Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this report, particularly under the headings “Risk Factors” and “Business.” This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity, and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See “Forward-Looking Statements.” These forward-looking statements are subject to numerous risks and uncertainties, including those described under “Risk Factors.” Our actual results could differ materially from those suggested or implied by any forward-looking statements.
Executive Summary
Some of our major achievements for fiscal 2024 are as follows:
We launched our long-term strategic plan, Project Restoration, and completed the first year of our turnaround. We thoughtfully outlined our plans in each of the four pillars – Consumer, Brand, Product, and Channel – and began implementation of key initiatives.
As a Company, we continued to carefully manage both gross margin and expenses and have instilled a culture of discipline around gross margin and expense control. We continued to strengthen and streamline our organizational structure and right-size our leadership team and cost structure for the size of our business, to address the continuing challenging macroeconomic environment and to best position us to achieve our long-term strategic plans. We also continued to make investments in customer data science, business analytics, and pricing optimization, allowing us to collect and analyze data and make fact-based decisions to more efficiently run our business.
At the Vera Bradley brand:
• We expanded our robust product innovation pipeline, including launching our Leather Collection, which was highly successful and will expand in fiscal 2025.
• We launched our NFL collection and will add more teams this year.
• We continued another year of product collaborations with iconic brands such as Disney, Harry Potter, Star Wars, Hello Kitty, and Peanuts, which align with our target customers and expand our customer reach.
• We made strides in sustainability by committing that the majority of our cotton products will be Better Cotton TM by fiscal 2025.
• In the fourth quarter, we transformed our online outlet from a flash-sale model to an everyday extension of our outlet stores – outlet.verabradley.com. This brought new customers to the brand and helped offset weakness in the outlet store channel.
• We made navigation changes on verabradley.com, which have been successful in reducing bounce rate and driving conversion and sales.
• We continued to strengthen and rationalize our store base. We have taken needed steps, via product, marketing, and expense discipline, to improve the profitability of our full-line stores and closed fewer locations than originally expected. In fiscal 2024, we closed eight underperforming full-line stores and one outlet store, and opened three outlet stores, ending the fiscal year with 43 full-line and 81 outlet locations.
At the Pura Vida brand:
• On the marketing front, our comprehensive customer data platform implemented in fiscal 2024 is allowing us to be more analytical and to more strategically target customers and potential customers, with a keen focus on both customer acquisition and retention.
• Our summer and fall “Live Free” and “College Mobile” tours were successes for customer engagement.
• In fiscal 2024, we continued collaborations with Disney, Harry Potter, Hello Kitty, and the World Surf League; partnered with key influencers; and offered themed-collections centered around key events such as Shark Week.
• We continued to innovate and added a new men’s jewelry collection, which still targets our core customer, who purchases these items for the men in her life.
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• Based on the success of our existing Pura Vida stores, we identified two new Pura Vida store locations that will open in fiscal 2025.
• And, to gain both operational and strategic efficiency, we moved the Pura Vida store operations under the Vera Bradley team.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures.
Net Revenues
Net revenues reflect sales of our merchandise and revenue from distribution and shipping and handling fees, less returns and discounts. Revenues for the VB Direct segment reflect sales through Vera Bradley full-line and outlet stores and the Vera Bradley websites (verabradley.com, international.verabradley.com, and outlet.verabradley.com). There were no sales from our Vera Bradley annual outlet sale in Fort Wayne, Indiana for fiscal years 2022 and 2023 as it was cancelled due to the COVID-19 pandemic. Revenues for the VB Indirect segment reflect sales of Vera Bradley-branded products to specialty retail partners; department stores; national accounts; third-party e-commerce sites; and third-party inventory liquidators, as well as royalties recognized through licensing agreements related to the Vera Bradley brand. Revenues for the Pura Vida segment reflect revenues generated through the Pura Vida websites (www.puravidabracelets.com, www.puravidabracelets.eu, and www.puravidabracelets.ca), through the distribution of Pura Vida-branded products to wholesale retailers, and through Pura Vida retail stores.
Comparable Sales
Typically, comparable sales are calculated based upon our stores that have been open for at least 12 full fiscal months and net revenues from our Vera Bradley e-commerce operations. Comparable store sales are calculated based solely upon stores that have been open for at least 12 full fiscal months. Remodeled stores are included in both comparable sales and comparable store sales unless the store was closed for more than one week of the current or comparable prior period, in which case the non-comparable temporary closure periods are not included, or the remodel resulted in a significant change in square footage. Some of our competitors and other retailers calculate comparable or “same store” sales differently than we do. As a result, data in this report regarding our comparable sales and comparable store sales may not be comparable to similar data made available by other companies. Non-comparable sales include sales from stores not included in comparable sales or comparable store sales.
As a result of the temporary closure of all Vera Bradley stores due to COVID-19 during portions of the first and second quarters of fiscal 2021, the Company's fiscal 2022 comparable store sales and comparable sales calculations are not meaningful and therefore are not provided.
Typically, measuring the change in year-over-year comparable sales allows us and our investors to evaluate how our store base and e-commerce operations are performing. Various factors affect our comparable sales, including:
• Overall economic trends;
• Consumer preferences and fashion trends;
• Competition;
• The timing of our releases of new patterns and collections;
• The timing of holidays;
• Changes in our product mix;
• Pricing and level of promotions;
• Amount of store, mall, and e-commerce traffic;
• The level of customer service that we provide in stores and to our on-line customers;
• Our ability to source and distribute products efficiently;
• The number of stores we open and close in any period; and
• The timing and success of promotional and marketing efforts.
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Gross Profit
Gross profit is equal to our net revenues less our cost of sales. Cost of sales includes the direct cost of purchased merchandise, distribution center costs, operations overhead, duty, all inbound freight costs incurred, and inventory adjustments including adjustments described in Note 16 to the Notes to the Consolidated Financial Statements herein. The components of our reported cost of sales may not be comparable to those of other retail and wholesale companies.
Gross profit can be impacted by changes in volume; fluctuations in sales price; operational efficiencies, such as leveraging of fixed costs; promotional activities, including free shipping; commodity prices, such as for cotton; tariffs; and labor costs.
Selling, General, and Administrative Expenses (“SG&A”)
SG&A expenses include selling; advertising, marketing, and product development; and administrative expenses. Selling expenses include:
•VB Direct business expenses, such as store expenses, employee compensation, and store occupancy and supply costs;
•VB Indirect business expenses consisting primarily of employee compensation and other expenses associated with sales to Indirect retailers; and
•Pura Vida business expenses primarily related to employee compensation and store expenses.
Advertising, marketing, and product development expenses include employee compensation, media costs, creative production expenses, marketing agency fees, new product design costs, public relations expenses, and market research expenses. A portion of our advertising expenses may be reimbursed by Indirect retailers, and such amount is classified as other income. Administrative expenses include employee compensation for corporate functions, corporate headquarters occupancy costs, consulting and software expenses, and charitable donations, as well as severance charges and consulting fees associated with cost savings initiatives disclosed in Note 16 to the Notes to the Consolidated Financial Statements herein.
Impairment Charges
Goodwill and Other Intangible Assets
The Company performs its indefinite-lived asset impairment test annually, or more frequently if facts and circumstances indicate possible impairment. Prior to fiscal 2024, the Company performed an annual impairment test for its goodwil l.
We have experienced significantly lower sales from our Pura Vida e-commerce channel due to a decline in social and digital media effectiveness, as well as lower wholesale sales. These lower sales volumes had a negative impact on the fair value determination of intangible assets in fiscal years 2024 and 2023.
The Company performed its annual impairment test in the second quarter of fiscal 2024 and recorded no impairment charges based on its quantitative analysis at that time. Due to subsequent triggering events, the Company performed a second quantitative analysis of the carrying value of the Pura Vida brand in the fourth quarter of fiscal 2024 and recorded an impairment charge of $5.4 million, further described in Note 15 to the Notes to the Consolidated Financial Statements herein.
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 to the Notes to the Consolidated Financial Statements herein. Impairment charges of $44.3 million and $25.0 million were recorded during fiscal 2023 for goodwill and the Pura Vida brand, respectively.
Refer to Note 15 to the Notes to the Consolidated Financial Statements herein for additional information regarding the goodwill and indefinite-lived intangible assets impairment tests.
Long-lived Assets
Property, plant, and equipment and lease right-of-use assets (the “asset group” for store-related assets) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. The reviews are conducted at the lowest identifiable level of cash flows. If the estimated undiscounted future cash flows related to the asset group are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, as further defined in Note 2 to the Notes to the Consolidated Financial Statements herein. Impairment charges of $1.4 million and $0.1 million w ere recognized in the fiscal years ended January 28, 2023 and January 29, 2022, respectively, for property, plant, and equipment assets and lease right-of-use assets related to underperforming stores and a corporate right-of-use asset and are included in SG&A expenses in the Consolidated Statements of Operations and in impairment charges in the Consolidated Statements of Cash Flows. Impairment char ges of $0.6 million were re corded within corporate unallocated during fiscal 2023. The remaining impairment charges were included in the VB Direct segment. No such impairment charges were recorded in fiscal 2024. We are unable to predict the extent of the impact that the inflationary
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environment, or other macroeconomic factors, will have on our operations, the economy, or other factors; therefore, it is possible additional impairments could be identified in future periods, and such amounts could be material.
Cost Savings Initiatives and Other Charges
During fiscal 2024, the Company continued the implementation of targeted cost reductions, which are expected to be fully realized in fiscal 2025. Expense savings are being derived across various areas of the Company, including retail store efficiencies, marketing expenses, inf ormation technology contracts, professional services, logistics and operational costs, and corporate payroll. Refer to Note 16 to the Notes to the Consolidated Financial Statements herein for additional information regarding charges for cost savings initiatives and remaining liabilities, as well as other charges not comparable with the prior year.
Macroeconomic Environment
Our business is impacted by broader macroeconomic issues in the U.S. marketplace – and can be affected both positively and negatively over time.
We have been specifically impacted by higher tariffs from previously duty-free countries, where we source products, as a result of the expiration of the Generalized System of Preferences (“GSP”) duty-free status at the end of calendar year 2020. In addition, the macroeconomic environment has been further challenged by inflationary pressures, including high gas prices, interest rates, and other related factors that have impacted consumer discretionary spending. We have also seen a trend of steeply increasing digital media costs.
To mitigate some of these inflationary and supply chain pressures, we implemented strategic price increases across both of our brands in late fiscal 2022 through fiscal 2024. We will continue to monitor our pricing as it relates to the current macroeconomic trends. In addition, in fiscal 2023 and 2024, we implemented targeted cost reductions across various areas of the Company, including retail store efficiencies, marketing expenses, information technology contracts, professional services, logistics and operational costs, and corporate payroll. We will continue to review our expense structure in future years for additional cost reduction opportunities.
We continue to actively monitor the changing macroeconomic circumstances and take mitigating actions where appropriate. Ongoing macroeconomic pressures could have a material adverse effect on our liquidity, operating results, and financial condition.
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Results of Operations
The following tables summarize key components of our consolidated results of operations for the last three fiscal years, both in dollars and as a percentage of our net revenues.
Fiscal Year Ended (1)
($ in thousands) February 3,
2024 January 28,
2023 January 29,
2022
Statement of Income (Loss) Data:
Net revenues $ 470,786 $ 499,961 $ 540,453
Cost of sales 214,373 261,017 252,510
Gross profit 256,413 238,944 287,943
Selling, general, and administrative expenses (2)
241,457 265,016 261,993
Impairment of goodwill and intangible assets 5,429 69,256 —
Other income, net 915 457 961
Operating income (loss) 10,442 (94,871) 26,911
Interest income (expense), net 890 (153) (263)
Income (loss) before income taxes 11,332 (95,024) 26,648
Income tax expense (benefit) 3,494 (15,640) 6,430
Net income (loss) 7,838 (79,384) 20,218
Less: Net (loss) income attributable to redeemable noncontrolling interest — (19,649) 2,380
Net income (loss) attributable to Vera Bradley, Inc. $ 7,838 $ (59,735) $ 17,838
Percentage of Net Revenues:
Net revenues 100.0 % 100.0 % 100.0 %
Cost of sales 45.5 % 52.2 % 46.7 %
Gross profit 54.5 % 47.8 % 53.3 %
Selling, general, and administrative expenses 51.3 % 53.0 % 48.5 %
Impairment of goodwill and intangible assets 1.2 % 13.9 % — %
Other income, net 0.2 % 0.1 % 0.2 %
Operating income (loss) 2.2 % (19.0) % 5.0 %
Interest income (expense), net 0.2 % — % — %
Income (loss) before income taxes 2.4 % (19.0) % 4.9 %
Income tax expense (benefit) 0.7 % (3.1) % 1.2 %
Net income (loss) 1.7 % (15.9) % 3.7 %
Less: Net (loss) income attributable to redeemable noncontrolling interest — % (3.9) % 0.4 %
Net income (loss) attributable to Vera Bradley, Inc. 1.7 % (11.9) % 3.3 %
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The following tables present net revenues by operating segment, both in dollars and as a percentage of our net revenues, and Vera Bradley full-line and outlet store data for the last three fiscal years:
Fiscal Year Ended (1)
($ in thousands, except as otherwise indicated) February 3,
2024 January 28,
2023 January 29,
2022
Net Revenues by Segment:
VB Direct $ 309,910 $ 328,231 $ 354,875
VB Indirect 73,803 73,316 66,001
Pura Vida 87,073 98,414 119,577
Total $ 470,786 $ 499,961 $ 540,453
Percentage of Net Revenues by Segment:
VB Direct 65.8 % 65.6 % 65.7 %
VB Indirect 15.7 % 14.7 % 12.2 %
Pura Vida 18.5 % 19.7 % 22.1 %
Total 100.0 % 100.0 % 100.0 %
Fiscal Year Ended
February 3,
2024 January 28,
2023 January 29,
2022
Vera Bradley Store Data (3) :
Total stores opened during period 3 5 6
Total stores closed during period (9) (20) (5)
Total stores open at end of period 124 130 145
Comparable sales (including e-commerce) decrease (4)
(7.1) % (9.5) % NM
Total gross square footage at end of period 375,198 381,664 397,037
Average net revenues per gross square foot (5)
$ 518 $ 555 $ 633
(1) The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to January 31. Fiscal year 2024 consisted of 53 weeks. Fiscal years 2023 and 2022 consisted of 52 weeks. The extra week in fiscal 2024 contributed approximately $6.0 million in net revenues and added an estimated $0.01 to diluted net income per share in fiscal 2024. By segment, the extra week contributed net revenues of approximately $2.8 million to Direct, $2.1 million to Indirect, and $1.1 million to Pura Vida in fiscal 2024.
(2) Impairment charges, related primarily to underperforming stores, tot aled $1.4 million, and $0.1 million duri ng the fiscal years ended January 28, 2023, and January 29, 2022, respectively. There were no store impairment charges in fiscal 2024.
(3) Includes Vera Bradley full-line and outlet stores.
(4) Comparable sales are calculated based upon stores that have been open for at least 12 full fiscal months and net revenues from e-commerce operations. Decrease is reported as a percentage of the comparable sales for the same period in the prior fiscal year. Remodeled stores are included in comparable sales unless the store was closed for a portion of the current or comparable prior period, in which case the non-comparable temporary closure periods are not included, or the remodel resulted in a significant change in square footage. As a result of Vera Bradley retail stores being temporarily closed for approximately half of the first and second quarters of fiscal 2021, comparable sales were not meaningful and were therefore not provided for fiscal year 2022. Calculation excludes sales for the fifty-third week in fiscal 2024.
(5) Dollars not in thousands. Average net revenues per gross square foot are calculated by dividing total net revenues for our stores that have been open at least 12 full fiscal months as of the end of the period by total gross square footage for those stores. Remodeled stores are included in average net revenues per gross square foot unless the store was closed for a portion of the period. Calculation excludes sales for the fifty-third week in fiscal 2024.
Fiscal 2024 Compared to Fiscal 2023
Net Revenues
For fiscal 2024, net reve nues decreased $29.2 million, or 5.8%, to $470.8 million, from $500.0 million for fiscal 2023.
VB Direct. For fiscal 2024, net rev enues decreased $18.3 million, o r 5.6%, to $309.9 million, from $328.2 million for fiscal 2023. Vera Bradley comparable sale s decreased $22.8 million, or 7.1%, which includes a 9.6% decrease in comparable store
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sales as well as a 2.6% decrease in e-commerce sales. This comparable sales decrease was partially offset by sales from our stores with non-comparable periods, including three outlet stores that opened in the current fiscal year and the return of the Annual Outlet Sale. The decrease in comparable sales and comparable store sales was impacted by reduced traffic, conversion, and units sold primarily in the outlet channel. These decreases were partially offset by price increases on certain merchandise in the current-year. Fiscal 2024 net revenues also include approximately $2.8 million attributed to the extra week in fiscal 2024.
VB Indirect. For fiscal 2024, net reven ues increased $0.5 million, or 0.7%, to $73.8 million, from $73.3 million for fiscal 2023, reflecting an increase in certain key account orders, partially offset by a decline in sales to certain specialty partners. Fiscal 2024 net revenues also include approximately $2.1 million attributed to the extra week in fiscal 2024.
Pura Vida . For fiscal 2024, net revenues decreased $11.3 million, or 11.5%, to $87.1 million, from $98.4 million for fiscal 2023. The decrease was primarily due to a decline of $10.4 million in e-commerce sales due to a continued decline in social and digital media effectiveness, as well as a decline of $3.5 million in wholesale sales. These decreases were partially offset by an increase in retail store sal es. Fiscal 2024 net revenues also include approximately $1.1 million attributed to the extra week in fiscal 2024.
Gross Profit
For fiscal 2024, gross prof it increased $17.4 million, or 7.3%, to $256.4 million, from $239.0 million for fi scal 2023. As a percentage of net revenues, gross prof it increased to 54.5% for fiscal 2024, fro m 47.8% fo r fiscal 2023. Fiscal 2024 gross profit as a percentage of net revenues was favorably impacted by lower year-over-year inventory reserve charges, lower year-over-year inbound and outbound freight expense, lower supply chain costs, and the sell-through of previously-reserved inventory, partially offset by an increase in promotional activity.
Selling, G eneral, and Administrative Expenses (“SG&A”)
For fiscal 2024, SG&A expenses decreased $23.5 million, or 8.9%, to $241.5 million, from $265.0 million for fi scal 2023. As a percentage of net revenues, SG&A expenses were 51.3% and 53.0% for fiscal 2024 an d fiscal 2023, respectively. SG&A expenses related to Vera Bradley and corporate unallocated w ere $192.1 million compared to $211.6 million i n the comparable prior-year period. SG&A expenses related to Pura Vida were $49.4 million compared to $53.4 million in the comparable prior-year period. The decrease in consolidated SG&A expenses for fiscal 2024 was primarily due to a decrease in employee-related expenses of $6.4 million due to a reduction in headcount, partially offset by an increase in incentive compensation; a decrease in severance charges of $6.3 million, which includes severance related to our CFO transition in the current year more than offset by the retirement severance related to our former CEO in the prior year; a $4.2 million decrease in professional expenses, a portion of which were associated with cost savings initiatives and other professional fees that did not recur in the current year; $1.4 million related to store and lease right-of-use asset impairment charges in the prior year that did not recur in the current year; and $5.2 million in other net expense reductions which included spending reductions related to information technology contracts, visual merchandising, and other expenses.
Impairment of Goodwill and Intangible Assets
Fiscal 2024 included a $5.4 million charge for impairment of the indefinite -lived Pura Vida brand intangible asset, which is reflected within the Pura Vida segment. A $69.3 million impairment charge of goodwill and intangible assets related to Pura Vida goodwill and the indefinite-lived Pura Vida brand intangible asset was recorded in fiscal 2023 within the Pura Vida segment. For additional information, refer to Goodwill and Other Intangible Assets herein.
Other Income, Net
For fiscal 2024, net other income increased $0.5 million to $0.9 million, from $0.5 million for fisca l 2023. The increase in net other income was primarily due to a legal settlement in the current year that did not occur in the prior year, ticket sales from the Vera Bradley annual outlet sale, and sublease income.
Operatin g Income (Loss)
For fiscal 2024, operating inco me increased $105.3 million, or 111.0%, to $10.4 million from an operating loss of $(94.9) million for fiscal 2023. As a percentage of net revenues, operatin g income (loss) was 2.2% and (19.0)% f or fiscal 2024 and fiscal 2023, respectively. Operatin g income increased due t o the factors described above.
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The following table provides additional information about our operat ing income (loss) ( in thousands):
Fiscal Year Ended $
Change %
Change
February 3,
2024 January 28,
2023
Operating Income (Loss):
VB Direct $ 61,873 $ 51,097 $ 10,776 21.1 %
VB Indirect 24,279 22,965 1,314 5.7 %
Pura Vida (2,321) (78,591) 76,270 97.0 %
Less: Unallocated corporate expenses (73,389) (90,342) 16,953 18.8 %
Operating income (loss) $ 10,442 $ (94,871) $ 105,313 111.0 %
VB Direct . For fiscal 2024, operating inc ome increased $10.8 million, or 21.1%. As a percentage of VB Direct segment net revenues, operating income in the VB Direct segment was 20.0% and 15.6% for fiscals 2024 and 2023, respectively. The increase in operating income as a percentage of VB Direct segment net revenues was primarily due to an increase in gross margin as a percentage of net revenues as described above; a decrease in employee-related expenses due to closed stores and cost savings initiatives; store impairment charges in the prior year that did not recur in the current year; and a reduction in spending associated with merchandising, professional fees, and other variable expenses.
VB Indirect . For fiscal 2024, operating inc ome increased $1.3 million, or 5.7%. As a percentage of VB Indirect segment net revenues, operating income in the VB Indirect segm ent was 32.9% and 31.3% f or fiscals 2024 and 2023, respectively. The increase in operating income as a percentage of VB Indirect segment net revenues was due to an increase in gross margin as a percentage of net revenues as described above, as well as decreased SG&A expenses.
Pura Vida. For fiscal 2024, operatin g loss decreased $76.3 million, or 97%. As a percentage of Pura Vida segment net revenues, operating loss in the Pura Vida segment was (2.7)% and (79.9)% for fiscals 2024 and 2023, respectively. The decrease in operating loss was primarily due to goodwill and indefinite-lived Pura Vida brand impairment charges in fiscal 2023 of $44.3 million and $25.0 million, respectively, compared to Pura Vida brand impairment charges of $5.4 million in fiscal 2024; a decrease in marketing and advertising expenses; a decrease in employee-related expenses due to headcount reductions and cost savings initiatives; and an increase in gross margin as a percentage of net revenues as described above.
Corporate Unallocated . For fiscal 2024, corporate unallocated expens es decreased $17.0 million, or 18.8% to $73.4 million from $90.3 million in the prior-year period. The decrease in corporate unallocated expenses was primarily due to a decrease in severance charges of $6.8 million which includes severance related to our CFO transition in the current year more than offset by the retirement severance related to our former CEO in the prior year; a decrease of $4.3 million a portion of which were associated with cost savings initiatives and other professional fees that did not recur in the current year; a reduction in employee-related expenses of $2.9 million primarily related to lower headcount, partially offset by an increase in incentive compensation; $0.6 million for a lease right-of-use asset charge in the prior year that did not recur in the current year; and $2.4 million in other net corporate expense reductions including a reduction in information technology contracts, corporate advertising expense, and other corporate expenses.
Interest Income (Expense), Net
For fiscal 2024, net interest in come totaled $0.9 million compared to net interest expense of $0.2 million in fiscal 2023, attributed to an increase in money market fund investments in fiscal 2024.
Income Tax Expense (Benefit)
For fiscal 2024, we recorded income tax expense of $3.5 million at an effective tax rate of 30.8%, compared to income tax benefit of $15.6 million at an effective tax rate of 16.5% for fiscal 2023. The effective tax rate increase was primarily due to the relative impact of permanent and discrete items in the current-year period compared to the prior-year period, primarily as a result of stock-based compensation, noncontrolling interest in the prior-year period, and non-deductible executive compensation.
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Ne t Income (Loss)
For fiscal 2024, net inco me increased $87.2 million to $7.8 million from a net loss of $(79.4) million in fiscal 2023 due to the factors described in the captions above.
Net Loss Attributable to Redeemable Noncontrolling Interest
For fiscal 2023, net loss attributable to redeemable noncontrolling interest was $(19.6) million. This represents the allocation of the Pura Vida net (loss) income to the noncontrolling interest. On January 30, 2023, we purchased the remaining 25% interest in Pura Vida resulting in 100% ownership. As a result, there was no noncontrolling interest for the current-year period.
Net Income (Loss) At tributable to Vera Bradley, Inc.
For fiscal 2024, net income attributable to Vera Bradle y, Inc. increased $67.5 million to $7.8 million from net loss attributable to Vera Bradley, Inc. of $(59.7) million in fiscal 2023 due to the factors described in the captions above.
Fiscal 2023 Compared to Fiscal 2022
Refer to the Company's Annual Report on Form 10-K filed wit h the SEC on March 28, 2023, for a comparison of fiscal 2023 to fiscal 2022 operating results.
Liquidity and Capital Resources
General
Our primary sources of liquidity are cash and cash equivalents and cash flow from operations. We also have access to additional liquidity, if needed, through borrowings under our $75.0 million asset-based revolving credit agreement (the “Credit Agreement”). There was no debt outstanding under the Credit Agreement as of February 3, 2024. Historically, our primary cash needs have been for merchandise inventories; payroll; store rent; capital expenditures associated with operational equipment, buildings, information technology, and opening new stores; and share repurchases. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts receivable, accounts payable, and other current liabilities.
We believe that cash and cash equivalents, cash flows from operating activities, and the availability of borrowings under our Credit Agreement or other financing arrangements will be sufficient to meet working capital requirements and anticipated capital expenditures, and other strategic uses of cash, if any, for the foreseeable future.
Cash Flow Analysis
A summary of operating, investing, and financing activities is shown in the following table (in thousands):
Fiscal Year Ended
February 3,
2024 January 28,
2023 January 29,
2022
Net cash provided by (used in) operating activities $ 47,993 $ (13,421) $ 39,861
Net cash used in investing activities (13,770) (8,239) (4,154)
Net cash used in financing activities (3,548) (20,105) (11,413)
Net Ca sh Provided by (Used in) Opera ting Activities
Net cash provided by (used in) operating activities consists primarily of net income (loss) adjusted for non-cash ite ms, including depreciation, amortization, impairment charges, deferred taxes, and stock-based compensation; and the effect of changes in assets and liabilities.
Net cash provided by operating activities was $48.0 million during fiscal 2024, as compared to net cash used in operating activities of $13.4 million during fiscal 2023 . The increase in cash provided by operating activities was primarily related to an increase in net income of $87.2 million and a non-cash change in deferred income taxes of $19.4 million, partially offset by a change in non-cash impairments of $65.2 million. An additional source of operating cash included changes in net working capital of $19.2 million. Net working capital changes include an increase in sources of cash from inventories, accounts receivable and accounts payable, partially offset by increases in use of cash from prepaid expenses and other assets and income taxes.
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Net Cash Used in Investing Activities
Investing activities consisted primarily of investments and capital expenditures related to new store openings, buildings, operational equipment, and information technology investments.
Net cash used in investing activities was $13.8 million in fiscal 2024, compared to $8.2 million in fiscal 2023. Th e increase in cash used in investing activities was primarily a result of the of the purchase of the remaining 25% interest in Pura Vida for $10.0 million, partially offset by a decline in property, plant, and equipment spending primarily as a result of a lower amount of new store construction in the current year and Vera Bradley store relocations in the prior year that did not recur.
Capital expenditures for fiscal 2025 are expected to be approximately $12 million to $14 million, related to planned investments associated with new and remodeled stores and technology and logistics enhancements.
Net Cash Used in Financing Activities
Net cash used in financing activities w as $3.5 million in fi scal 2024 comp ared to $20.1 million in fiscal 2023. The decrease in cash used in financing activities was primarily due to a decrease in repurchases of common stock of $15.9 million.
Refer to the Company's Annual Report on Form 10-K filed with the SEC on March 28, 2023, for a comparison of fiscal 2023 to fiscal 2022 cash flow activity.
Credit Agreement
On September 7, 2018, Vera Bradley Designs, Inc. (“VBD”), a wholly-owned subsidiary of the Company, entered into an asset-based revolving Credit Agreement (the “Credit Agreement”) among VBD, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto. On August 3, 2023, certain subsidiaries of the Company, JP Morgan Chase Bank, N.A., as the administrative agent, and lenders from time to time party thereto, entered into a Third Amendment (the “Third Amendment”) to the Credit Agreement. The Credit Agreement provides for certain credit facilities to VBD in an aggregate principal amount not to initially exceed the lesser of $75.0 million or the amount of borrowing availability determined in accordance with a borrowing base of certain assets. Borrowings under the credit facilities are available to finance general corporate purposes of VBD and its subsidiaries, including but not limited to Vera Bradley International, LLC, Vera Bradley Sales, LLC, and Creative Genius, 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 $50.0 million.
For further information regarding the Credit Agreement, please see Note 6 of the Notes to Consolidated Financial Statements set forth in Part II, “Item 8. Financial Statements and Supplementary Data,” of this report.
Material Cash Requirements
Our material cash requirements from known contractual and other obligations include the following:
• Operating lease obligations as disclosed further in Note 4 to the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report;
• Purchase order commitments primarily related to inventory purchases;
• Salaries, cash incentives, benefits, and other employee-related costs;
• Commitments for capital expenditures;
• Income tax payments; and
• Other supply and service agreements entered into as part of our normal operations.
We may be subject to additional material cash requirements that are contingent upon certain events that have not yet occurred. We expect to fund these cash requirements using cash on hand, cash provided by our operations and, to the extent necessary, borrowings under our Credit Agreement.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues, and expenses, as well as the disclosures relating to contingent assets and liabilities at the date of the consolidated financial statements. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.
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We evaluate the development and selection of our critical accounting policies and estimates and believe that the following policies and estimates involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. Our historical results for the periods presented in the consolidated financial statements, however, have not been materially impacted by such variances. More information on all of our significant accounting policies can be found in Note 2, “Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method. Appropriate consideration is given to obsolescence, excess quantities, and other factors, including the popularity of a pattern or product, in evaluating net realizable value. We record valuation adjustments to our inventories, which are reflected in cost of sales, if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. This adjustment calculation requires us to make assumptions and estimates, which are based on factors such as merchandise seasonality, historical trends, and estimated sales and inventory levels, including sell-through of remaining units. In addition, as part of inventory adjustments, we provide for inventory shrinkage based on historical trends from our physical inventory counts. We perform physical inventory counts throughout the year and adjust the shrinkage provision accordingly.
The balance of inventory adjustments wa s $8.1 million an d $16.5 million for these matters as of the fiscal years ended February 3, 2024, and January 28, 2023, respectively. The decrease in the balance was primarily related to the destruction of reserved product and the sell through of reserved inventory in fiscal 2024. The fiscal 2023 balance included adjustments for excess Pura Vida inventory and excess mask inventory, the exit of certain technology products, and valuation adjustments to write discounted inventory down to its net realizable value.
We believe we have the ability to sell some of our retired finished goods through a number of channels, including our Vera Bradley and Pura Vida websites, the Vera Bradley online outlet site, Vera Bradley outlet stores, the Vera Bradley Annual Outlet Sale, and through third-party liquidators as needed.
Valuation of Long-lived Assets
Property, plant, and equipment and operating right-of-use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. In evaluating an asset group for recoverability, we estimate the future cash flows expected to result from the use of the asset group at the store level, the lowest identifiable level of cash flow, if applicable. If the sum of the estimated undiscounted future cash flows related to the asset group is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by an estimated discounted cash flow analysis of the asset. Factors used in the valuation of long-lived assets include, but are not limited to, our plans for future operations, brand initiatives, recent operating results, and projected future cash flows. With respect to our stores, we analyze store economics, location within the shopping center, the size and shape of the space, and desirable co-tenancies in our selection process. Impairment charges are classified in SG&A expenses and were $1.4 million, and $0.1 million for the periods ended January 28, 2023, and January 29, 2022, respectively. No impairment charges were recorded in fiscal 2024.
The discounted cash flow models used to estimate the applicable fair values involve numerous estimates and assumptions that are highly subjective. Changes to these estimates and assumptions could materially impact the fair value estimates. The estimates and assumptions critical to the overall fair value estimates include: (1) estimated future cash flow generated at the store level; (2) discount rates used to derive the present value factors used in determining the fair values; and (3) market rentals at the retail store. These and other estimates and assumptions are impacted by economic conditions and our expectations and may change in the future based on period-specific facts and circumstances. If economic conditions were to deteriorate, future impairment charges may be required.
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Goodwill and Other Intangible Assets
As of February 3, 2024 identifiable intangible assets consisted of the Pura Vida brand and customer relationships. Prior to fiscal 2024, the Company performed an annual impairment test for its goodwill. Goodwill was fully impaired during fiscal 2023, leavi ng no balance. Our Pura Vida brand, an indefinite-lived asset, is not amortized but assessed for impairment at least annually or whenever events or circumstances indicate that the brand may be impaired . The Pura Vida customer relationship, a definite-lived intangible asset, is amortized over its estimated useful life and is also subject to impairment testing, similar to the Company’s other long-lived assets.
Our annual intangible asset impairment test may be completed through a qualitative assessment to determine if the fair value of the Pura Vida brand is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value, we test for impairment using a quantitative process. Our quantitative process includes comparing the carrying value to the fair value of the Pura Vida brand, with any excess recognized as an impairment loss. Fair value is estimated using a relief-from-royalty method. The estimates and assumptions used in the determination of the fair value of the Pura Vida brand include the projected revenue growth, long-term growth rate, the royalty rate, and discount rate.
As of February 3, 2024, the carrying value of the Pura Vida brand was $6.2 million. The Company performed a quantitative analysis of the Pura Vida brand for the annual impairment test in the second quarter of fiscal 2024, at which time no impairment was recorded. Subsequent to the annual impairment test, due to triggering events, the Company performed an additional quantitative analysis and recorded an impairment charge of $5.4 million in the fourth quarter of fiscal 2024, further described in Note 15 herein.
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 of the Notes to the Consolidated Financial Statements herein. Impairment charges of $44.3 million and $25.0 million were recorded 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 and estimated cash flows change from the estimates we used in our fiscal 2024 impairment analysis, we may record additional impairment charges in future years.
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