Tax (Benefit) Expense
For fiscal 2023, we recorded an income tax benefit of $15.6 million at an effective tax rate of 16.5%, compared to income tax expense of $6.4 million at an effective tax rate of 24.1% for fiscal 2022. The effective tax rate decreased 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 non-deductible executive compensation and stock-based compensation.
Net (Loss) Income
For fiscal 2023, net loss increased $99.6 million to $(79.4) million from net income of $20.2 million in fiscal 2022 due to the factors described in the captions above.
Net (Loss) Income Attributable to Redeemable Noncontrolling Interest
For fiscal 2023, net loss attributable to redeemable noncontrolling interest was $(19.6) million compared to net income attributable to redeemable noncontrolling interest of $2.4 million in the prior-year period. This represents the allocation of the Pura Vida net (loss) income to the noncontrolling interest. The change in net (loss) income was due to the factors described above in the Pura Vida operating segment.
Net (Loss) Income Attributable to Vera Bradley, Inc.
For fiscal 2023, net loss attributable to Vera Bradley, Inc. increased $77.5 million to $(59.7) million from net income attributable to Vera Bradley, Inc. of $17.8 million in fiscal 2022 due to the factors described in the captions above.
Fiscal 2022 Compared to Fiscal 2021
Refer to the Company's Annual Report on Form 10-K filed with the SEC on March 29, 2022, for a comparison of fiscal 2022 to fiscal 2021 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 under the Credit Agreement as of January 28, 2023. 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 28,
2023 January 29,
2022 January 30,
2021
Net cash (used in) provided by operating activities $ (13,421) $ 39,861 $ 20,702
Net cash (used in) provided by investing activities (8,239) (4,154) 17,680
Net cash used in financing activities (20,105) (11,413) (24,146)
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Net Cash (Used in) Provided by Operating Activities
Net cash (used in) provided by operating activities consists primarily of net (loss) 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 used in operating activities was $13.4 million during fiscal 2023, as compared to net cash provided by operating activities of $39.9 million during fiscal 2022. The increase in cash used in operating activities was primarily related to an increase in the net loss after non-cash charges of $47.5 million, as well as the change in assets and liabilities. Changes in assets and liabilities resulting in a use of cash were primarily related to the change in accounts payable due to a reduction in inventory in-transit and timing of payments, an increase in accounts receivable partly associated with increased VB Indirect segment sales, as well as a reduction in accrued and other liabilities reflecting a reduction in freight and duty accruals due to lower inbound units and costs at the end of the year, and a reduction in certain variable liabilities due in part to lower sales including the percent rent liability, partially offset by accruals associated with severance payments. The change in inventory reflects $16.7 million in inventory adjustments associated primarily with excess inventory, the exit of certain technology products, valuation adjustments to write discounted inventory down to its net realizable value in the current-year period, and concept brand exit costs. The change in inventory was also impacted by decreased sales compared to the prior-year period, a reduction in transit times, as well as incremental freight and duty costs. Changes that provided a source of cash were due primarily to net payments of $6.6 million in income taxes which we received during the current-year period.
Net Cash Used in Investing Activities
Investing activities consisted primarily of investments and capital expenditures related to new store openings, buildings, operational equipment, and information technology investments.
Net cash used in investing activities was $8.2 million in fiscal 2023, compared to $4.2 million in fiscal 2022. The increase in cash used in investing activities was primarily a result of increased spending associated with purchases of property, plant, and equipment due mostly to relocations of certain existing Vera Bradley factory outlet stores, incremental Pura Vida retail stores, and timing of payments.
Capital expenditures for fiscal 2024 are expected to be approximately $5.0 million related to planned investments associated with new Vera Bradley factory store locations and technology and logistics enhancements.
Net Cash Used in Financing Activities
Net cash used in financing activities was $20.1 million in fiscal 2023 compared to $11.4 million in fiscal 2022. The increase in cash used in financing activities was primarily due to $18.1 million of common stock repurchases in the current-year period compared to $7.7 million in the comparable prior-year period.
Refer to the Company's Annual Report on Form 10-K filed with the SEC on March 29, 2022, for a comparison of fiscal 2022 to fiscal 2021 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. Borrowings under the credit facilities are available 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.
For further information regarding the Credit Agreement, please see Note 6 of the Notes to Consolidated Financial Statements set forth in Part II, “Item 8. Financial Statements and Supplementary Data,” of this report.
Material Cash Requirements
Our material cash requirements from known contractual and other obligations include the following:
• The $10.0 million purchase of the remaining Pura Vida Interests paid subsequent to fiscal 2023 as further described in Note 2 to the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report;
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• Approximately $3.1 million of severance liability associated with cost savings initiatives further described in Note 16 to the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report;
• Operating lease obligations as disclosed further in Note 4 to the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report;
• 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. We expect to fund these cash requirements using cash on hand, cash provided by our operations and, to the extent necessary, borrowings under our Credit Agreement.
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.
The balance of inventory adjustments was $16.5 million and $0.6 million for these matters as of the fiscal years ended January 28, 2023, and January 29, 2022, respectively. The increase in the balance was primarily related to adjustments for excess Pura Vida inventory and excess mask inventory, the exit of certain technology products, and valuation adjustments to write discounted inventory down to its net realizable value. We believe we have the ability to move some of our retired finished goods through a number of channels, including our Vera Bradley and Pura Vida websites, the Vera Bradley online outlet site, Vera Bradley factory outlet stores, the Vera Bradley Annual Outlet Sale which is planned to resume in June 2023, and through third-party liquidators as needed.
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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 $1.4 million, $0.1 million, and $7.4 million for the periods ended January 28, 2023, January 29, 2022, and January 30, 2021, respectively.
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 28, 2023, the Company had no goodwill recorded as it recorded a full goodwill impairment charge of $44.3 million within the Pura Vida reporting unit during fiscal 2023. For the annual goodwill impairment analysis performed during fiscal 2023, we performed a quantitative analysis. We performed subsequent impairment tests during the third and fourth quarters of fiscal 2023 due to triggering events, including lower operating profit compared to previous forecasts, as well as changes in the long-range plan such as a pause on the opening of new Pura Vida retail stores.
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 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.
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As of January 28, 2023, the carrying value of the Pura Vida brand was $11.7 million. For the annual impairment analysis performed during fiscal 2023, we performed a quantitative analysis. Consistent with the goodwill analysis, we performed subsequent impairment tests during the third and fourth quarters of fiscal 2023 due to the aforementioned triggering events. We recorded $25.0 million in impairment charges for the Pura Vida brand during fiscal 2023.
The estimated fair value of the Pura Vida brand is 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 for the Pura Vida brand asset may be necessary in future years.
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