Vera Bradley, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Vera Bradley, Inc. Index to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm (PCAOB ID 34 ) 49 Consolidated Balance Sheets as of January 2 8 , 202 3 , and January 29, 2022 52 Consolidated Statements of Operations for the fiscal years ended January 2 8 , 202 3 , January 29, 2022, and January 30, 2021 53 Consolidated Statements of Comprehensive Income for the fiscal years ended January 28, 2023, January 29, 2022, and January 30, 2021 54 Consolidated Statements of Shareholders’ Equity for the fiscal years ended January 28, 2023, January 29, 2022, and January 30, 2021 55 Consolidated Statements of Cash Flows for the fiscal years ended January 28, 2023, January 29, 2022, and January 30, 2021 56 Notes to Consolidated Financial Statements 58 48 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Vera Bradley, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Vera Bradley, Inc. and subsidiaries (the "Company") as of January 28, 2023 and January 29, 2022, the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended January 28, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 28, 2023 and January 29, 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 28, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 28, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 28, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current‐period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill and Indefinite-Lived Intangible Assets – Refer to Notes 2 and 15 to the financial statements Critical Audit Matter Description The Company’s quantitative analysis of the Pura Vida reporting unit of goodwill (“goodwill”) and the indefinite‐lived Pura Vida brand asset (“Pura Vida brand”) for impairment involves the comparison of the fair value of the goodwill or Pura Vida brand asset to its respective carrying value. The fair value of goodwill was determined using an income‐based approach and a market‐based approach, which required management to make significant estimates and assumptions including the projected revenue growth, operating profit growth, and discount rate. The Company used the relief‐from‐royalty method to estimate the fair value of the Pura Vida brand, which required management to make significant estimates and assumptions related to the projected revenue growth, royalty rate and discount rate. The goodwill balance was $0 as of January 28, 2023. The carrying value of the Pura Vida brand was $11.7 million as of January 28, 2023. The carrying values of goodwill and the Pura Vida brand exceeded their fair values during fiscal 2023 and, therefore, impairment of $44.3 million and $25.0 million, respectively, was recognized during the year ended January 28, 2023. We identified the impairment analysis of goodwill and the Pura Vida brand as a critical audit matter because of the significant judgments made by management to estimate the fair value of these indefinite‐lived assets. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions particularly related to the projected revenue growth, operating profit growth and discount rate for the goodwill impairment analysis and the projected revenue growth, royalty rate, and discount rate for the Pura Vida brand impairment analysis. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the projected revenue growth, operating profit growth and discount rate for goodwill and Pura Vida brand as well as the royalty rate for the Pura Vida brand included the following, among others: 49 1. We tested the effectiveness of controls over management’s goodwill and brand impairment analyses, including those over the determination of the fair value, such as controls related to management’s forecasts of projected revenue growth, operating profit growth, and selection of royalty rate and discount rates. 2. We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. 3. We evaluated the reasonableness of management’s projected revenue growth and operating profit growth by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in industry reports. 4. With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, and (2) discount rates and royalty rate by: a. Assessing the appropriateness of the valuation methodology used to determine the discount rates and royalty rate. b. Testing the underlying source information and the mathematical accuracy of the calculations. c. Developing a range of independent estimates and comparing those to the discount rates and royalty rate selected by management. /s/ Deloitte & Touche LLP Indianapolis, Indiana March 28, 2023 We have served as the Company's auditor since 2016. 50 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Vera Bradley, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Vera Bradley, Inc. and subsidiaries (the “Company”) as of January 28, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended January 28, 2023, of the Company and our report dated March 28, 2023, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Indianapolis, Indiana March 28, 2023 51 Vera Bradley, Inc. Consolidated Balance Sheets (in thousands) January 28, 2023 January 29, 2022 Assets Current assets: Cash and cash equivalents $ 46,595 $ 88,436 Accounts receivable, net 22,105 20,681 Inventories 142,275 144,881 Income taxes receivable 1,311 9,391 Prepaid expenses and other current assets 14,276 15,928 Total current assets 226,562 279,317 Operating right-of-use assets 77,954 79,873 Property, plant, and equipment, net 58,674 59,941 Intangible assets, net 15,918 44,223 Goodwill — 44,254 Deferred income taxes 21,542 3,857 Other assets 3,851 6,081 Total assets $ 404,501 $ 517,546 Liabilities, Redeemable Noncontrolling Interest, and Shareholders’ Equity Current liabilities: Accounts payable $ 20,350 $ 30,492 Accrued employment costs 14,312 12,463 Short-term operating lease liabilities 19,714 18,699 Other accrued liabilities 12,723 16,422 Income taxes payable 558 — Total current liabilities 67,657 78,076 Long-term operating lease liabilities 74,664 80,861 Other long-term liabilities 90 195 Total liabilities 142,411 159,132 Commitments and contingencies Redeemable noncontrolling interest 10,712 30,974 Shareholders’ equity: Preferred stock; 5,000 shares authorized, no shares issued or outstanding — — Common stock, without par value; 200,000 shares authorized, 42,846 and 42,429 shares issued and 30,766 and 33,170 outstanding, respectively — — Additional paid-in capital 109,718 107,907 Retained earnings 274,629 334,364 Accumulated other comprehensive loss ( 105 ) ( 29 ) Treasury stock ( 132,864 ) ( 114,802 ) Total shareholders’ equity of Vera Bradley, Inc. 251,378 327,440 Total liabilities, redeemable noncontrolling interest, and shareholders’ equity $ 404,501 $ 517,546 The accompanying notes are an integral part of these consolidated financial statements. 52 Vera Bradley, Inc. Consolidated Statements of Operations (in thousands, except per share data) Fiscal Year Ended January 28, 2023 January 29, 2022 January 30, 2021 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 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 ( 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 Basic weighted-average shares outstanding 31,503 33,785 33,390 Diluted weighted-average shares outstanding 31,503 34,437 33,914 Basic net (loss) income per share attributable to Vera Bradley, Inc. common shareholders $ ( 1.90 ) $ 0.53 $ 0.26 Diluted net (loss) income per share attributable to Vera Bradley, Inc. common shareholders $ ( 1.90 ) $ 0.52 $ 0.26 The accompanying notes are an integral part of these consolidated financial statements. 53 Vera Bradley, Inc. Consolidated Statements of Comprehensive Income (in thousands) Fiscal Year Ended January 28, 2023 January 29, 2022 January 30, 2021 Net (loss) income $ ( 79,384 ) $ 20,218 $ 10,689 Unrealized loss on available for sale debt investments — ( 4 ) ( 172 ) Cumulative translation adjustment ( 76 ) ( 33 ) 22 Comprehensive (loss) income, net of tax ( 79,460 ) 20,181 10,539 Less: Comprehensive (loss) income attributable to redeemable noncontrolling interest ( 19,649 ) 2,380 2,008 Comprehensive (loss) income attributable to Vera Bradley, Inc. $ ( 59,811 ) $ 17,801 $ 8,531 The accompanying notes are an integral part of these consolidated financial statements. 54 Vera Bradley, Inc. Consolidated Statements of Shareholders’ Equity (in thousands, except share data) Number of Shares Accumulated Other Comprehensive Income (Loss) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings Treasury Stock Total Shareholders’ Equity of Vera Bradley, Inc. Balance at February 1, 2020 33,503,249 8,011,372 $ 100,357 $ 307,414 $ 158 $ ( 104,159 ) $ 303,770 Net income attributable to Vera Bradley, Inc. — — — 8,681 — — 8,681 Translation adjustments — — — — 22 — 22 Unrealized loss on available for sale investments — — — — ( 172 ) — ( 172 ) Restricted shares vested, net of repurchase for taxes 293,076 — ( 575 ) — — — ( 575 ) Stock-based compensation — — 5,651 — — — 5,651 Treasury stock purchased ( 381,835 ) 381,835 — — — ( 2,901 ) ( 2,901 ) Redeemable noncontrolling interest redemption value adjustment — — — 431 — — 431 Balance at January 30, 2021 33,414,490 8,393,207 $ 105,433 $ 316,526 $ 8 $ ( 107,060 ) $ 314,907 Net income attributable to Vera Bradley, Inc. — — — 17,838 — — 17,838 Translation adjustments — — — — ( 33 ) — ( 33 ) Unrealized loss on available for sale investments — — — — ( 4 ) — ( 4 ) Restricted shares vested, net of repurchase for taxes 621,474 — ( 2,456 ) — — — ( 2,456 ) Stock-based compensation — — 4,930 — — — 4,930 Treasury stock purchased ( 865,534 ) 865,534 — — — ( 7,742 ) ( 7,742 ) Balance at January 29, 2022 33,170,430 9,258,741 $ 107,907 $ 334,364 $ ( 29 ) $ ( 114,802 ) $ 327,440 Net loss attributable to Vera Bradley, Inc. — — — ( 59,735 ) — — ( 59,735 ) Translation adjustments — — — — ( 76 ) — ( 76 ) Restricted shares vested, net of repurchase for taxes 416,543 — ( 1,430 ) — — — ( 1,430 ) Stock-based compensation — — 3,241 — — — 3,241 Treasury stock purchased ( 2,820,949 ) 2,820,949 — — — ( 18,062 ) ( 18,062 ) Balance at January 28, 2023 30,766,024 12,079,690 $ 109,718 $ 274,629 $ ( 105 ) $ ( 132,864 ) $ 251,378 The accompanying notes are an integral part of these consolidated financial statements. 55 Vera Bradley, Inc. Consolidated Statements of Cash Flows (in thousands) Fiscal Year Ended January 28, 2023 January 29, 2022 January 30, 2021 Cash flows from operating activities Net (loss) income $ ( 79,384 ) $ 20,218 $ 10,689 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation of property, plant, and equipment 8,854 9,315 13,483 Amortization of operating right-of-use assets 21,543 20,521 21,128 Goodwill and intangible asset impairment 69,256 — — Other impairment charges 1,351 85 7,446 Amortization of intangible assets 3,303 3,073 9,009 Provision for doubtful accounts ( 77 ) 101 1,333 Stock-based compensation 3,241 4,930 5,651 Deferred income taxes ( 17,685 ) ( 327 ) 4,126 Gain on investments — — 13 Adjustment of earn-out liability — — 229 Other non-cash charges (gain), net 6 ( 37 ) ( 1 ) Changes in assets and liabilities: Accounts receivable ( 1,347 ) 6,761 ( 5,579 ) Inventories 2,606 ( 3,465 ) ( 17,810 ) Prepaid expenses and other assets 3,882 2,215 ( 7,940 ) Accounts payable ( 10,223 ) 3,210 7,353 Income taxes 8,638 ( 2,340 ) ( 8,121 ) Operating lease liabilities, net ( 25,398 ) ( 25,961 ) ( 22,680 ) Accrued and other liabilities ( 1,987 ) 1,562 2,373 Net cash (used in) provided by operating activities ( 13,421 ) 39,861 20,702 Cash flows from investing activities Purchases of property, plant, and equipment ( 8,239 ) ( 5,489 ) ( 5,743 ) Purchases of investments — — ( 851 ) Proceeds from maturities and sales of investments — 1,290 23,281 Cash received for business acquisition, net of cash acquired — — 993 Proceeds from disposal of property, plant, and equipment — 45 — Net cash (used in) provided by investing activities ( 8,239 ) ( 4,154 ) 17,680 Cash flows from financing activities Tax withholdings for equity compensation ( 1,430 ) ( 2,456 ) ( 575 ) Repurchase of common stock ( 18,062 ) ( 7,742 ) ( 3,077 ) Distributions to redeemable noncontrolling interest ( 613 ) ( 1,215 ) ( 1,817 ) Borrowings under asset-based revolving credit agreement — — 60,000 Repayment of borrowings under asset-based revolving credit agreement — — ( 60,000 ) Payment of contingent consideration for business acquisition — — ( 18,677 ) Net cash used in financing activities ( 20,105 ) ( 11,413 ) ( 24,146 ) Effect of exchange rate changes on cash and cash equivalents ( 76 ) ( 33 ) 22 Net (decrease) increase in cash and cash equivalents ( 41,841 ) 24,261 14,258 Cash and cash equivalents, beginning of period 88,436 64,175 49,917 Cash and cash equivalents, end of period $ 46,595 $ 88,436 $ 64,175 56 Vera Bradley, Inc. Consolidated Statements of Cash Flows (in thousands) (continued) Fiscal Year Ended January 28, 2023 January 29, 2022 January 30, 2021 Supplemental disclosure of cash-flow information Cash (received) paid for income taxes, net $ ( 6,573 ) $ 9,083 $ 5,079 Cash paid for interest $ 88 $ 293 $ 1,133 Supplemental disclosure of non-cash activity Non-cash operating, investing, and financing activities Repurchase of common stock incurred but not yet paid As of January 28 2023, January 29, 2022, and January 30, 2021 $ — $ — $ — As of January 29, 2022, January 30, 2021, and February 1, 2020 $ — $ — $ 176 Purchases of property, plant, and equipment incurred but not yet paid As of January 28 2023, January 29, 2022, and January 30, 2021 $ 363 $ 250 $ 343 As of January 29, 2022, January 30, 2021, and February 1, 2020 $ 250 $ 343 $ 559 Refer to Note 4 herein for supplemental cash flow information regarding the Company’s leases. The accompanying notes are an integral part of these financial statements. 57 Vera Bradley, Inc. Notes to Consolidated Financial Statements 1. Description of the Company The term “Company” refers to Vera Bradley, Inc. and its wholly and majority owned subsidiaries, except where the context requires otherwise or where otherwise indicated. Vera Bradley, Inc. operates two unique lifestyle brands – Vera Bradley and Pura Vida. We believe Vera Bradley and Pura Vida are complementary businesses, both with devoted, emotionally-connected, and multi-generational female customer bases; alignment as casual, comfortable, affordable, and fun brands; positioning as “gifting” and socially-connected brands; strong, entrepreneurial cultures; a keen focus on community, charity, and social consciousness; multi-channel distribution strategies; and talented leadership teams aligned and committed to the long-term success of their brands. Vera Bradley is a leading designer of women’s handbags, luggage and travel items, fashion and home accessories, and unique gifts. Founded in 1982 by friends Barbara Bradley Baekgaard and Patricia R. Miller, the brand’s innovative designs, iconic patterns, and brilliant colors continue to inspire and connect women. In July 2019, Vera Bradley, Inc. acquired a 75 % interest in Creative Genius, Inc., which also operates under the name Pura Vida Bracelets (“Pura Vida”). On January 30, 2023, subsequent to the end of fiscal 2023, the Company purchased the remaining 25% interest in Pura Vida. Pura Vida, based in La Jolla, California, is a digitally native lifestyle brand that we believe 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 has three reportable segments: Vera Bradley Direct (“VB Direct”), Vera Bradley Indirect (“VB Indirect”), and Pura Vida. • The VB Direct business consists of sales of Vera Bradley products through Vera Bradley full-line and factory outlet stores in the United States; verabradley.com and verabradley.ca; the Vera Bradley online outlet site; and typically the Vera Bradley annual outlet sale in Fort Wayne, Indiana. As of January 28, 2023, the Company operated 51 full-line stores and 79 factory outlet stores. In light of the COVID-19 pandemic, the Company cancelled its calendar year 2022, 2021, and 2020 annual outlet sales. The sale will resume in calendar year 2023. • The VB Indirect business consists of sales of Vera Bradley products to approximately 1,700 specialty retail locations, substantially all of which are located in the United States, as well as 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. • The Pura Vida segment represents revenues generated through the Pura Vida websites, www.puravidabracelets.com, www.puravidabracelets.eu, and www.puravidabracelets.ca, the distribution of Pura Vida-branded products to wholesale retailers, substantially all of which are located in the United States, as well as through its five retail stores. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, and its majority owned subsidiary, Pura Vida beginning on July 17, 2019. The Company has eliminated intercompany balances and transactions in consolidation. Fiscal Periods The Company utilizes a 52-53 week fiscal year ended on the Saturday closest to January 31. As such, fiscal years 2023, 2022, and 2021, ending on January 28, 2023, January 29, 2022, and January 30, 2021 respectively, each reflected a 52-week period. 2. Summary of Significant Accounting Policies Use of Significant Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of the Company’s assets, liabilities, revenues, and expenses, as well as the disclosures relating to contingent assets and liabilities at the date of the consolidated financial statements. Significant areas requiring the use of management estimates include the 58 Vera Bradley, Inc. Notes to Consolidated Financial Statements valuation of inventories, valuation of long-lived assets, including operating right-of-use assets, valuation of goodwill and indefinite-lived intangible assets, accounts receivable valuation allowances, and sales return allowances. Actual results could differ from these estimates. The Company revises its estimates and assumptions as new information becomes available. Cash and Cash Equivalents Cash and cash equivalents represent cash on hand, deposits with financial institutions, and investments with an original maturity of three months or less. 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. Substantially all inventory relates to finished goods. Property, Plant, and Equipment Property, plant, and equipment are carried at cost and depreciated or amortized over the following estimated useful lives using the straight-line method: Buildings and building improvements .............................................. 39.5 years Land improvements ........................................................................... 5 – 15 years Furniture and fixtures, and leasehold improvements ........................ 3 – 10 years Equipment ......................................................................................... 7 years Vehicles ............................................................................................. 5 years Computer equipment and software ................................................... 3 – 5 years The Company recognizes depreciation and amortization expense within cost of sales for expenditures related to distribution center, sourcing, and other related functions and selling, general, and administrative expenses for all other expenditures. Leas ehold improvements are amortized over the shorter of the life of the asset or the lease term. Lease terms typically range from three to ten years . When a decision is made to abandon property, plant, and equipment prior to the end of the previously estimated useful life, depreciation or amortization estimates are revised to reflect the use of the asset over the shortened estimated useful life. At the time of disposal, the cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts and any resulting loss is included in the Consolidated Statements of Operations. Property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset groups may not be recoverable. The reviews are conducted at the lowest identifiable level of cash flows, which is at the retail store level for store-related assets. If the estimated undiscounted future cash flows related to the property, plant, and equipment and operating right-of-use assets are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the fair value, as further defined below in “Fair Value of Financial Instruments.” Routine maintenance and repair costs are expensed as incurred. The Company capitalizes certain costs incurred in connection with acquiring, modifying, and installing internal-use software. Capitalized costs are included in property, plant, and equipment and are amortized over three to five years . Software costs that do not meet capitalization criteria are expensed as incurred. Revenue Recognition and Accounts Receivable Vera Bradley and Pura Vida product sales to customers, including amounts billed to customers for shipping fees, as well as royalties from licensing arrangements related to the Vera Bradley brand, are included in net revenues. Costs related to shipping of product are classified in cost of sales in the Consolidated Statements of Operations. The Company has elected to treat shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill 59 Vera Bradley, Inc. Notes to Consolidated Financial Statements the promise to transfer the product rather than as an additional promised service. Net revenues exclude sales taxes collected from customers and remitted to governmental authorities from the transaction price. Revenue from the sale of the Company’s products is recognized when control of the promised goods or services is transferred to customers, in the amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Revenue is recognized using the five-step model. These steps are: (i) identify the contract with the customer; (ii) identify the performance obligations; (iii) determine the transaction price; (iv) allocate the transaction price to each performance obligation; and (v) recognize revenue as the performance obligations are satisfied. The Company collects payment at the point of sale for Vera Bradley and Pura Vida full-line and factory outlet store transactions, upon shipment for Vera Bradley e-commerce transactions, and upon purchase for Pura Vida e-commerce transactions. The Company generally collects payment in arrears in accordance with established payment terms for each customer within the VB Indirect segment and for Pura Vida wholesale retailers. Historical experience provides the Company the ability to reasonably estimate the amount of product sales that customers will return. Product returns are often resalable through multiple channels. Additionally, the Company reserves for customer allowances for certain VB Indirect retailers based upon various contract terms and other potential product credits granted to VB Indirect retailers. The returns and credits reserve and the related activity for each fiscal year presented were as follows (in thousands): Balance at Beginning of Year Provision Charged to Net Revenues Allowances Taken / Written Off Balance at End of Year Fiscal year ended January 28, 2023 $ 1,582 $ 12,320 $ ( 12,101 ) $ 1,801 Fiscal year ended January 29, 2022 1,714 17,043 ( 17,175 ) 1,582 Fiscal year ended January 30, 2021 1,362 14,284 ( 13,932 ) 1,714 The Company establishes an allowance for doubtful accounts based on historical experience and customer-specific identification and believes that collections of receivables, net of the allowance for doubtful accounts, are reasonably assured. The allowance for doubtful accounts was approximately $ 0.8 million and $ 1.2 million as of January 28, 2023 and January 29, 2022, respectively. The provision for doubtful accounts is based upon the likelihood of default expected during the life of the receivable. Cost of Sales Cost of sales includes material and labor costs, freight, inventory shrinkage, operating lease costs, duty, and other operating expenses, including depreciation of the Vera Bradley distribution center and equipment. Costs and related expenses to purchase and distribute the products are recorded as cost of sales when the related revenues are recognized. Operating Leases The Company recognizes lease liabilities at the lease commencement date based upon the present value of the remaining lease payments. Operating right-of-use assets are based on the lease liability adjusted for prepaid rent, deferred rent, and tenant allowances received from certain of the Company’s landlords, primarily for its retail store locations. Operating lease liabilities are amortized based upon the effective interest method. Operating right-of-use assets are amortized based upon the straight-line lease expense less interest on the lease liability. Operating lease expense is recognized on a straight-line basis over the lease term. Variable rent expense is recognized in the period incurred. Operating right-of-use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The reviews are conducted at the lowest identifiable level of cash flows, which is at the retail store level for store-related assets. If the estimated undiscounted future cash flows related to the operating right-of-use assets are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the fair value, as further defined below in “Fair Value of Financial Instruments.” Refer to Note 4 herein for additional information regarding the Company's leases. 60 Vera Bradley, Inc. Notes to Consolidated Financial Statements Store Pre-Opening, Occupancy, and Operating Costs The Company charges costs associated with the opening of new stores to selling, general, and administrative expenses as incurred. Selling, general, and administrative expenses also include store operating costs, store employee compensation, and store occupancy and supply costs. Business Combination In connection with a business combination, the Company records the identifiable assets acquired, liabilities assumed, contingent consideration liabilities, if any, and any noncontrolling interest in the acquiree at their acquisition-date fair values. Goodwill is measured indirectly as the excess of the sum of (1) the consideration transferred (including contingent consideration, if any) and (2) the fair value of any noncontrolling interest in the acquiree over the net assets acquired and liabilities assumed. Refer to Note 14 herein for additional information regarding the noncontrolling interest in Pura Vida as of January 28, 2023. These fair value assessments require management judgment and include the use of significant estimates and assumptions including future cash flows, discount and other market rates, and asset lives, among other items. Goodwill and Other Intangible Assets Upon an acquisition, the Company records the fair value of goodwill and the identifiable intangible assets. As of January 28, 2023 the identifiable intangible assets consisted of the Pura Vida brand and customer relationships. As of January 29, 2022 the balance also included non-competition agreements. Assets that are determined to have an indefinite life, including goodwill and the Pura Vida brand, are not amortized but are assessed for impairment at least annually or whenever events or circumstances indicate that the goodwill may be impaired . Definite-lived intangible assets, including customer relationships and non-competition agreements, are amortized over their estimated useful lives and are also subject to impairment testing, similar to the Company’s long-lived assets. The Company performs its annual goodwill and Pura Vida brand impairment test during the second quarter. The Company may first use a qualitative analysis to determine whether it is more-likely-than-not that the fair value of the reporting unit (including goodwill) is less than its carrying value. 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 the Company elects to bypass the qualitative analysis, or if it is determined through the qualitative analysis that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value, a quantitative analysis is performed. 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 amount of total 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 Company's critical estimates for the goodwill test include the revenue growth rate, operating profit, and discount rate. The fair value of the Pura Vida brand is estimated using the relief-from-royalty method. The critical estimates for the Pura Vida brand impairment test include the projected revenue growth, long-term growth rate, the royalty rate, and the discount rate. As of January 28, 2023, the carrying value of the Pura Vida brand was $ 11.7 million. Goodwill was fully impaired during fiscal 2023 leaving no balance. For the annual impairment analysis performed during fiscal 2023, the Company performed a quantitative analysis, as well as subsequent analyses due to triggering events, further described in Note 15 herein. There were impairment charges recorded of $ 44.3 million and $ 25.0 million during fiscal 2023 for goodwill and the Pura Vida brand, respectively. 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 may be necessary in future years. Redeemable Noncontrolling Interest On July 16, 2019, as contemplated by the Interest Purchase Agreement, the Company and certain of its subsidiaries and the owners of the remaining twenty-five percent ( 25 %) ownership interest in Pura Vida (the “Sellers”) which was not acquired by the Company (the “Remaining Pura Vida Interest”) entered into a Put/Call Agreement (the “Put/Call Agreement”). Pursuant to the Put/Call Agreement, and subject to the terms and conditions thereof, the Sellers have the right to sell all of the Remaining Pura Vida Interest to the Company, and the Company has the right to purchase all of the Remaining Pura 61 Vera Bradley, Inc. Notes to Consolidated Financial Statements Vida Interests from Sellers, in each case generally at any time following the fifth anniversary of the closing date of the transaction until the tenth anniversary thereof. The purchase price for any Remaining Pura Vida Interest put to, or called by, the Company will be determined based on the arithmetic average of a multiple of adjusted EBITDA of Pura Vida and a multiple of adjusted EBITDA of the Company, as defined in the Put/Call Agreement, over the twelve-month period ending on the last day of the month immediately preceding the month in which an exercise notice is delivered by a relevant party. In the event of a change in control of the Company, the parties may exercise a portion of their put and call rights prior to the fifth anniversary of the closing date (as defined in the Put/Call Agreement). As a result of this redemption feature, the Company recorded the noncontrolling interest as redeemable and classified it in temporary equity within its Consolidated Balance Sheets initially at its acquisition-date fair value. The noncontrolling interest is adjusted each reporting period for income (or loss) attributable to the noncontrolling interest. A measurement period adjustment, if any, is then made to adjust the noncontrolling interest to the higher of the redemption value or carrying value each reporting period. These adjustments are recognized through retained earnings and are not reflected in net income or net income attributable to Vera Bradley, Inc. When calculating earnings per share attributable to Vera Bradley, Inc., the Company adjusts net income attributable to Vera Bradley, Inc. for the measurement period adjustment to the extent the redemption value exceeds the fair value of the noncontrolling interest on a cumulative basis. The fair value of the noncontrolling interest is estimated using a combination of the income approach, a discounted cash flow analysis, and the market approach, utilizing the guideline company method. The reporting unit’s discounted cash flow analysis requires significant management judgment with respect to revenue, total direct costs, selling, general, and administrative expenses, capital expenditures, and the selection and use of an appropriate discount rate. The projected revenue and expense assumptions and capital expenditures are based on our annual and long-term business plans. Discount rates reflect market-based estimates of the risks associated with the projected cash flows directly resulting from the use of those assets in operations. Subsequent Event On January 23, 2023, the Company and certain of its subsidiaries entered into an Interest Purchase Agreement (the “Interest Purchase Agreement”) with Creative Genius Holdings, Inc. a California corporation, Creative Genius Investments, Inc., a California corporation, Griffin Thall and Paul Goodman (collectively “Sellers”) to purchase the remaining 25 % of the outstanding membership interests (the "Remaining Pura Vida Interests") of Pura Vida. The closing date of the Transaction was January 30, 2023 (fiscal 2024). Pursuant to the Interest Purchase Agreement, and subject to the terms and conditions thereof, on the closing date, the Company indirectly acquired the Remaining Pura Vida Interests (the “Transaction”) in exchange for cash consideration consisting of approximately $ 10 million payable at closing, subject to certain adjustments. The Transaction was not subject to financing conditions. The Company’s existing available cash and cash equivalents funded the purchase price. Following completion of the Transaction, the Company owns one hundred percent ( 100 %) of the ownership interests in Pura Vida. The Interest Purchase Agreement also includes certain non-competition and customer, supplier and employee non-solicitation and non-interference covenants from the Sellers in favor of the Company during the four-year period beginning on the closing date of the Transaction. The Interest Purchase Agreement provides that, as of the closing of the Transaction, all rights and obligations of the Company and the Sellers under any agreements among the parties, including the Put/Call Agreement, were terminated. Stock-Based Compensation The Company accounts for stock-based compensation using the fair-value recognition provisions of ASC 718, Stock Compensation . Under these provisions, for its awards of restricted stock and restricted-stock units, the Company recognizes stock-based compensation expense in an amount equal to the fair market value of the underlying stock on the grant date of the respective award. The Company recognizes this expense, net of estimated forfeitures, on a straight-line basis over the requisite service period. Advertising Costs The Company expenses advertising costs at the time the promotion first appears in media, in stores, or on its websites, and includes those costs in selling, general, and administrative expenses in the Consolidated Statements of Operations. 62 Vera Bradley, Inc. Notes to Consolidated Financial Statements Total advertising expense was as follows (in thousands): Fiscal year ended January 28, 2023 $ 54,941 Fiscal year ended January 29, 2022 61,223 Fiscal year ended January 30, 2021 54,571 Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date: • Level 1 – Quoted prices in active markets for identical assets or liabilities; • Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; • Level 3 – Unobservable inputs based on the Company’s own assumptions. The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement. The carrying amounts reflected on the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, and accounts payable as of January 28, 2023 and January 29, 2022, approximated their fair values. The following table details the fair value measurements of the Company’s investments as of January 28, 2023 and January 29, 2022 (in thousands): Level 1 Level 2 Level 3 January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022 Cash equivalents (1) $ 360 $ 2,856 $ — $ — $ — $ — (1) Cash equivalents relate to a money market fund that has a maturity of three months or less at the date of purchase. Due to its short maturity, the Company believes the carrying value approximates fair value. The Company assesses potential impairments to its long-lived assets, which includes property, plant, and equipment and lease right-of-use assets, on a quarterly basis or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Store-level assets and right-of-use assets are grouped at the individual store-level for the purpose of the impairment assessment. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The fair value of the store assets is determined using the discounted future cash flow method of anticipated cash flows through the store’s lease-end date using fair value measurement inputs classified as Level 3. The fair value of right-of-use assets is estimated using market comparative information for similar properties. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. The Company recorded $ 1.4 million , $ 0.1 million , and $ 7.4 million in impairment charges primarily related to store assets including property, plant, and equipment and lease right-of-use assets during the fiscal years ended January 28, 2023, January 29, 2022, and January 30, 2021, respectively. Assets recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property, plant, and equipment, including leasehold improvements, and operating lease assets, as well as assets related to the Pura Vida acquisition including goodwill and intangible assets. These assets are measured at fair value if determined to be impaired. Refer to Note 15 herein regarding the Pura Vida brand and goodwill impairment test and fiscal 2023 impairment charges. 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 63 Vera Bradley, Inc. Notes to Consolidated Financial Statements 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 which may be material. Income Taxes The Company accrues income taxes payable or refundable and recognizes deferred tax assets and liabilities based on differences between the book and tax bases of assets and liabilities. The Company measures deferred tax assets and liabilities using enacted rates in effect for the years in which the differences are expected to reverse, and recognizes the effect of a change in enacted rates in the period of enactment. When measuring deferred tax assets, the Company considers both positive and negative evidence to determine whether it is more likely than not that the deferred tax assets will be realized. This evidence includes recent operating results, projected future taxable income, the reversal of existing taxable differences, tax planning strategies, among other factors. When necessary, a valuation allowance is recorded to reduce the deferred tax assets to their anticipated realizable value. The Company establishes liabilities for uncertain positions taken or expected to be taken in income tax returns, using a more-likely-than-not recognition threshold. The Company includes in income tax expense any interest and penalties related to uncertain tax positions. Cloud Computing Arrangements The Company capitalizes implementation costs associated with its Cloud Computing Arrangements (“CCA”) consistent with costs capitalized for internal-use software. The CCA costs are amortized over the term of the related hosting agreement, taking into consideration renewal options, if any. The renewal period is included in the amortization period if determined that the option is reasonably certain to be exercised. The amortization expense is recorded in the same line item within the Company's Consolidated Statements of Operations as the related hosting fees. The balance of the unamortized CCA implementation costs totaled $ 6.4 million and $ 8.0 million as of January 28, 2023 and January 29, 2022, respectively. Of this total, $ 3.0 million and $ 2.8 million was recorded within prepaid expenses and other current assets and $ 3.4 million and $ 5.2 million was recorded within other assets on the Company's Consolidated Balance Sheets as of January 28, 2023 and January 29, 2022, respectively. The CCA implementation costs are recorded within operating activities in the Company's Consolidated Statements of Cash Flows. Recently Issued Accounting Pronouncements There were no new accounting pronouncements issued or which became effective during fiscal 2023 which had, or are expected to have, a significant impact on the Company's Consolidated Financial Statements. 64 Vera Bradley, Inc. Notes to Consolidated Financial Statements 3. Revenue from Contracts with Customers Disaggregation of Revenue The following presents the Company's net revenues disaggregated by product category for the fifty-two weeks ended January 28, 2023, January 29, 2022, and January 30, 2021 (in thousands): Fifty-Two Weeks Ended January 28, 2023 VB Direct Segment VB Indirect Segment Pura Vida Segment Total Product categories Bags $ 131,432 $ 38,587 $ 1,249 $ 171,268 Travel 79,585 14,283 — 93,868 Accessories 58,932 10,312 90,743 159,987 Home 38,040 4,233 — 42,273 Apparel/Footwear (6) 12,701 2,236 3,844 18,781 Other 7,541 (1) 3,665 (2) 2,578 (3) 13,784 Total net revenues $ 328,231 (4) $ 73,316 (5) $ 98,414 (4) $ 499,961 (1) Primarily includes net revenues from stationery, freight, and gift card breakage. (2) Primarily includes net revenues from licensing agreements, freight, and merchandising. (3) Related to freight. (4) Net revenues were related to product sales recognized at a point in time. (5) $ 70.7 million of net revenues related to product sales recognized at a point in time and $ 2.6 million of net revenues related to sales-based royalties recognized over time. (6) Includes mask sales. Fifty-Two Weeks Ended January 29, 2022 VB Direct Segment VB Indirect Segment Pura Vida Segment Total Product categories Bags $ 138,910 $ 33,125 $ 974 $ 173,009 Travel 82,507 12,150 — 94,657 Accessories 65,219 10,021 111,248 186,488 Home 41,987 4,416 — 46,403 Apparel/Footwear (6) 18,592 2,406 4,110 25,108 Other 7,660 (1) 3,883 (2) 3,245 (3) 14,788 Total net revenues $ 354,875 (4) $ 66,001 (5) $ 119,577 (4) $ 540,453 (1) Primarily includes net revenues from stationery, freight, and gift card breakage. (2) Primarily includes net revenues from licensing agreements, freight, and merchandising. (3) Related to freight. (4) Net revenues were related to product sales recognized at a point in time. (5) $ 63.1 million of net revenues related to product sales recognized at a point in time and $ 2.9 million of net revenues related to sales-based royalties recognized over time. (6) Includes mask sales. 65 Vera Bradley, Inc. Notes to Consolidated Financial Statements Fifty-Two Weeks Ended January 30, 2021 VB Direct Segment VB Indirect Segment Pura Vida Segment Total Product categories Bags $ 105,197 $ 26,732 $ — $ 131,929 Travel 59,606 12,191 — 71,797 Accessories 49,578 8,207 106,547 164,332 Home 31,819 2,253 — 34,072 Apparel/Footwear (6) 36,762 13,416 1,857 52,035 Other 6,312 (1) 3,718 (2) 4,077 (3) 14,107 Total net revenues $ 289,274 (4) $ 66,517 (5) $ 112,481 (4) $ 468,272 (1) Primarily includes net revenues from stationery, freight, and gift card breakage. (2) Primarily includes net revenues from licensing agreements, freight, and merchandising. (3) Related to freight. (4) Net revenues were related to product sales recognized at a point in time. (5) $ 63.5 million of net revenues related to product sales recognized at a point in time and $ 3.0 million of net revenues related to sales-based royalties recognized over time. (6) Includes mask sales. Contract Balances Contract liabilities as of January 28, 2023 and January 29, 2022, were $ 3.2 million and $ 3.9 million, respectively. The balance consisted of unredeemed gift cards, unearned revenue related to the monthly bracelet and jewelry clubs of the Pura Vida segment, Pura Vida loyalty club points, and Pura Vida customer deposits and payments collected before shipment. These contract liabilities are recognized within other accrued liabilities on the Company’s Consolidated Balance Sheets. Substantially all contract liabilities are recognized within one year. The Company did no t have contract assets as of January 28, 2023 and January 29, 2022. The balance for accounts receivable from contracts with customers, net of allowances, as of January 28, 2023 and January 29, 2022 was $ 20.7 million and $ 18.1 million, respectively, which is recognized within accounts receivable, net, on the Company’s Consolidated Balance Sheets. The provision for doubtful accounts was $ 0.8 million and $ 1.2 million as of January 28, 2023 and January 29, 2022, respectively. The provision for doubtful accounts is based upon the likelihood of default expected during the life of the receivable. Performance Obligations The performance obligations for the VB Direct, VB Indirect, and Pura Vida segments include the promise to transfer distinct goods (or a bundle of distinct goods). The VB Indirect segment also includes the right to access intellectual property (“IP”) related to the Vera Bradley brand. Remaining Performance Obligations The Company does not have remaining performance obligations in excess of one year or contracts that it does not have the right to invoice as of January 28, 2023. Significant Judgments Product Sales In the Vera Bradley and Pura Vida retail stores (recognized within the VB Direct segment and the Pura Vida segments), control is transferred and net revenue is recognized at the point of sale. Product shipments for the Company’s e-commerce channels (recognized within the VB Direct and Pura Vida segments) and shipments to its wholesale retailers (recognized within the VB Indirect segment and Pura Vida segment) are generally shipped Free on Board (“FOB”) shipping point typically from its distribution center in Roanoke, Indiana, for Vera Bradley products and primarily from its third-party fulfillment center in Tijuana, Mexico for Pura Vida products. Net revenue is recognized upon shipment consistent with 66 Vera Bradley, Inc. Notes to Consolidated Financial Statements when control is transferred to the customer. Upon shipment, the customer has the right to direct the use of, and obtain substantially all of the benefits from, the product. Licensing Royalties The Company grants rights to access its Vera Bradley IP and accounts for any resulting sales-based royalty revenue over time, as the subsequent sales occur. The Company has contractually guaranteed minimum royalties in certain of its sales-based royalty arrangements which are recognized straight-line over the remaining license period once determined that the minimum sales level will not be achieved. Licensing royalties are recognized within VB Indirect segment net revenues. Transaction Price and Amounts Allocated to Performance Obligations The transaction price is the amount of consideration the Company expects to be entitled to in a sales transaction. The transaction price is net of discounts, estimated variable consideration (if any), and any customer allowances offered or estimated, including those offered to certain Indirect retailers based on various contract terms. The transaction price also is net of allowances for product returns, which the Company is able to reasonably estimate based upon historical experience. The transaction price is allocated to each performance obligation in the contract based upon the standalone selling price. Contract Costs Sales commissions are paid to certain employees based upon specific sales achieved during a time period. As the Company’s contracts related to these sales commissions do not exceed one year, these incentive payments are expensed as incurred. Other Practical Expedients Significant Financing Components The Company does not adjust for the time value of money as the majority of its contracts have an original expected duration of one year or less; contracts that are greater than one year are related to net revenues that are constrained until the subsequent sales occur. The net revenues associated with these contracts are immaterial, and the Company does not adjust for the time value of money. Concentration of Credit Risk Five customers represented nearly 50.0 % of the balance of accounts receivable, net as of January 28, 2023. 4. Leases Nature of Leases The Company has operating leases at all of its Vera Bradley and Pura Vida retail stores, as well as for its New York office, the California Pura Vida office, Asia sourcing office, and showrooms. The Company also has operating leases for storage spaces. The Company does not have residual value guarantees, restrictions, or covenants imposed by leases. Determination of Lease Terms Retail store leases have remaining terms of up to 10 years as of January 28, 2023. These leases generally have early termination rights when certain sales thresholds are not met for a specified measurement period. The Company's other leases have remaining terms of up to approximately four years as of January 28, 2023. If the lease contains a renewal period at the Company's option, the renewal period is included in the lease term if determined the option is reasonably certain to be exercised at lease commencement. The Company's lease options generally do not include termination rights other than those mentioned. The Company did not have financing leases as of January 28, 2023. Variable Rental Payments All of the Company's retail store leases contain variable rental payments when the retail store's sales exceed a specified breakpoint. In addition, the majority of the Company's leases contain real estate taxes, common area maintenance, and similar items that are billed as pass-through charges from its landlords. These rental payments are not included in the measurement of the lease liability, but are recognized as variable lease cost in the period incurred. 67 Vera Bradley, Inc. Notes to Consolidated Financial Statements Certain of the Company's leases also contain lease components with increases based upon an index or rate. These lease components are included on the Company's balance sheet at the rate as of lease commencement. Future changes in the index or rate will generally be included as variable lease cost. Significant Judgments and Assumptions Determination of Whether a Contract Contains a Lease The Company determines whether a contract is or contains a lease at the inception of the contract. The contract is, or contains, a lease if the contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company generally must also have the right to obtain substantially all of the economic benefits from use of the property, plant, and equipment and have the right to direct its use. Discount Rate The weighted-average discount rate as of January 28, 2023 and January 29, 2022, was 4.6 % and 4.7 %, respectively. The discount rate is not readily determinable in the lease; therefore, the Company estimated the incremental borrowing rate, at the commencement or remeasurement date of each lease, which is the rate of interest it would have to borrow on a collateralized basis over a similar term with similar payments. Leases Not Yet Commenced As of January 28, 2023, the Company had two leases which were executed but did it not have control of the underlying assets; therefore, the lease liability and right-of-use asset are not recorded on the Condensed Consolidated Balance Sheet. These leases contain undiscounted lease payments, which will be included in the determination of the lease liability, totaling approximately $ 5.1 million and have terms of approximately 10 years commencing in fiscal year 2024. Practical Expedients (Policy Elections) The Company has elected the following practical expedients as policy elections upon the adoption of ASC Topic 842. Short-Term Leases The Company elected to exclude leases with a term of 12 months or less from recognition on the balance sheet for all leases. Not Separating Lease and Nonlease Components The Company elected to combine lease and nonlease components and recognize as a single lease component for all leases. Amounts Recognized in the Consolidated Financial Statements The following lease expense is recorded within cost of sales for the Asia sourcing office and certain equipment leases and within selling, general, and administrative expenses for all other leases, including retail store leases, in the Company's Consolidated Statements of Operations for the fiscal years ended January 28, 2023, January 29, 2022, and January 30, 2021 (in thousands): Fifty-Two Weeks Ended January 28, 2023 January 29, 2022 January 30, 2021 Operating lease cost $ 25,118 $ 25,200 $ 26,112 Variable lease cost 5,975 7,560 5,821 Short-term lease cost 476 515 445 Less: Sublease income (1) ( 234 ) — — Total lease cost $ 31,335 $ 33,275 $ 32,378 (1) Related to the sublease of a former Company location. The weighted-average remaining lease term as of January 28, 2023 and January 29, 2022 was 5.4 years and 5.3 years, respectively. 68 Vera Bradley, Inc. Notes to Consolidated Financial Statements Supplemental operating cash flow information was as follows (in thousands): Fifty-Two Weeks Ended January 28, 2023 January 29, 2022 January 30, 2021 Cash paid for amounts included in the measurement of operating lease liabilities (1) $ 30,014 $ 33,517 $ 27,180 Right-of-use assets increase as a result of new and modified operating lease liabilities, net $ 20,379 $ 11,584 $ 1,268 (1) $ 2.5 million of lease liabilities were recorded within accounts payable on the Company's Consolidated Balance Sheets as of January 30, 2021, and were paid in the first quarter of fiscal 2022. Maturity Analysis of Operating Lease Liabilities Maturities of the Company's operating lease liabilities (undiscounted) reconciled to its lease liability as of January 28, 2023 were as follows (in thousands): Operating Leases Fiscal 2024 $ 23,650 Fiscal 2025 22,290 Fiscal 2026 17,099 Fiscal 2027 12,908 Fiscal 2028 9,629 Thereafter 21,974 Total remaining obligations 107,550 Less: Interest ( 13,172 ) Present value of lease liabilities $ 94,378 5. Property, Plant, and Equipment Property, plant, and equipment consisted of the following (in thousands): January 28, 2023 January 29, 2022 Land and land improvements $ 5,981 $ 5,981 Building and building improvements 46,276 46,233 Furniture, fixtures, leasehold improvements, computer equipment and software 86,180 88,097 Equipment and vehicles 28,528 27,893 Construction in progress 489 733 167,454 168,937 Less: Accumulated depreciation and amortization ( 108,780 ) ( 108,996 ) Property, plant, and equipment, net $ 58,674 $ 59,941 Depreciation and amortization expense associated with property, plant, and equipment, excluding impairment charges (in thousands): Fiscal year ended January 28, 2023 $ 8,854 Fiscal year ended January 29, 2022 9,315 Fiscal year ended January 30, 2021 13,483 69 Vera Bradley, Inc. Notes to Consolidated Financial Statements 6. Debt As of January 28, 2023 and January 29, 2022, the Company had no borrowings outstanding and availability of $ 75.0 million under its Credit Agreement. 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 Credit Agreement also requires the loan parties, as defined in the Credit Agreement, to maintain a minimum fixed charge coverage ratio of 1.0 0 to 1.00 during periods when borrowing availability is less than the greater of (A) $ 7.5 million, and (B) 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. There were no material fees or expenses associated with the Credit Agreement. 70 Vera Bradley, Inc. Notes to Consolidated Financial Statements 7. Income Taxes The components of the income tax (benefit) expense were as follows (in thousands): January 28, 2023 January 29, 2022 January 30, 2021 Current: Federal $ 680 $ 5,923 $ ( 4,644 ) Foreign 562 279 268 State 803 555 1,423 2,045 6,757 ( 2,953 ) Deferred: Federal ( 15,517 ) ( 1,300 ) 4,794 State ( 2,168 ) 973 ( 668 ) ( 17,685 ) ( 327 ) 4,126 Total income tax (benefit) expense $ ( 15,640 ) $ 6,430 $ 1,173 A breakdown of the Company’s (loss) income before income taxes is as follows (in thousands): January 28, 2023 January 29, 2022 January 30, 2021 Domestic $ ( 98,539 ) $ 24,881 $ 10,151 Foreign 3,515 1,767 1,711 Total (loss) income before income taxes $ ( 95,024 ) $ 26,648 $ 11,862 A reconciliation of the income tax (benefit) expense to the amount computed at the federal statutory rate is as follows (in thousands): January 28, 2023 January 29, 2022 January 30, 2021 Federal taxes at statutory rate $ ( 19,955 ) 21.0 % $ 5,596 21.0 % $ 2,491 21.0 % State and local income taxes, net of federal benefit ( 1,063 ) 1.1 1,175 4.4 598 5.0 Impact related to redeemable noncontrolling interest 4,126 ( 4.3 ) ( 508 ) ( 1.9 ) ( 419 ) ( 3.5 ) Shortfall from stock-based compensation 271 ( 0.3 ) ( 472 ) ( 1.8 ) 597 5.0 Impact of foreign rate differential ( 167 ) 0.2 ( 82 ) ( 0.3 ) 211 1.8 Change in uncertain tax positions ( 15 ) — 32 0.1 ( 2 ) — Benefits provided by the CARES Act — — — — ( 2,793 ) ( 23.5 ) Non-deductible executive compensation 1,150 ( 1.2 ) 471 1.8 246 2.1 Other 13 — 218 0.8 244 2.0 Total income tax (benefit) expense $ ( 15,640 ) 16.5 % $ 6,430 24.1 % $ 1,173 9.9 % For the tax year ending January 30, 2021, the effective tax rate reflects the favorable impact of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, enacted on March 27, 2020. The Company realized a $ 2.8 million tax benefit related to the net operating loss carryback provisions of the CARES Act. 71 Vera Bradley, Inc. Notes to Consolidated Financial Statements Deferred income taxes reflect the net tax effects of temporary differences between the book and tax bases of assets and liabilities. Significant components of deferred tax assets and liabilities were as follows (in thousands): January 28, 2023 January 29, 2022 Deferred tax assets: Operating lease liabilities $ 25,262 $ 27,317 Compensation and benefits 2,602 2,807 Inventories 2,298 1,637 Investment in subsidiary 14,595 826 Other 1,519 2,041 Subtotal deferred tax assets 46,276 34,628 Less: valuation allowances ( 48 ) ( 48 ) Total deferred tax assets 46,228 34,580 Deferred tax liabilities: Operating lease assets ( 19,858 ) ( 21,043 ) Property, plant, and equipment ( 2,966 ) ( 6,056 ) Other ( 1,862 ) ( 3,624 ) Total deferred tax liabilities ( 24,686 ) ( 30,723 ) Net deferred tax assets $ 21,542 $ 3,857 The Company considered both positive and negative evidence to determine whether it was more likely than not that some, or all, of the deferred tax assets would not be realized in its valuation allowance assessment. Based on this assessment, t he Company recorded immaterial valuation allowances as of January 28, 2023 and January 29, 2022 Uncertain Tax Positions A reconciliation of the beginning and ending gross amount of unrecognized tax benefits (excluding interest and penalties) is as follows (in thousands): January 28, 2023 January 29, 2022 January 30, 2021 Beginning balance $ 92 $ 55 $ 59 Net increases in unrecognized tax benefits as a result of current year activity 2 37 — Lapse of statute of limitations ( 21 ) — ( 4 ) Ending balance $ 73 $ 92 $ 55 As of January 28, 2023, $ 0.1 million of total unrecognized tax benefits, net of federal benefit, would, if recognized, favorably affect the effective tax rate in future periods. Total unrecognized tax benefits are currently not expected to decrease by a significant amount in the next twelve months. The Company recognized an immaterial amount of interest only, no penalties, related to unrecognized tax benefits in the fiscal years ended January 29, 2022, February 1, 2020, and February 2, 2019. Unrecognized tax benefits are included within other long-term liabilities in the Company's Consolidated Balance Sheets. The Company files income tax returns in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. The Company is subject to U.S. federal income tax examinations for fiscal years 2020 and forward. With a few exceptions, the Company is subject to audit by various state and foreign taxing authorities for fiscal 2019 through the current fiscal year. 8. Stock-Based Compensation The Company’s stock-based compensation consists of awards of restricted stock and restricted stock units. The Company recognized stock-based compensation expense of $ 3.2 million, $ 4.9 million, and $ 5.7 million in the fiscal years ended January 28, 2023, January 29, 2022, and January 30, 2021, respectively. 72 Vera Bradley, Inc. Notes to Consolidated Financial Statements Awards of Restricted-Stock Units The Company reserved 3,000,000 shares of common stock for issuance or transfer under the 2020 Equity and Incentive Plan, which allows for grants of restricted stock units, as well as other equity awards. The Company maintains the 2010 Equity and Incentive Plan for awards granted prior to the effectiveness of the 2020 Equity and Incentive Plan. During the fiscal year ended January 28, 2023, the Company granted a total of 1,652,898 time-based and performance-based restricted stock units to certain employees and non-employee directors under the 2020 Equity and Incentive Plan with an aggregate fair value of $ 9.3 million. The Company determined the fair value of the units based on the closing price of the Company’s common stock on the grant date. The majority of time-based restricted stock units vest and settle in shares of the Company’s common stock, on a one -for-one basis, in equal installments on each of the first three anniversaries of the grant date. Restricted stock unit awards issued to non-employee directors vest after a one-year period from the grant date. The Company recognizes the expense relating to these awards, net of estimated forfeitures, on a straight-line basis over the vesting period. The majority of performance-based restricted stock units vest upon the completion of a three-year period of time (cliff vesting), subject to the employee’s continuing employment throughout the three-year performance period and the Company’s achievement of annual earnings per share targets, or other Company performance targets, during the three-year performance period. The Company recognizes the expense relating to these units, net of estimated forfeitures and based on the probable outcome of achievement of the financial targets, on a straight-line basis over the vesting period. The following table summarizes information about restricted-stock units as of and for the year ended January 28, 2023 (units in thousands): Time-based Restricted Stock Units Performance-based Restricted Stock Units Number of Units Weighted- Average Grant Date Fair Value (per unit) Number of Units Weighted- Average Grant Date Fair Value (per unit) Nonvested units outstanding at January 29, 2022 855 $ 7.43 708 $ 7.95 Granted 992 5.60 661 5.62 Change due to performance condition achievement — — ( 159 ) 6.56 Vested ( 442 ) 7.73 ( 174 ) 13.10 Forfeited ( 440 ) 6.70 ( 513 ) 6.92 Nonvested units outstanding at January 28, 2023 965 $ 5.74 523 $ 4.71 As of January 28, 2023, there was $ 4.4 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stock units. That cost is expected to be recognized over a weighted average period of 1.9 years, subject to meeting performance conditions. The total fair value of restricted stock units for which restrictions lapsed (vested) during fiscal 2023 was $ 4.4 million. 9. Commitments and Contingencies The Company is subject to various claims and contingencies arising in the normal course of business, including those relating to product liability, legal claims, employee benefits, environmental issues, and other matters. Management believes that at this time it is not probable that any of these claims will have a material adverse effect on the Company’s financial condition, results of operations, or cash flows. However, the outcomes of legal proceedings and claims brought against the Company are subject to uncertainty and future developments could cause these actions or claims, individually or in the aggregate, to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows of a particular reporting period. In August of 2019, Vesi Incorporated (“Vesi”) filed suit against the Company in the U.S. District Court for the Southern District of Ohio related to the Company’s licensing business and alleging breach of fiduciary duty, unfair competition, defamation, and tortious interference with prospective business relationships. The complaint seeks damages in an amount not less than $ 10.0 million for punitive damages, attorney fees, prejudgment interest, and any other additional relief. The Company has denied any liability and intends to vigorously defend itself in the case. In November 2019, the Company filed 73 Vera Bradley, Inc. Notes to Consolidated Financial Statements a counterclaim against the principals of Vesi as personal guarantors for monies owed to the Company by Vesi. The Company filed a motion for summary judgement asking the Court to dismiss all claims with prejudice and grant judgement on its counterclaim. On January 4, 2023, the Court granted the Company’s motion for summary judgment dismissing Vesi’s claims and also granted judgment on the Company’s counterclaims against the principals of Vesi for an immaterial amount. Vesi has appealed this decision. At this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition or results of operations due to the fact that the Company is vigorously defending itself and management believes that the Company has a number of meritorious legal defenses. 74 Vera Bradley, Inc. Notes to Consolidated Financial Statements 10. 401(k) Profit Sharing Plan and Trust The Company has a 401(k) profit sharing plan and trust for all qualified employees and provides a 100 % match for the first 3 % of employee contributions and a 50 % match for the next 2 % of employee contributions, for a maximum Company match of 4 % of employee contributions, limited to the annual legal allowable limit. Additionally, the Company has the option of making discretionary profit sharing payments to the plan as approved by the board of directors. As of January 28, 2023, January 29, 2022, and January 30, 2021, no discretionary profit sharing payments had been approved. The 401(k) contribution match was temporarily suspended beginning in March 2020 as a result of the COVID-19 pandemic and resumed in January 2021. The Company recognizes 401(k) Company contributions within cost of sales for employees related to distribution center, sourcing, and other related functions and selling, general, and administrative expenses for all other employees. Total Company contributions to the plan were as follows (in thousands): Fiscal year ended January 28, 2023 $ 1,854 Fiscal year ended January 29, 2022 1,929 Fiscal year ended January 30, 2021 723 11. Related-Party Transactions Charitable Contributions . The Vera Bradley Foundation for Breast Cancer (the “Foundation”) was founded by one of the Company’s directors, who is also on the board of directors of the Foundation. The liability associated with commitments to the Foundation was approximately $ 0.1 million as of January 28, 2023 and January 29, 2022. The liability consisted of pass-through donations from customers and is included in other accrued liabilities in the Consolidated Balance Sheets. The associated expense for contributions to the Foundation, which is included in selling, general, and administrative expenses, was as follows (in thousands): Fiscal year ended January 28, 2023 $ 191 Fiscal year ended January 29, 2022 160 Fiscal year ended January 30, 2021 53 75 Vera Bradley, Inc. Notes to Consolidated Financial Statements 12. Earnings Per Share Basic net (loss) income per share is computed based on the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed based on the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock and restricted-stock units. The components of basic and diluted net (loss) income per share are as follows (in thousands, except per share data): Fiscal Year Ended January 28, 2023 January 29, 2022 January 30, 2021 Numerator: 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 Denominator: Weighted-average number of common shares (basic) 31,503 33,785 33,390 Dilutive effect of stock-based awards — 652 524 Weighted-average number of common shares (diluted) 31,503 34,437 33,914 Net (loss) income per share attributable to Vera Bradley, Inc.: Basic $ ( 1.90 ) $ 0.53 $ 0.26 Diluted $ ( 1.90 ) $ 0.52 $ 0.26 As of January 28, 2023, all potential common shares were excluded from the diluted share calculation because they were anti-dilutive due to the net loss in the period. As of January 29, 2022 and January 30, 2021, there were an immaterial number of additional shares issuable upon the vesting of restricted stock units that were excluded from the diluted share calculations because they were anti-dilutive. The diluted share calculations include performance-based restricted stock units for completed performance periods. 13. Common Stock On November 29, 2018, the Company's board of directors approved a share repurchase plan (the “2018 Share Repurchase Program”) authorizing up to $ 50.0 million of repurchases of shares of the Company's common stock. On December 3, 2020, the 2018 Share Repurchase Program was extended through December 11, 2021. On March 20, 2020, the Company temporarily suspended the share repurchase program to conserve cash as a result of the COVID-19 pandemic. The board of directors authorized the resumption of the share repurchase program beginning on March 11, 2021. In December 2021, the Company's board of directors approved a new share repurchase plan (the “2021 Share Repurchase Program”) which authorized Company management to utilize up to $ 50.0 million of available cash for repurchases of shares of the Company's common stock. The 2021 Share Repurchase Program went into effect beginning December 13, 2021 and expires in December 2024. During the fiscal year ended January 28, 2023, the Company purchased and held 2,820,949 shares at an average price of $ 6.40 per share, excluding commissions, for an aggregate amount of $ 18.1 million, under the 2021 Share Repurchase Programs. During the fiscal year ended January 29, 2022, the Company purchased and held 865,534 shares at an average price of $ 8.94 per share, excluding commissions, for an aggregate amount of $ 7.7 million, under the 2018 and 2021 Share Repurchase Programs. 76 Vera Bradley, Inc. Notes to Consolidated Financial Statements During the fiscal year ended January 30, 2021, the Company purchased and held 381,835 shares at an average price of $ 7.60 per share, excluding commissions, for an aggregate amount of $ 2.9 million, under the 2018 Share Repurchase Program. As of January 28, 2023, there was $ 27.7 million remaining available to repurchase shares of the Company’s common stock under the 2021 Share Repurchase Program. As of January 28, 2023, the Company held as treasury shares 12,079,690 shares of its common stock at an average price of $ 11.00 per share, excluding commissions, for an aggregate carrying amount of $ 132.9 million. The Company’s treasury shares may be issued under the 2010 Equity and Incentive Plan (with respect to outstanding awards under that plan), under the 2020 Equity and Incentive Plan, or for other corporate purposes. 14. Redeemable Noncontrolling Interest Redeemable noncontrolling interest represents the remaining twenty-five percent ( 25 %) interest in Pura Vida not acquired by the Company. On January 30, 2023, subsequent to the end of fiscal 2023, the Company purchased the remaining 25 % interest in Pura Vida. Refer to Note 2 herein for additional information. Changes in redeemable noncontrolling interest for the fifty-two weeks ended January 28, 2023, January 29, 2022, and January 30, 2021 were as follows (in thousands): Balance at February 1, 2020 $ 30,049 Net income attributable to redeemable noncontrolling interest 2,008 Distributions to redeemable noncontrolling interest ( 1,817 ) Adjustment to redemption value ( 431 ) Balance at January 30, 2021 $ 29,809 Net income attributable to redeemable noncontrolling interest 2,380 Distributions to redeemable noncontrolling interest ( 1,215 ) Balance at January 29, 2022 $ 30,974 Net loss attributable to redeemable noncontrolling interest ( 19,649 ) Distributions to redeemable noncontrolling interest ( 613 ) Balance at January 28, 2023 $ 10,712 77 Vera Bradley, Inc. Notes to Consolidated Financial Statements 15. Intangible Assets and Goodwill The following tables detail the carrying value of the Company’s intangible assets other than goodwill related to the acquisition of a majority interest in Pura Vida. January 28, 2023 in thousands Gross Basis Accumulated Amortization (1) Carrying Amount Definite-lived intangible assets Customer Relationships $ 24,208 $ ( 19,956 ) $ 4,252 Non-competition Agreements 788 ( 788 ) — Total definite-lived intangible assets 24,996 ( 20,744 ) 4,252 Indefinite-lived intangible asset Pura Vida Brand (2) 11,666 — 11,666 Total intangible assets, excluding goodwill $ 36,662 $ ( 20,744 ) $ 15,918 (1) Amortization expense is recorded within the Pura Vida segment. (2) Impairment charges of $ 9.9 million and $ 15.1 million were recorded within the Pura Vida segment during the second and fourth quarters of fiscal 2023. January 29, 2022 in thousands Gross Basis Accumulated Amortization (1) Carrying Amount Definite-lived intangible assets Customer Relationships $ 24,208 $ ( 17,041 ) $ 7,167 Non-competition Agreements 788 ( 400 ) 388 Total definite-lived intangible assets 24,996 ( 17,441 ) 7,555 Indefinite-lived intangible asset Pura Vida Brand 36,668 — 36,668 Total intangible assets, excluding goodwill $ 61,664 $ ( 17,441 ) $ 44,223 (1) Amortization expense is recorded within the Pura Vida segment. The amortization expense for intangible assets is as fo llows (in thousands): Amortization Expense Fiscal 2024 $ 2,916 Fiscal 2025 1,336 Total $ 4,252 The total amount of the goodwill as of January 29, 2022, was $ 44.3 million which was recorded within the Pura Vida segment upon acquisition. There was no goodwill balance as of January 28, 2023 due to impairment charges recorded during the year. Goodwill is deductible for tax purposes, limited to the Company's 75 % majority ownership interest. Refer 78 Vera Bradley, Inc. Notes to Consolidated Financial Statements to Note 2 herein for addition information regarding goodwill. Changes to goodwill for the fiscal year ended January 28, 2023 are as follows (in thousands): Balance at January 29, 2022 $ 44,254 Goodwill impairment (1) ( 44,254 ) Balance at January 28, 2023 $ — (1) Goodwill impairment charges of $ 19.4 million and $ 24.9 million were recorded within the Pura Vida segment during the second and fourth quarters of fiscal 2023. There were no changes in goodwill for the fiscal year ended January 29, 2022. The Company performs its annual impairment test over goodwill and the indefinite-lived Pura Vida brand during the second quarter of each fiscal year. The Company has experienced significantly lower sales from its Pura Vida e-commerce channel due to a decline in social and digital media effectiveness, as well as lower sales from the wholesale channel. These lower sales volumes had a negative impact on the fair value determination of the aforementioned assets. The fair value of the Pura Vida reporting unit was determined using a combination of an income-based approach (discounted cash flows) and a market-based approach (guideline transaction method). The discounted cash flow method involved subjective estimates and assumptions such as projected revenue growth, operating profit, and the discount rate. The guideline transaction method involved 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. The fair value of the Pura Vida brand was estimated using a relief-from-royalty method. The estimates and assumptions used in the determination of the fair value of the Pura Vida brand included the projected revenue growth, long-term growth rate, the royalty rate, and discount rate. 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, the Company 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. While we consider our assumptions in the determination of the fair value of these assets to be reasonable, they are complex and highly subjective. Adverse changes in key assumptions in future periods may result in further declines in the fair value estimates of the Pura Vida brand below its carrying value resulting in additional impairment charges, which could be material. Our key assumptions (as described above in the valuation methodologies used in the determination of fair value) may be impacted by macroeconomic conditions, including inflationary pressures and the impact on consumer discretionary spending, supply chain challenges, as well as a sustained decline in stock price and potential changes in business strategy. Refer to Note 2 herein for additional information regarding the fair value measurement. 16. Cost Savings Initiatives and Other Charges Cost Savings Initiatives and Severance 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. 79 Vera Bradley, Inc. Notes to Consolidated Financial Statements The Company has incurred the following charges during the fifty-two weeks ended January 28, 2023 (in thousands): Reportable Segment VB Direct VB Indirect Pura Vida Unallocated Corporate Expenses Total Expense Severance charges and cash retention payment acceleration charges (1) $ 15 $ — $ 422 $ 8,745 $ 9,182 Consulting fees and other costs (2) 302 — 179 3,976 4,457 Total (3) $ 317 $ — $ 601 $ 12,721 $ 13,639 (1) Includes CEO retirement severance and Vera Bradley brand executive officer severance (2) Includes $ 3.9 million for fees related to cost savings initiatives and CEO search; $ 0.3 million for concept brand exit costs; and $ 0.3 million for certain professional fees (3) $ 13.4 million of the charges are recorded within selling, general, and administrative expenses and $ 0.2 million are recorded within cost of sales A summary of charges and related liabilities associated with the cost savings initiatives and severance charges are as follows (in thousands): Severance Charges and Cash Retention Payment Acceleration Charges (1) Consulting Fees and Other Costs (2) Fiscal 2023 charges $ 9,182 $ 4,457 Cash payments ( 6,083 ) ( 4,095 ) Non-cash charges and adjustments ( 16 ) ( 302 ) Liability as of January 28, 2023 $ 3,083 $ 60 (1) Remaining liability is recorded within accrued employment costs (2) Remaining liability is recorded within accounts payable There were no similar charges during fiscal years 2022 and 2021. Other Charges Fiscal 2023 . During the fifty-two weeks ended January 28, 2023, the Company recorded within cost of sales $ 18.1 million of inventory adjustments which consisted of: $ 8.9 million of excess Pura Vida inventory recognized in the fourth quarter as a result of a change in the Company’s liquidation strategy during the quarter; $ 6.4 million related to the exit of certain technology products and excess mask products recognized in the second and fourth quarters; $ 1.2 million of valuation adjustments to write discounted inventory down to its net realizable value recognized in the fourth quarter; and $ 1.6 million for purchase order cancellation fees related to spring 2023 product and certain raw materials. During the fifty-two weeks ended January 28, 2023, the Company recorded within selling, general, and administrative expenses: $ 1.0 million for CEO sign-on bonus and relocation expenses; $ 0.4 million for former CEO salary retention payments and stock-based compensation associated with retirement; and $ 0.2 million of professional fees associated with strategic initiatives and other costs. Collectively, $ 6.2 million was recorded within the Direct segment, $ 1.7 million was recorded within the Indirect segment,$ 10.2 million was recorded within the Pura Vida segment, and $ 1.6 million was recorded within corporate unallocated expenses. There were no similar charges during fiscal years 2022 and 2021. 80 Vera Bradley, Inc. Notes to Consolidated Financial Statements 17. Segment Reporting The Company has three operating segments, which are also its reportable segments: VB Direct, VB Indirect, and Pura Vida. These operating segments are components of the Company for which separate financial information is available and for which operating results are evaluated on a regular basis by the chief operating decision maker in deciding how to allocate resources and in assessing the performance of the segments. The VB Direct segment includes Vera Bradley full-line and factory outlet stores, the Vera Bradley websites, verabradley.com and verabradley.ca, the Vera Bradley online outlet site, and the Vera Bradley annual outlet sale. Revenues generated through this segment are driven through the sale of Vera Bradley-branded products from Vera Bradley to end consumers. The VB Indirect segment represents revenues generated through the distribution of Company-branded products to specialty retailers representing approximately 1,700 locations, substantially all of which are located in the United States, as well as select department stores, national accounts, third-party e-commerce sites, third-party inventory liquidators, and licensing agreements related to the Vera Bradley brand. No customer accounted for 10% or more of the Company’s net revenues during fiscal years 2023, 2022, and 2021. The Pura Vida segment represents revenues generated through the Pura Vida websites, www.puravidabracelets.com, www.puravidabracelets.eu, and www.puravidabracelets.ca, Pura Vida retail stores, and through the distribution of Pura Vida-branded products to wholesale retailers, substantially all of which are located in the United States. Corporate costs represent the Company’s administrative expenses, which include, but are not limited to: human resources, legal, finance, information technology, design, product development, merchandising, corporate-level marketing and advertising, and various other corporate-level-activity-related expenses not directly attributable to a reportable segment. All intercompany-related activities are eliminated in consolidation and are excluded from the segment reporting. Company management evaluates segment operating results based on several indicators. The primary or key performance indicators for each segment are net revenues and operating income. The table below represents key financial information for each of the Company’s operating and reportable segments: VB Direct, VB Indirect, and Pura Vida. The accounting policies of the segments are the same as those described in Note 2. The Company does not report depreciation or amortization expense, total assets, or capital expenditures by segment as such information is neither used by management nor accounted for at the segment level. 81 Vera Bradley, Inc. Notes to Consolidated Financial Statements Net revenues and operating (loss) income information for the Company’s reportable segments consisted of the following (in thousands): Fiscal Year Ended January 28, 2023 January 29, 2022 January 30, 2021 Segment net revenues: 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 Segment operating (loss) income: VB Direct $ 51,097 $ 73,506 $ 48,524 VB Indirect 22,965 20,323 24,502 Pura Vida ( 78,591 ) 9,519 8,031 Total $ ( 4,529 ) $ 103,348 $ 81,057 Reconciliation: Segment operating (loss) income $ ( 4,529 ) $ 103,348 $ 81,057 Less: Unallocated corporate expenses ( 90,342 ) ( 76,437 ) ( 67,992 ) Operating (loss) income $ ( 94,871 ) $ 26,911 $ 13,065 Sales outside of the United States were immaterial for all periods presented. Revenues from external customers for Vera Bradley brand products are attributable to sales of bags, accessories, travel, apparel/footwear, and home items. Other revenues from Vera Bradley external customers primarily include revenues associated with our freight, stationery, licensing, merchandising, and gift card breakage. Revenues from external customers for Pura Vida brand products are primarily attributable to sales of accessories and apparel. Other revenues from Pura Vida external customers include revenues associated with freight. Refer to Note 3 herein for disaggregation of net revenues by reportable segment. As of January 28, 2023 and January 29, 2022, substantially all of the Company’s long-lived assets were located in the United States. 82 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.