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 2025 are as follows:
We made continued progress on our long-term strategic plan, Project Restoration, our comprehensive strategic initiative to transform our business model and brand positioning. 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. While we remain confident in our strategic direction, we continue to make refinements based on selling data and customer feedback. Most of these shifts are occurring in our product and pricing strategy.
At the Vera Bradley brand:
• We launched the first phase of our renewed vision for Vera Bradley in July fiscal 2025, which included elevated brand product, marketing, store design and website in our Brand stores and on verabradley.com.
• We expanded our NFL collection by adding representation for more teams.
• We continued another year of product collaborations with iconic brands such as Disney, Wicked, and Peanuts, which align with our target customers and expand our customer reach.
• We are a Better Cotton TM member and continue to increase our procurement of cotton from Better Cotton TM supply chain partners.
• Our online site – outlet.verabradley.com, has brought new customers to the brand and provided steady performance throughout the year, helping offset weakness in the outlet store channel.
• We continued to strengthen and rationalize our store base. We are continuing to look for opportunities to improve the full-line profitability of our full-line store portfolio by re-balancing our existing fleet through select closures along with identifying future market opportunities. We will continue to focus on our highest-potential stores by enhancing the customer experience. In fiscal 2025, we closed five underperforming full-line stores and one outlet store, and opened one full-line store and seven outlet stores, ending the fiscal year with 39 full-line and 87 outlet locations.
At the Pura Vida brand:
• Pura Vida found positive responses through collegiate football, gymnastics, and sorority activations.
• In fiscal 2025, Pura Vida had collaborations with Dutch Brothers Coffee, Kulani Kinis swimwear, and the Varsity Cheer League; partnered with key influencers; and offered themed-collections centered around key events such as Shark Week.
• Pura Vida continued to innovate and expand on our personalized offerings through harper charms, which still targets our core customer, and provides her endless options to suit her style.
• Two new Pura Vida store locations were opened in fiscal 2025.
How We Assess the Performance of Our Business
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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 year 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 website (www.puravidabracelets.com ), 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.
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.
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.
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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.
Cost Savings Initiatives and Other Charges
During fiscal 2025, the Company continued the implementation of targeted cost reductions. 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.
The macroeconomic environment has been 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 through fiscal 2025, 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 1,
2025 February 3,
2024 January 28,
2023
Statement of (Loss) Income Data:
Net revenues $ 371,967 $ 470,786 $ 499,961
Cost of sales 185,128 214,373 261,017
Gross profit 186,839 256,413 238,944
Selling, general, and administrative expenses (2)
223,808 241,457 265,016
Impairment of goodwill and intangible assets 6,237 5,429 69,256
Other income, net 850 915 457
Operating (loss) income (42,356) 10,442 (94,871)
Interest income (expense), net 1,118 890 (153)
(Loss) income before income taxes (41,238) 11,332 (95,024)
Income tax expense (benefit) 20,950 3,494 (15,640)
Net (loss) income (62,188) 7,838 (79,384)
Less: Net loss attributable to redeemable noncontrolling interest — — (19,649)
Net (loss) income attributable to Vera Bradley, Inc. $ (62,188) $ 7,838 $ (59,735)
Percentage of Net Revenues:
Net revenues 100.0 % 100.0 % 100.0 %
Cost of sales 49.8 % 45.5 % 52.2 %
Gross profit 50.2 % 54.5 % 47.8 %
Selling, general, and administrative expenses 60.2 % 51.3 % 53.0 %
Impairment of goodwill and intangible assets 1.7 % 1.2 % 13.9 %
Other income, net 0.2 % 0.2 % 0.1 %
Operating (loss) income (11.4) % 2.2 % (19.0) %
Interest income (expense), net 0.3 % 0.2 % — %
(Loss) income before income taxes (11.1) % 2.4 % (19.0) %
Income tax expense (benefit) 5.6 % 0.7 % (3.1) %
Net (loss) income (16.7) % 1.7 % (15.9) %
Less: Net loss attributable to redeemable noncontrolling interest — % — % (3.9) %
Net (loss) income attributable to Vera Bradley, Inc. (16.7) % 1.7 % (11.9) %
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The following tables present net revenues by operating segment, both in dollars and as a percentage of our net revenues, and Vera Bradley full-line and outlet store data for the last three fiscal years:
Fiscal Year Ended (1)
($ in thousands, except as otherwise indicated) February 1,
2025 February 3,
2024 January 28,
2023
Net Revenues by Segment:
VB Direct $ 257,609 $ 309,910 $ 328,231
VB Indirect 61,186 73,803 73,316
Pura Vida 53,172 87,073 98,414
Total $ 371,967 $ 470,786 $ 499,961
Percentage of Net Revenues by Segment:
VB Direct 69.3 % 65.8 % 65.6 %
VB Indirect 16.4 % 15.7 % 14.7 %
Pura Vida 14.3 % 18.5 % 19.7 %
Total 100.0 % 100.0 % 100.0 %
Fiscal Year Ended
February 1,
2025 February 3,
2024 January 28,
2023
Vera Bradley Store Data (3) :
Total stores opened during period 8 3 5
Total stores closed during period (6) (9) (20)
Total stores open at end of period 126 124 130
Comparable sales (including e-commerce) decrease (4)
(16.6) % (7.1) % (9.5) %
Total gross square footage at end of period 387,510 375,198 381,664
Average net revenues per gross square foot (5)
$ 403 $ 518 $ 555
(1) The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to January 31. Fiscal years 2025 and 2023 consisted of 52 weeks. Fiscal year 2024 consisted of 53 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 $2.6 million , and $1.4 million duri ng the fiscal years ended February 1, 2025, and January 28, 2023, 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. 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 2025 Compared to Fiscal 2024
Net Revenues
For fiscal 2025, net revenues decreased $98.8 million, or 21.0%, to $372.0 million, from $470.8 million for fiscal 2024. Fiscal 2024 net revenues also include approximately $6.0 million attributable to the extra week in fiscal 2024.
VB Direct. For fiscal 2025, net rev e nues decreased $52.3 million, or 16.9%, to $257.6 million, from $309.9 million for fiscal 2024. Vera Bradley comparable sales decreased $49.6 million, or 16.6%, which includes a 22.2% decrease in comparable store sales as well as a 7.3% decrease in e-commerce sales. The decrease in comparable sales and comparable store sales was
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impacted by reduced traffic, conversion, and units sold primarily in the outlet channel as well as the full-line channel. Fiscal 2024 net revenues also include approximately $2.8 million attributed to the extra week in fiscal 2024.
VB Indirect. For fiscal 2025, net revenues decreased $12.6 million, or 17.1%, to $61.2 million, from $73.8 million for fiscal 2024. The decrease is primarily driven by decreased specialty and other indirect retailer sales resulting from reduced customer count and order volume, as well as a decrease in liquidation orders. These decreases were partially offset by an increase in certain key account orders. Fiscal 2024 net revenues also include approximately $2.1 million attributed to the extra week in fiscal 2024.
Pura Vida . For fiscal 2025, net revenu es decreased $33.9 million, or 38.9%, to $53.2 million, from $87.1 million for fiscal 2024. The decrease was primarily due to a decrease in e-commerce sales due to a continued decline in social and digital media effectiveness, as well as decreased wholesale sales, partially offset by an increase in retail store sales. Fiscal 2024 net revenues also include approximately $1.1 million attributed to the extra week in fiscal 2024.
Gross Profit
For fiscal 2025, gross prof it decreased $69.6 million, or 27.1%, to $187.8 million, from $256.4 million for fiscal 2024. As a percentage of net revenues, gross profit decreased to 50.2% for fiscal 2025, from 54.5% for fiscal 2024. The decrease in consolidated gross profit as a percentage of net revenues for the fiscal year was driven by sales channel mix, reduced margins for indirect liquidation sales, and inventory adjustments related to excess inventory in the Pura Vida segment.
Selling, General, and Administrative Expenses (“SG&A”)
For fiscal 2025, SG&A expenses decreased $17.7 million, or 7.3%, to $223.8 million, from $241.5 million for fiscal 2024. As a percentage of net revenues, SG&A expenses were 60.2% and 51.3% for fiscal 2025 and fiscal 2024, respectively. SG&A expenses related to Vera Bradley and corporate unallocated were $186.9 million compared to $192.1 million in the comparable prior-year period. SG&A expenses related to Pura Vida were $36.9 million compared to $49.4 million in the comparable prior-year period. The decrease in consolidated SG&A expenses for fiscal 2025 was primarily due to a decrease in employee-related expenses of $13.4 million due to a reduction in headcount and incentive compensation; a $2.6 million decrease in selling expenses due to decreased sales; decreased advertising of $2.5 million, primarily related to Pura Vida variable advertising due to decreased sales, partially offset by Vera Bradley advertising largely related to Project Restoration; a $1.6 million decrease in intangible asset amortization; and $0.2 million in other net expense reductions. These decreases were partially offset by an increase of $2.6 million for property, plant, and equipment impairment charges in the current year.
Impairment of Intangible Assets
Fiscal 2025 included a $6.2 million charge for impairment of the indefinite-lived Pura Vida brand intangible asset, which reflects a full impairment and is recorded within the Pura Vida segment. A $5.4 million impairment charge of the indefinite-lived Pura Vida brand intangible asset was recorded in fiscal 2024 within the Pura Vida segment. For additional information, refer to Note 15 of the Consolidated Financial Statements herein.
Other Income, Net
For fiscal 2025, net other inco me totaled $0.9 million, consistent with the prior year.
Operating (Loss) Income
For fiscal 2025, there was an operating loss of $(42.4) million, a $52.8 million decrease, or 505.7%, from operating income of $10.4 million for fiscal 2024. As a percentage of net revenues, operating (loss) income was (11.4)% and 2.2% for fiscal 2025 and fiscal 2024, respectively. Operating (loss) income decreased due to the factors described above.
The following table provides additional information about our operating (loss) income (in thousands):
Fiscal Year Ended $
Change %
Change
February 1,
2025 February 3,
2024
Operating (Loss) Income:
VB Direct $ 25,240 $ 61,873 $ (36,633) (59.2) %
VB Indirect 15,414 24,279 (8,865) (36.5) %
Pura Vida (15,121) (2,321) (12,800) (551.5) %
Less: Unallocated corporate expenses (67,889) (73,389) 5,500 7.5 %
Operating (loss) income $ (42,356) $ 10,442 $ (52,798) 505.6 %
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VB Direct . For fiscal 2025, operating income decreased $36.6 million, or 59.2%. As a percentage of VB Direct segment net revenues, operating income in the VB Direct segment was 9.8% and 20.0% for fiscals 2025 and 2024, respectively. The decrease in operating income as a percentage of VB Direct segment net revenues was primarily due to decreased sales, a decrease in gross margin as a percent of net revenues driven by a change in sales channel mix, and SG&A expense deleverage associated with decreased sales.
VB Indirect . For fiscal 2025, operating income decreased $8.9 million, or 36.5%. As a percentage of VB Indirect segment net revenues, operating income in the VB Indirect segment was 25.2% and 32.9% for fiscals 2025 and 2024, respectively. The decrease in operating income as a percentage of VB Indirect segment net revenues was primarily due to reduced margin for indirect liquidations sales, an increase in wholesale discounting, and SG&A expense deleverage resulting from decreased sales.
Pura Vida. For fiscal 2025, operating loss increased $12.8 million, or 551.5%. As a percentage of Pura Vida segment net revenues, operating loss in the Pura Vida segment was (28.4)% and (2.7)% for fiscals 2025 and 2024, respectively. The increase in operating loss as a percentage of Pura Vida net revenues was primarily due to decreased sales, increase in inventory reserves, SG&A expense deleverage associated with decreased sales, and increased promotional activity.
Corporate Unallocated . For fiscal 2025, corporate unallocated expenses decreased $5.5 million, or 7.5% to $67.9 million from $73.4 million in the prior-year period. The decrease in corporate unallocated expenses was primarily due to a $6.2 million decrease in employee related expenses including incentive compensation and salaries resulting from headcount reductions and $0.2 million in net other expense reductions, partially offset by an increase of $0.6 million in advertising related to Project Restoration and an increase in professional fees of $0.3 million.
Interest Income, Net
For fiscal 2025, net interest income increased $0.2 million to $1.1 million from $0.9 million in fiscal 2024.
Income Tax Expense
For fiscal 2025, we recorded income tax expense of $21.0 million at an effective tax rate of (50.8)%, compared to income tax expense of $3.5 million at an effective tax rate of 30.8% for fiscal 2024. The effective tax rate change was primarily attributable to the full valuation allowance recorded against the Company's net deferred tax assets, as well as the relative impact of permanent and discrete items in the current-year period compared to the prior-year period which largely relates to non-deductible executive compensation.
Net (Loss) Income
For fiscal 2025, there was a net loss of $(62.2) million, a $70.0 million decrease, from net income of $7.8 million in fiscal 2024 due to the factors described in the captions above.
Fiscal 2024 Compared to Fiscal 2023
Refer to the Company's Annual Report on Form 10-K filed wit h the SEC o n March 29, 2024, for a comparison of fiscal 2024 to fiscal 2023 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 1, 2025. 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.
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Cash Flow Analysis
A summary of operating, investing, and financing activities is shown in the following table (in thousands):
Fiscal Year Ended
February 1,
2025 February 3,
2024 January 28,
2023
Net cash (used in) provided by operating activities $ (14,102) $ 47,993 $ (13,421)
Net cash used in investing activities (10,373) (13,770) (8,239)
Net cash used in financing activities (22,515) (3,548) (20,105)
Net Ca sh (Used in) Provided by Operating Activities
Net cash (used in) provided by operating activities consists primarily of net (loss) income adjusted for non-cash items, including depreciation, amortization, impairment charges, deferred taxes, and stock-based compensation; and the effect of changes in assets and liabilities.
Net cash used in operating activities was $14.1 million during fiscal 2025, as compared to net cash provided by operating activities of $48.0 million during fiscal 2024. The increase in cash used in operating activities was primarily related to a net loss of $(62.2) million, a $70.0 million decrease, from net income in the comparable prior-year period, $0.3 million in other non-cash items, partially offset by a change in deferred income taxes of $18.6 million and property, plant, and equipment impairment charges of $2.6 million in the current year period. Additionally,there was a net use of cash in the current year period in changes in assets and liabilities of $12.9 million, primarily driven by a decrease cash provided by inventories.
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 $10.4 million in fiscal 2025, compared to $13.8 million in fiscal 2024. The decrease in cash used in investing activities was primarily a result of the purchase of the remaining 25% interest in Pura Vida for $10.0 million in the prior year, partially offset by an increase in property, plant, and equipment spending of $6.6 million primarily as a result of 8 store openings and Project Restoration initiatives in the current year, compared to 3 store openings in the prior year.
Net Cash Used in Financing Activities
Net cash used in financing activities w as $22.5 million in fiscal 2025 compared to $3.5 million in fiscal 2024. The increase in cash used in financing activities was primarily due to an increase in repurchases of common stock of $19.6 million.
Refer to the Company's Annual Report on Form 10-K filed with the SEC on March 29, 2024 , for a comparison of fiscal 2024 to fiscal 2023 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.
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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.
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 $7.7 million an d $8.1 million for these matters as of the fiscal years ended February 1, 2025, and February 3, 2024, respectively.
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.
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Valuation of Long-lived Assets
Property, plant, and equipment and operating right-of-use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. In evaluating an asset group for recoverability, we estimate the future cash flows expected to result from the use of the asset group at the store level, the lowest identifiable level of cash flow, if applicable. If the sum of the estimated undiscounted future cash flows related to the asset group is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by an estimated discounted cash flow analysis of the asset. Factors used in the valuation of long-lived assets include, but are not limited to, our plans for future operations, brand initiatives, recent operating results, and projected future cash flows. With respect to our stores, we analyze store economics, location within the shopping center, the size and shape of the space, and desirable co-tenancies in our selection process. Impairment charges are classified in SG&A expenses and were $2.6 million, and $1.4 million for the periods ended February 1, 2025, and January 28, 2023, 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.
Goodwill and Other Intangible Assets
Prior to February 1, 2025 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, leaving no balance. The 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 1, 2025, the Company had no intangible assets as it recorded a full impairment charge of the Pura Vida brand within the Pura Vida reporting unit during fiscal 2025. The Company performed a quantitative analysis of the Pura Vida brand for the annual impairment test in the second quarter of fiscal 2025, 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 $6.2 million in the fourth quarter of fiscal 2025, further described in Note 15 of the Consolidated Financial Statements herein.
For the annual impairment analysis performed during fiscal 2024, 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. An impairment charge of $5.4 million was recorded during fiscal 2024 for the Pura Vida brand.
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.
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