Vera Bradley Inc. (NASDAQ: VRA) Q2 2021 Earnings Call Transcript

Vera Bradley Inc  (NASDAQ: VRA) Q2 2021 Earnings Call dated September 02, 2020

Corporate Participants:

Mark Dely — Chief Administrative Officer

Robert Wallstrom — President, Chief Executive Officer and Director

John Enwright — Executive Vice President and Chief Financial Officer

Analysts:

Mark Altschwager — Robert W. Baird — Analyst

Kimberly Hong — Cowen and Company — Analyst

Eric Beder — SCC Research — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Steven Marotta — CL King & Associates — Analyst

Rick Fearon — Accretive Capital Partners — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Vera Bradley Second Quarter Conference Call. [Operator Instructions]

And now, I would like to turn the call over to Mark Dely, Vera Bradley’s Chief Administrative Officer. Please go ahead.

Mark Dely — Chief Administrative Officer

Good morning and welcome everyone. We’d like to thank you for joining us for Vera Bradley’s earnings call. Some of the statements made during our prepared remarks and in response to your questions may constitute forward-looking statements made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect.

Please refer to today’s press release and the Company’s most recent Form 10-K filed with the SEC for a discussion of known risks and uncertainties. Investors should not assume that the statements made during the call will remain operative at a later time. We undertake no obligation to update any information discussed on the call.

I will now turn it over to Vera Bradley’s CEO, Rob Wallstrom. Rob?

Robert Wallstrom — President, Chief Executive Officer and Director

Thank you, Mark and good morning, everyone and thank you for joining us on today’s call. John Enwright, our CFO also joins me today. I am extremely pleased with our second quarter results which exceeded our expectations and last year’s performance despite facing the headwinds of COVID-19. I credit the agility, tenacity, collaboration, ingenuity of our entire team for making these results a reality.

We proved that by focusing on innovation that enhances the customer experience in product, marketing and technology and controlling what we can control, we can drive strong results, produce strong cash flow and position ourselves to emerge a stronger Company. Total Company year-over-year second quarter revenue grew by 10% driven by the addition of Pura Vida for a full quarter and Vera Bradley’s e-commerce sales doubling, offset by a decrease in Vera Bradley store revenues due to COVID-19 related store closings for a portion of the quarter. At both Vera Bradley and Pura Vida, customers responded to new product launches and marketing initiatives and sales of cotton masks drove meaningful revenue growth.

We significantly expanded our consolidated gross margin rate in the quarter through sales of cotton masks, product collaborations, careful inventory management and tightly controlled promotional activity. We carefully managed our expenses, achieving expense leverage in the quarter. Our balance sheet remains strong even after paying $30 million on our ABL facility during the quarter, we ended with cash and investments of $77.1 million. On May 5, 2020, we began reopening our Vera Bradley stores in phased approach with 58 out of 82 full-line stores in 64 of 65 factory stores opened by the end of June. All factory stores and all but three full-line stores were opened as of the second quarter end, although with reduced hours, lower staffing levels and greatly enhanced customer capacity and safety protocols.

While we are making no assumptions on future growth performance based upon a limited number of days of sales data, the 133 existing stores that were open for the entire fiscal month of July, in the aggregate generated approximately 70% of the prior year sales. While traffic was typically down more than the sales level, increased conversion and units per transaction allowed us to significantly outperform this traffic trend. Our e-commerce business, Vera Bradley and Pura Vida combined was very strong in the quarter, even the stores began to reopen.

We know that that pandemic will have a lasting impact on the way consumers act and shop, and that our digital competencies are even more important in this new environment. Our acquisition of digitally native Pura Vida which resulted in e-commerce being a larger share of our total Company revenues along with our continued investment in Vera Bradley’s e-commerce site and infrastructure has positioned us well for the future. We are so appreciative of all our associates and are especially thankful to those team members that have been on the front lines in our distribution center, keeping our e-commerce business driving, and in our stores, ensuring that our customers are safe and having great experiences.

We are delighted to provoke — we were delighted to provide a $500 bonus to our distribution center store and customer service associates working full-time in the quarter and pro-rated for our full and part-time associates working a portion of the quarter, for their extraordinary hard work and dedication during this time. All of this associate dedication is indicative of a great culture, we have built and nurture at both of our brands. Our recent associate engagement survey once again indicated that our associates are highly engaged and passionate about our Company.

We are always striving to build upon our strengths and a key part of this is enhancing our diversity and inclusion initiatives. And although, we have a history of building an inclusive environment, we want to do even better and build a more diverse community. We have appointed a talented and long-time Vera Bradley associate as diversity and inclusion manager to lead our efforts. Starting with launching of project quilt in the formation of a diversity and inclusion committee, whose members represent diverse communities across our organization. This is only the beginning of our efforts, but we want to take serious and thoughtful actions to continue to enhance diversity, equality and inclusion throughout our Company and in the communities we serve. We will focus on three key areas, the associated experience, the customer experience and the community experience. And we look forward to keeping you updated on our progress.

Now, let me turn the call over to John to review the financial results. John?

John Enwright — Executive Vice President and Chief Financial Officer

Thanks, Rob and good morning. Let me go over a few highlights for the quarter. As a reminder, financial results have been consolidated to include Pura Vida beginning July 17th, 2019, the first full day following the acquisition. Prior period numbers have not been restated. The numbers I will discuss today are all non-GAAP. For a complete reconciliation of GAAP to non-GAAP numbers, please reference the schedules attached to today’s press release. The current year non-GAAP second quarter income statement numbers exclude that the intangible asset amortization and the project notice expenses.

Non-GAAP EPS for the current quarter also excludes the ASC 480 measurement adjustment described in today’s release. The non-GAAP income statement numbers for the prior-year second quarter exclude that the Pura Vida acquisition-related charges and Project Novus expenses. Consolidated net revenues totaled $131.8 million for the current year second quarter, an increase of 10% over the prior year. Excluding Pura Vida, Vera Bradley net revenues totaled $99 million, a 13.5% decrease from $114.4 million in the prior year second quarter. Cotton masks represent over 10% of consolidated revenues for the quarter. Excluding charges, Vera Bradley, Incorporated non-GAAP consolidated net income was $10.9 million or $0.32 per diluted share for the second quarter compared to $8.7 million or $0.25 per diluted share of last year.

Vera Bradley Direct segment revenues totaled $81.2 million, a 13.9% decrease from $94.4 million in the prior year second quarter. The decline primarily resulted from stores that were temporarily closed as a result of COVID-19 for approximately half of the second quarter partially offset by a 99.1% increase in e-commerce revenues for the quarter. We closed 12 full-line stores and opened five factory stores in the last 12 months. Vera Bradley Indirect segment revenues totaled $17.7 million, an 11.4% decrease from $20 million in the prior-year second quarter reflecting a reduction in orders primarily related to COVID-19 and in a number of specialty and department store accounts.

Pura Vida segment revenues totaled $32.8 million compared to $5.4 million in the prior year which represented revenues for the partial period or post-acquisition. Second quarter consolidated gross margin totaled $79.6 million or 60.4% of net revenues compared to $68.4 million or 57.1% in the prior year on a non-GAAP basis. Pura Vida benefited the current year second quarter non-GAAP percentage by approximately 40 basis points. We significantly expanded our gross margin rate in the quarter through sales of cotton masks, product collaborations, careful inventory management and tightly-controlled promotional activity.

Cotton masks added nearly 300 basis points to gross margin for the quarter. On a non-GAAP basis, consolidated SG&A expense totaled $58.6 million or 44.5% of net revenues for the current year second quarter compared to $57.8 million or 48.2% of net revenues last year. On a non-GAAP basis, Pura Vida contributed $13.5 million of SG&A expenses in the current year and $2.4 million in the prior year. Excluding these additional Pura Vida expenses, Vera Bradley SG&A expenses were lower than the prior year primarily due to temporary and permanent expense reductions related to COVID-19.

On a non-GAAP basis, current year second quarter consolidated operating income totaled $21.1 million or 16% compared to $11.3 million or 9.5% of net revenues last year. The uncertainties continuing related to COVID-19 make fiscal 2021 financial performance extremely difficult to predict. As a result, we are not providing forward-looking guidance. Second quarter performance should not be considered to predict our future performance, particularly as the sales of masks may not be as strong for the balance of the year.

Now let me turn to the balance sheet. Net capital spending for the second quarter and six months totaled $2 million and $4.3 million respectively. Capital expenditures are expected to total approximately $8 million to $10 million for the year, primarily related to new factory stores and technology and logistics enhancements. Cash, cash equivalents and investments as of August 1st of 2020 totaled $77.1 million compared to $70.5 million at the end of last year second quarter.

As Rob noted, we repaid $30 million of borrowings on our ABL credit facility in the second quarter, leaving a balance outstanding of $30 million on the $75 million facility. Quarter-end inventory was $136.2 million compared to $130.7 million at the end of the second quarter last year. The Company has canceled certain quarters of fall product due to COVID-19 and expect future inventory to be relatively flat for the balance of the year. And then the good news is, much of our inventory is not seasonal, and does not have the shelf life of fashion apparel. We will be rational and prudent as we clear inventory as we always try to be. Rob?

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, John. First, let me update you on our recent technology system transformation. In early August, after more than a year of hard work and dedication, Project Novus, our new technology platform went live. We migrated our e-commerce site to the best-in-class cloud based Shopify Plus platform, cloud-based Microsoft D365 replaced our existing ERP, POS, business intelligence and order management systems, streamlining and simplifying our work and providing for additional capabilities such as mobile POS.

This conversion not only less than the complexity of our IT systems, but has provided us with a more efficient technology platform that will enable the entire enterprise to achieve our future objectives. To thrive in this environment and in the future, we must be able to make quick database informed decisions and to further enhance our customer experience. We are excited about the capabilities and possibilities of our new systems and we will continue to invest in technology and build our capabilities as we move forward. Through these systems, we will be able to harness customer data and feedback earlier and more instantaneously to drive innovation across product, marketing and stores. We have also added new warehouse automation systems to our distribution center, which should enhance productivity, increase our capacity and enhance the consumer experience.

Now let’s shift to an update on our two brands. We remain focused on propelling both the Vera Bradley and Pura Vida brands forward through innovation and product, marketing and technology. The way that customers live and work has dramatically and permanently changed due to COVID-19, and we are especially well positioned with our casual and comfortable brands that dovetail into this shift. Let me start with Vera Bradley. Our products will remain authentic and true to our brand heritage, but innovation is becoming more and more important to our existing customers and in continuing to attract new customers. We have a robust fabric innovation process in place to update our cotton collection and to develop fabric alternatives.

Our newest full-line offerings of Performance Twill and Re-Active or recycled collection are gaining traction and are highly-rated by our customers. We just introduced a new ultra light fabrication in our factory stores and the early results are strong. Stay tuned for more fabric innovation over the next 12 to 24 months. We will also continue to bring new patterns and styles and differentiated silhouettes to the market to meet all facets of our customers’ lifestyle.

Our key focus is our hands-free products like our slings and cross bodies as they are becoming increasingly important to our customers, particularly during the pandemic. Our long-term focus continues to be on building upon our dominance in our key franchise areas of youth campus, travel and every day. A great example of newness and innovation is our cotton mask, which drove meaningful revenue and gross margin dollars for us during the quarter. In April, we ramped up our manufacturing and distribution of mask and since then we have continued to add different styles, sizes, patterns and solids.

We are happy to offer our customers and the communities we serve necessary personal protective equipment and provide a little color and fun in the process. You will also see our masks in Target and Staples, and on QVC. As the impact of COVID-19 lessens, we expect the sales of masks to slow in the back half of the year, but we are also anticipating to see a further recovery in the core business. We continue to offer special limited time capsule collections centered around seasonal periods or novelty, which add excitement and a sense of urgency for our customers to shop.

Last year, customers were wild about our fun and playful cats meow collection. So this month, we launched our best in show print which of course features dogs. This is sure to be a Vera Bradley fan favorite. In recognition of Pride Month in June, we introduced our Pride Tote, and to commemorate the 100th anniversary of the 19th amendment to the constitution, guaranteeing women the right to vote, we reviewed our persistence, patchwor, limited edition Tote on August 18th. We are continuing with our collaborations and strategic alliances that excites and engage existing and new customers, expand our brand reach, increase brand awareness, generate media attention and provide opportunities for Vera Bradley to strategically test and ultimately enter new product categories. These partnerships are a true testament to the strength and wide appeal of our brands.

In July, we introduced our second Gillette Venus collaboration distributed through Target and Sainsbury in the UK. And in August, we launched both our newest Disney collection on verabradley.com, and our second annual collaboration with Crocs. Of course, we were most excited about our long-awaited Vera Bradley plus Harry Potter collaboration that launched in July. In partnership with Warner Brothers, consumer products, the captivating capsule collection embodies the imagination and spirit of adventure of the Wizarding World. For backpacks and lunch bags, to robes, lanyards accessories and more, this collection has something for everyone. Whether they’re gearing up for back-to-school or simply looking for a bit of magic.

All styles in the collection are available in an exclusive Home to Hogwarts pattern, which includes iconic symbols from the Harry Potter series with Vera Bradley’s signature colorful touch. Select pieces are also available in solid corduroy pattern styled with each Hogwarts house. We had an overwhelming response from the many Vera Bradley and Harry Potter fans and many items sold out quickly. The day of the launch, we had record visitors to our website, many of whom were new to Vera Bradley. This launch was a huge success and we are reordering some of the most popular items just in time for holiday.

Let me switch to marketing, beginning with VB Cares, as we focus on reinforcing our position as an ESG organization, we continue to strengthen our community support and charitable initiatives under the umbrella of VB Cares particularly through organization that can meaningfully improve the lives of women and children. One such organization is the Coronavirus Response Fund for Nurses. The Company contributed a percentage of each cotton mask sold through the end of July to support nurses who will work tirelessly and bravely on the front lines of the COVID-19 crisis. Through the sale of our cotton mass, we were able to donate over 630,000 to the American Nurses Fund. Our associates are so thrilled to be able to support the healthcare workers fighting every day to treat those affected by the pandemic. And we are very appreciative of our loyal customers for making this happen.

Blessings in a Backpack is very near and dear to our hearts. This amazing organization mobilizes communities, individuals and resources to provide food on the weekends for under-resourced elementary school children across America who fight — who might otherwise go hungry. Unfortunately with COVID-19, gathering limitations and the uncertainties surrounding the school year, we are not hosting our traditional backpack giveaways this year. However, we have been able to provide financial support to Blessings plus through our May limited edition product collaborations with Olympian gold medalist, Shawn Johnson East and our sale of special key chains this fall, we are able to help this great cause all year long.

Our digital and marketing teams are focused on accelerating our digital and customer growth. Our investments in customer data science and business analytics, position us well as we enter the pandemic to respond in an agile way as customers underwent unprecedented change, essentially operating as a digitally-only business until our stores reopened. New customer acquisition on verabradley.com rose triple digits in the quarter, while return on ad-spend in year-over-year e-commerce revenues doubled. We have built a strategic marketing platform enabled by our investments in data-driven marketing and data science, which has allowed our teams to react to the uncertainty in real time.

We have adjusted brand spend away from categories such as travel and beach and into areas such as hands-free, washable masks and other healthcare products. Using our data-centric programmatic buying, we have doubled our paid media efficiency and revenue attributable to paid media during the quarter. We will continue to mine our customer data and optimize our marketing spend for the back half of the year.

Vera Bradley has always been a brand about connecting people and the team has really helped demonstrate that during these challenging times. We have seen increased strength in both new followers and customer engagement across social channels. Our enhanced social media strategy includes increased influencer participation, several co-branded sweepstakes, and more diverse user generated content. In fact, in the second quarter more than 40% of Instagram content was user generated. These efforts drove our largest quarter of Instagram follower growth. Our most highly engaged social media posts revolve around Harry Potter, COVID-19 relief efforts, masks and our sustainability focused products.

Earned media was strong during the second quarter with almost 3 billion impressions. We had exceptional media coverage of our mask efforts supporting communities and nurses, and in our brand collaborations like Harry Potter, Venus, and our Shawn Johnson East collection. In Baird’s recent analysis of earned media, influencer and social media engagement trends for July, Vera Bradley was one of only nine out of over 150 brands that had positive growth in social media engagement month-over-month at 236% and year-over-year at 29%.

In July, we tested our first foray into connected TV advertising. The ad focused on backpacks and coordinating masks to help keep our brand top of mind as shoppers prepare to go back to school, back to work, or back to traveling. The ad ran digitally in 15 states on a variety of streaming services, drove traffic and sales in those markets. Based on the success of this test, we are planning to release another ad for the holiday period.

Let me give you a brief update on stores. And although our digital business is becoming a larger portion of our revenue, stores continue to be an important part of our omnichannel strategy. As I noted earlier, the 133 stores that were open for the entire fiscal month of July in the aggregate generated approximately 70% of the prior-year sales. In aggregate, our factory stores outperformed our full-line stores compare to last year as customers on average have felt more comfortable shopping in outdoor centers than in enclosed malls. As more retailers open and consumers feel more comfortable shopping, we believe Vera Bradley store traffic and sales will improve. Of course, we are continuing to watch COVID-19 cases by geography and will react accordingly.

We continue to focus on enhancing the customer experience in both our full-line and factory stores, on verabradley.com, in our fulfillment operations, and in our customer service department. Our goal is to be available where she is, offering exceptional service whether in-store, on e-commerce, by appointment, or curbside pick-up. Our robust Voice of the Customer initiative and our customer service execution once again drove industry-leading customer satisfaction scores in the quarter despite all of the COVID-19 related disruption. This quarter NICE, experts in customer service, announced Vera Bradley as a winner of its 2020 Excellence Awards for best customer experience, noting Vera Bradley achieved a deep understanding of customers’ personalities and journeys to improve customer experience through advanced real time analytics.

We have opened five new factory stores this year and expanded our highly productive Myrtle Beach, South Carolina factory store. We still expect to permanently close up to 12 full-line stores during the year, which will bring our total full-line store closings to 38 since the beginning of fiscal 2018. We have closed six so far this year. We continue to be in conversations and negotiations with our landlords and have made progress on rent relief on several of our properties.

Now let’s talk about Pura Vida. We remain very confident in and excited about the vision of the founders, Griffin and Paul, for the future growth of the digitally native Pura Vida business as every day more customers want to be part of the Pura Vida lifestyle. For the quarter, Pura Vida’s total revenues increased nearly 6% over last year despite a significant supply chain and wholesale disruption. Revenue was driven by a 22% increase in e-commerce sales. Average orders and conversion rates continued to grow over last year.

Due to COVID-19, our primary manufacturing facility in El Salvador was closed for over seven weeks in the quarter and did not fully reopen until late June. We are actively working to further strengthen and diversify our raw material sourcing and production capabilities and expect to have the alternate sources operational for fourth quarter deliveries.

In product, we continually introduced new styles of the Pura Vida signature core bracelets and style packs and our expansion into metal, mood, and semi-precious stone charms and jewelry have continued in popularity and are at a higher price point than our traditional string bracelets. Despite COVID-19, our second quarter product introductions were successful with several special launches, like our Pride and Mother’s Day bracelets selling out quickly.

We introduced hair accessories in the second quarter and they are off to a good start. Our expanding selection of KITSCH and beyond the beach styles, like our daisy seed bead-based jewelry, kitten earrings and alphabet bead bracelets are very popular. We are continuing to expand above the key board items like necklaces and earrings for our customers working from home and on never-ending Zoom calls.

Personalization is a continuing popular trend. Customers can personalize their signature core bracelets by choosing the color combination special to them, or they can customize their looks with fun patches and pins. Our engraveable collection launched earlier this year has really taken off with customers loving the customization of our necklaces, rings, and coin bracelets. We are excited about the further expansion of this program.

Pura Vida’s signature charity bracelets are truly an integral part of the Pura Vida lifestyle and continue to be a growing category as they are so important to our many loyal cause-minded customers. We are continually adding to our popular charity charm bracelets that we introduced earlier this year and to our charity style packs that support such amazing causes as autism awareness, charity water, and save the dolphins. The expansion of charms and style packs to our charity assortment is not only enabling us to increase our price points but to increase total donations to these great causes.

We will continue to innovate and expand in this key area of the business. To date, Pura Vida has donated over $2.6 million to dozens of charities. In the second quarter, Pura Vida teamed up with Vera Bradley to create a limited edition face mask that combines Pura Vida’s beachside vibes with Vera Bradley’s iconic style. We have sold tens of thousands of these masks, and they are so popular that they are currently sold out. We are currently taking pre-orders for the next delivery and anticipate selling out again.

Pura Vida is continuing to expand on the distribution front. Earlier this year, we launched our Canada Shopify fulfillment capabilities and entered into an agreement with Hectic Europe for the wholesale distribution of our products in Europe to complement our existing e-commerce business and third party fulfillment there. We already have many Pura Vida fans around the world and this global expansion will allow us to not only serve those customers but extend our reach to others. There is more international expansion to come.

Pura Vida is an expert at engaging customers and is always looking for new ways to build loyalty as well as bring new customers into the Pura Vida lifestyle. Our popular monthly bracelet and jewelry clubs and Shore Club loyalty program are all creative ways to connect our customers with our products and our lifestyle.

On the marketing front, Pura Vida’s social media engagement is strong. We love feedback and interaction from customers and we are always anxious to hear what they have to say about our products, we should create, charities we should support. Pura Vida remains one of the most highly engaged brands in the accessory space on social media with over 2 million Instagram followers. Pura Vida is consistently listed as one of the most, if not the most engaged jewelry brands on Instagram. TikTok has also taken off with nearly 100,000 followers.

An army of brand ambassadors and close to 150,000 micro influencers are an active part of the brand and a key part of our marketing strategy. These passionate advocates help us spread the Pura Vida movement, showcasing their devotion to the brand while scoring perks along the way. When selecting brand ambassadors, we not only look at the number of followers but also look for talented photographers and the right aesthetic. Pura Vida has personal relationships with many of the ambassadors and we help them create amazing and memorable experiences, given them authentic reasons to post about their experiences with our brand. We also collaborate with several of our top influencers to create products that sell themselves with organic buzz and built-in promotion. We are diligently working to add more diversity to our influencers and marketing efforts. We have several exciting influencer product launches lined up for fall.

We are very excited about our partnership with dancer and TikTok star, Charli D’Amelio to launch a Pura Vida bracelet influencer style pack this holiday season. Now with over 81 million followers, she is the most followed personality on TikTok and was dubbed the reigning queen of TikTok by the New York Times. Charli’s target demographic fits perfectly with the Pura Vida brand.

In closing, I think there are four words I could use to sum up the last quarter, and it would be agility, innovation, digital and cash. I am so proud of how our entire organization has responded to the unprecedented crisis and maintained an offensive mindset that is propelling us forward. Even while working remotely, our teams have demonstrated flexibility and decision making, created new products and marketing initiatives, and added efficiency to the organization. Investments in our digital infrastructure have paid off and our focus on cash management has driven us to think of creative ways to drive sales, expand margins, and reduce expenses. Our multi-brand strategy is proving to be even more powerful.

Now more than ever, I am confident we are in the right space with our casual and comfortable product offerings at both Vera Bradley and Pura Vida. Our focus on customers who live beyond the major city centers is even more advantageous in a COVID world, as we are seeing a migration from major cities to the smaller towns and from a dressier lifestyle to a more casual lifestyle.

Operator, we will now open the call to questions?

Questions and Answers:

Operator

Thank you. [Operator instructions] And we’ll take our first question from Mark Altschwager with Baird.

Mark Altschwager — Robert W. Baird — Analyst

Good morning. Thanks for taking my question, and congrats on strong quarter in this really tough backdrop. First, I wanted to clarify a couple of things on the mask sales. I think you said 10% of total sales in the quarter — maybe just confirm that that’s correct. And what was the mix between direct and indirect there, and then just finally on the masks, I know you said you expect that to moderate in the back half, but just given that it’s been so significant of an impact, any further help you could provide on what the monthly run rate has been looking like in August?

John Enwright — Executive Vice President and Chief Financial Officer

Yes, so Mark, the 10% was the number we commented to, and it was of total revenue, so it was above 10%. The mix between segments, it was a little bit more, call it 60-40 direct to indirect, close to those values, so that if you’re looking to kind of split that out. In regards to future quarters, we don’t anticipate — again, the unpredictability of COVID and the really kind of the economy going forward, we expect to have some mask sales in the back two quarters, but we don’t necessarily anticipate it to be about 10% of sales. So it’s hard for me to give you any forward guidance associated with that, because we think it’s going to be unpredictable, but the current run rate in August is something similar to what we have seen in kind of the July time frame. It’s not significantly different right now, but we anticipate that to moderate as we go throughout the year.

Mark Altschwager — Robert W. Baird — Analyst

That’s really helpful, thank you. And then switching gears, store productivity, I think you said 70% was the number for July. Curious, if that’s shifted at all in August as you kind of move into the meat of the back-to-school season, and just from a channel perspective, how has digital trended with stores reopened?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah, a couple things, Mark. One, from a store performance, it’s relatively the same, in that 70% number. It’s been interesting — you know, we have seen a softness in back-to-school business, but that’s kind of being offset by some of the other businesses and the innovation that’s driving customers but I would say the run rate’s been similar. In terms of digital, I would say that might be one of our larger surprises that we saw, because when were kind of digital only and e-commerce was up at triple digits, we thought that that would moderate quickly as stores started to reopen, and we didn’t see that. The digital business has remained very strong, so that’s something that we’re really watching as we go out through the rest of the year and how that holds.

I think what’s really driving digital was two things. It’s innovation through new marketing, right. All of the analytics we’ve put in place, all the programmatic buying has really been instrumental in, A, getting customers into the brand as well as keeping customer engaged in the brand, so we’ve seen strong new customer growth across the digital channels. We’ll watch that through the year and see how that moderates, but I think our feeling at this point is that digital is going to be an elevated part of our business ongoing, and we think that some of this consumer behavior is a permanent shift, so we’ll see how that goes going forward.

Mark Altschwager — Robert W. Baird — Analyst

Okay, that’s all really helpful. And then maybe just bigger picture, the operating margin in the quarter, 16%, really quite an incredible result. Maybe just help us understand, I mean, how much of this was driven by some of the temporary factors, like the mask sales which are going to moderate, versus or maybe in addition to some corporate cost savings, versus more structural changes to the cost structure within the various segments. In general, with the learnings through this more challenging period, any bigger picture thoughts on how you’re thinking about the margin profile of the business on a go-forward basis?

John Enwright — Executive Vice President and Chief Financial Officer

Yeah, so let me just actually correct something I said earlier, in regards to mask sales, they’re probably closer to 70-30 versus 60-40 in the quarter, so it’s a little bit higher from a direct perspective than I commented to before.

In regards to operating margin, I think what’s having — some of the SG&A savings was associated with the 80% plus individuals who were furloughed with our store closures, so we got some benefit there with having the operating expenses being a little bit more reduced, so I would call that temporary definitely in the quarter. But I do believe, we have been able to look at some discretionary spend and cut back discretionary spend, and that will be savings as we look forward into the remainder of this year as well as when we plan and think about next year, and you can think of that as T&E — travel.

Obviously travel, we think is going to be different for not only corporate individuals, but potentially some of our indirect individuals as we utilize technology in order to kind of meet with individuals, so we think there’s going to be some savings there. We also are really looking at kind of all expense structures, all contracts, and we think there’s going to be some permanent savings associated with that, and as we’ve introduced Project Novus, we should see some savings over time associated with that.

In regards to masks, we do — obviously we got some significant benefit from a gross margin perspective that obviously moved down to the operating margin perspective, and as we continue to sell masks, we should see some benefit to the operating margin on a go-forward basis. I don’t know if you wanted to add anything, Rob?

Mark Altschwager — Robert W. Baird — Analyst

That’s helpful. Thanks for all the detail. Best of luck this fall.

John Enwright — Executive Vice President and Chief Financial Officer

Thanks, Mark.

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, Mark.

Operator

Our next question comes from Oliver Chen with Cowen and Company.

Kimberly Hong — Cowen and Company — Analyst

Hi, this is Kimberly Hong on for Oliver. Thank you for taking our questions. How are you thinking about back to school this year? Given the current uncertainty around school re-openings this year, how would you repurpose your inventory that’s targeted to the back to school crowd if there’s not enough demand?

Robert Wallstrom — President, Chief Executive Officer and Director

Yes, Kimberly, thanks for the question. Back to school has definitely been off to a slow start as we’ve seen around the industry, and so we’ve definitely seen some suppression in the backpack and lunch bag business. One thing that’s interesting as schools are moving around, for example a lot of the stores in Texas moving to October openings, we think one thing that’s going to happen is back to school is going to be a very elongated season. So, it used to be very targeted in the August period and now we really think that’s going to run out potentially for all of fall, and we expect it to be an important part of the holiday season.

One thing that’s always been one of our advantages, particularly at Vera Bradley, if you think about that brand, the ability for our product to be evergreen in a lot of situations, right? It’s not that we have to rush. If we have lower demand, we can change future on-order and kid rebalance the portfolio, so we’re not concerned with the inventory levels.

At Pura Vida, from back to school, it’s also a very important business for them. It drives a lot of business around — they have the whole program where people will buy bracelets as fundraisers and buy packs and do that for sports teams and schools, so they’ve seen some softness there, but we believe right now that the back to school period is going to be soft. We’re going to get through it. We started to get through it in our second quarter performance, and we think it will be similar for third quarter.

Operator

Does that answer your question?

Kimberly Hong — Cowen and Company — Analyst

Hi — sorry, I was on mute. Thank you. Just one more from me. Based on the math, Pura Vida looks like it’s been pretty resilient in this environment versus the indirect and direct segments that were down year-over-year. Can you speak to Pura Vida’s demand throughout this environment and also if you’ve seen the customer base from Pura Vida, the Gen V and the millennial base transfer over to Vera Bradley’s products over the last year.

Robert Wallstrom — President, Chief Executive Officer and Director

Well, a couple things. One, on the Pura Vida business, we definitely are seeing continued strong customer engagement, especially through all their social channels, which is one thing we really monitor closely in terms of consumer health, so we’re very excited about the customer is still engaging with the brand. We have a lot of initiatives going forward, so there’s good momentum there.

In terms of their customer migrating back against Vera Bradley, that has not been part of our strategy and we haven’t seen a big push back. The consumer still is really seeing both brands as separate brands, and they both have very loyal followings. We have some crossover, but the plan has always been to let both businesses kind of grow their individual customer communities.

Kimberly Hong — Cowen and Company — Analyst

Okay, thank you.

Robert Wallstrom — President, Chief Executive Officer and Director

You’re welcome.

Operator

Our next question comes from Eric Beder with SCC Research.

Eric Beder — SCC Research — Analyst

Good morning, congratulations.

Robert Wallstrom — President, Chief Executive Officer and Director

Hi, Eric.

John Enwright — Executive Vice President and Chief Financial Officer

Hi, Eric.

Eric Beder — SCC Research — Analyst

Can you talk a little bit about the Re-Active and Performance Twill? Are you seeing those new fabrics expand the customer base, and is it driving traffic in both stores and online?

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks for the question, Eric. Yeah, both of the new fabric innovations have been receiving really strong customer response. We’ve seen very good feedback from customers in terms of the product, really understanding what the product is for, how it’s developed. Re-Active was our first real jump into the sustainability movement in a large way. That is something that you’re going to see us continue to go after that’s helped bring new customers in the brand. It’s also helped bring a younger, more sustainable focused customer into the brand, so that’s been very encouraging.

Performance Twill has been off to a really strong start, good feedback, but that one has been a little bit more focused on a slightly dressier lifestyle for us, so as we’ve been through COVID and there’s a little less going to office and those things, that has not been growing at the same rate that we’ve seen in Re-Active, but we’re very confident in both. We think that Performance Twill, from everything we’ve heard from our customers, adds another aesthetic, adds another lifestyle piece to our business, and we think that will continue to grow in the future.

Eric Beder — SCC Research — Analyst

When you look at the cotton potential, cotton fabric upgrade, what are you trying to accomplish there? I mean, obviously cotton has always been the core of the Vera Bradley experience, so what are you trying to do there that you haven’t done with other ones, or are looking to do?

Robert Wallstrom — President, Chief Executive Officer and Director

In terms of cotton, there are a few different things happening with cotton. If you say short term, we use cotton as really the foundation for a lot of our collaborations. It really is our heritage, it still is an incredibly important part. It’s the most dominant piece of our business, so it’s where all of our innovation around collaboration really focuses in on. But second of all, as we move into next year, we’re really focusing on cotton too as we look at new innovation, so some of the innovation we’re bringing to market will be in our cotton franchise, so kind of watch for more information on that.

Then lastly, what’s been interesting during this period with COVID, there’s been a different focus, obviously for our consumer, right. The idea of hygiene becomes really important, and what we’ve really seen is our customer responding very well to the washable part of our cotton collection, right — the fact that you can wash it, therefore it improves the hygiene, very comfortable, very wearable. That’s really resonating well with our customers.

Mark Dely — Chief Administrative Officer

My last question on Pura Vida, I know that you pushed back the rollout of kind of test Pura Vida store in September to next year. Is that still in the plans, and how do you see that as potentially driving business going forward?

Robert Wallstrom — President, Chief Executive Officer and Director

Yes, we still have plans to open a store for Pura Vida. We were actually out there looking at real estate, but we wanted to make sure in this new COVID world that we were able to find the right location. Obviously more locations have opened up than there were a few months ago, and obviously economics have changed, so we want to make sure that we make the right deal. But we are excited to bring a Pura Vida store to reality over the next year, so stay tuned and we’ll have more announcements about that as we move into next year.

Eric Beder — SCC Research — Analyst

Great. Good luck for the holiday season.

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, Eric.

John Enwright — Executive Vice President and Chief Financial Officer

Thanks, Eric.

Operator

[Operator Instructions] We’ll move onto our next question from Dana Telsey with Telsey Advisory Group.

Dana Telsey — Telsey Advisory Group — Analyst

Good morning, everyone. As you think about this shift to digital for the business model, how are you planning shipping expenses? How do you see that impacting the overall operating margin structure, and when you think about the success that you’ve had with masks, how are you planning masks going forward for the balance of the year? And are there other categories that we should be looking for in this post COVID environment that you see adding to the sales base? Thank you.

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, Dana. So let me handle both questions. First of all, from a digital shipping perspective, you’re right that as we look out over the rest of the year and the conversations around surcharges and so forth, we believe there will continue to be pressure on shipping costs. We’re looking at different ways of being creative about that, how we charge for shipping, how we motivate less packages. We just did something recently here when we finished our online outlet sale, where we had free shipping prior. We tried a $35 threshold — that worked very well, that helped us consolidate packages. We had a lot of feedback from customers that they just waited and made one purchase as opposed to six, seven or 10. We’re going to continue to manage that.

The other thing that we’re working very hard on is driving efficiency through the distribution center. We just put in our automation in the distribution center, so it’s a robotic pick process. We believe that that will also drive long-term efficiency that can help be used to offset some of the shipping costs, and then we obviously continue as we manage the logistics network, continue to look for ways of being more and more efficient and how we build efficiency between the Vera Bradley and Pura Vida distribution platforms. So long term, we think that from an operating margin standpoint, there’s pushes and takes but we still are focused on our long term EBITDA targets, that we don’t think this will have a huge detriment to that.

John Enwright — Executive Vice President and Chief Financial Officer

Yeah, the only thing I would add to that, Rob, is there will be a difference in kind of where it is from an accounting perspective. You may see some gross margin pressure with freight expense above, and we maybe get a little bit more of SG&A leverage depending on how we’re able to manage where the sales move to.

Robert Wallstrom — President, Chief Executive Officer and Director

And then from the mask standpoint, with masks we’re continuing — we feel it’s an important part of the business. It’s been interesting to watch how the consumers responded. I think what it’s really done is also said not only is there an opportunity today that we can expand upon, and we’ve done other things in terms of other types of PPE type stuff, whether it’s headbands, bandanas, and all kind of plans to continue to use masks as innovation, but it’s also been an opportunity to expand distribution in terms of our relationships with people like Target and Staples, so we think it’s important for that.

I think the big lesson there, though, which I think is important both for investors and something we’ve been talking about as a management team, is that the Vera Bradley brand and I believe the Pura Vida brand both have a lot of flexibility, because they truly are lifestyle brands, so there’s the ability to find items and find categories and really lean into it, and I think that gives us a lot more flexibility than a lot of brands have. I think that’s part of the magic of why we really wanted to focus on these casual comfortable lifestyle brands.

Beyond masks, some other things that we’re continuing to see the consumer respond to are things around home, things around comfort as we move into fourth quarter. The importance of things like our throw blanket, that’s always been so important, or some of the expansion of our fleece program into robes and loungewear and those type of things, we think will continue to resonate well with the customer in this environment, so we think those are other areas to watch.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, Dana.

Operator

We’ll take our next question from Steven Marotta from CL King & Associates.

Steven Marotta — CL King & Associates — Analyst

Good morning, Rob and John. I know that you do not provide specific guidance, but can you talk a little bit about the expectations to generate cash in the third quarter and the ability to pay down the last tranche of that little bit of debt, and if not in the third quarter, when would you anticipate having that off the books?

John Enwright — Executive Vice President and Chief Financial Officer

Given that we’re not giving guidance, I think it’s hard to project, but the fact that we paid down $30 million, I think is a good indication that we don’t anticipate needing to borrow any additional funds from the current ABL facility. Based on different models that we’re looking at, we think that there’s probably an ability to pay it down by the end of the year.

Steven Marotta — CL King & Associates — Analyst

Very helpful, thank you.

John Enwright — Executive Vice President and Chief Financial Officer

Thanks, Steven.

Operator

We’ll take our next question from Rick Fearon from Accretive Capital Partners.

Rick Fearon — Accretive Capital Partners — Analyst

Hey, Rob and John, congratulations on a really impressive quarter.

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, Rick.

Rick Fearon — Accretive Capital Partners — Analyst

I just want to thank you, guys for the — I want to thank you for the really bold steps you took on March 19 to reduce the operating costs. Your actions were decisive and so [Indecipherable] particularly the substantial salary cuts you yourselves took and even your board of directors. These are qualities of a great company, great management team, and we really appreciate it. I just have a few quick questions. Prior to the pandemic, Pura Vida’s EBITDA margin was running in the high teens to 20 range, and it sounds like we’re not far from there currently. Is this a currently — realistic target for Pura Vida going forward, or is there additional margin expansion expected?

John Enwright — Executive Vice President and Chief Financial Officer

Yes, so, Rick, I believe from a Pura Vida perspective, even in the second quarter we generated, call it 20%, 20.5% margin, EBITDA margin for Pura Vida, and we anticipate on the long term to continue to be in the high teens margin profile for Pura Vida.

Rick Fearon — Accretive Capital Partners — Analyst

That’s great, because I know that customization probably brings the margins down a little bit, but the growth, I’m sure is helping you leverage your infrastructure. Along the same lines, Vera Bradley achieved a full year EBITDA of $65 million last year on $495 million in sales. It’s better than a 13% EBITDA margin. As you continue to expand your e-commerce presence and make the investment into your systems and the digital infrastructure, is a higher EBITDA margin or something closer to that mid to high teens a realistic goal?

John Enwright — Executive Vice President and Chief Financial Officer

Yeah, I think over the long term. Obviously this year it will be a little bit different given some of the challenges with COVID and some of the challenges with what we had in the first quarter, but over the long term we’ve commented to expecting an operating margin in kind of the low to mid teen range, and that would be inclusive of Pura Vida. You can use that as a proxy for what we think EBITDA margin would be.

Rick Fearon — Accretive Capital Partners — Analyst

That’s great, thanks. It sounds like the collaborations with Disney and Crocs and Warner Brothers have been phenomenal successes, and I was wondering if there are additional collaborations, such as the recent focus on colleges and the military, perhaps K-12 schools or the very large and fragmented club sports market across the country, are those areas that you foresee Vera Bradley and/or — I know Pura Vida is already sort of targeting that K-12 market, but are there collaborations that could be capitalized upon in those areas?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah, Rick, I think there’s two different ways to think about that. So, first of all in terms of the collaboration particularly around some of these licensing products, like Disney, Harry Potter, I think that that’s an opportunity both for Vera Bradley to continue to explore and continue to expand, as well as Pura Vida. So I think that you’re going to see that that will be something that will be ongoing.

I think the second thing that you’re really mentioning is the idea of being able to get into more of the teen spirit space in terms of how we address that, and that kind of, can be through both brands, right? It’s an area where Pura Vida has had a lot of success in the fundraising side, but it’s definitely something that’s on our radar. We believe that helps.

Again as you look at these collaborations, we talk a lot about the character in terms of Disney and in terms of Harry Potter and the big success, but it’s broader for us too, so collaborations is not just there. We’ve also had great success with Gillette and Venus and we’ve seen that expansion not only at target but around the world. Crocs, this has been our second collaboration with them. That grew in year two over year one, and we have a lot more exciting collaborations coming up next year that we’ll be talking about.

We believe that’s a really important part of the strategy, because it brings new customers to the brand, expands the customer reach, it gets people to think about Vera Bradley in a new way, and I think as we’ve seen with masks in our collaborations that our brands can go beyond just their traditional category and move into other areas, so we look forward to doing more of that across both brands.

The other thing maybe just to mention too, which I didn’t talk about, is we have a tendency to speak o four collaborations around product all the time, but I think in this new world, collaborations around marketing and how you use influencers, what Pura Vida is doing in their partnership with Charli I think just shows the power of collaborations that are marketing-focused too, so be looking for more collaborations on the marketing side as well as on the product side as we move forward.

Rick Fearon — Accretive Capital Partners — Analyst

That’s, great, thanks. Obviously part of the magic of Pura Vida are the ambassadors, the influencers. Is that an area where Vera Bradley considers there’s opportunity as well?

Robert Wallstrom — President, Chief Executive Officer and Director

Yes, we do believe there really is an opportunity to build out that ambassador base, and we have some work underway right now that we’ll be talking about more in the future.

Rick Fearon — Accretive Capital Partners — Analyst

Okay, great. Look forward to that. Just a couple quick additional questions. The wonderful story about Barbara and Patricia founding the company 38 years ago and the authenticity of that story, it just seems like there’s a great message here of empowering women to achieve their dreams and that this really would resonate with your customer base to the extent that it can be showcased or featured in some of the social media, or even possibly talk shows or that concept. Are there efforts to do that underway as well?

Robert Wallstrom — President, Chief Executive Officer and Director

There is some around that. Barb wrote a book a year ago. Pat and Barb still do some speaking out there, but what we want to do is not only continue to highlight that story, but what we’ve actually found from our customer is whether it’s at Vera Bradley or whether it’s been at Pura Vida, the idea that them being able to participate in some of these stories is even more important, so being able to do things like become involved with us and supporting these different charities that we’re working with, and whether it’s the ones we work with at Vera Bradley between our foundation and New Hope Girls and Blessings in a Backpack, or the charity bracelet program at Pura Vida, what we’re finding out with this younger customer is it’s not only about the stories that are told but it’s more about the stories that they can help write. For us, we’re spending a lot of focus on really bringing our customer into these stories in addition to maybe talking about our heritage, and we think that’s where the most power lies.

Rick Fearon — Accretive Capital Partners — Analyst

That makes sense, and it sounds like you’ve been giving back to the community exactly the same way Pura Vida does, and that’s a shared cultural approach which I know also resonates with that demographic. I guess the last question, Rob, with what appears to be just great success with the Pura Vida acquisition, do you consider this a template for growth possibly via future acquisitions?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah, I think two things, right. One, we don’t peak a lot about kind of future acquisitions, but at the same time we’ve been very happy with the Pura Vida acquisition. We think it’s gone really well. We think it’s a very special company. We think what Griffin and Paul have done there is really unique and special, and I think both brands are really helping each other, which I think is a great model. The integration’s gone well, we’ve been very pleased so far, and I do think that we have a lot of optionality.

We still have a strong cash flow model between the two brands that allows us to have capital to potentially invest in other brands going forward. If we did that, we would still want to find companies that feel like Vera Bradley and Pura Vida — lifestyle driven brands with a strong ESG focus. It could be in the future, but we’re not commenting specifically on that being a focus at the moment. Right now, our number 1 focus is continue to strengthen the Vera Bradley and Pura Vida brands and continue to show growth.

Rick Fearon — Accretive Capital Partners — Analyst

Understood, and you’ve got plenty of organic growth opportunities, so totally understood. Rob and John, thanks for all your hard work on behalf of all Vera Bradley stakeholders and look forward to staying in touch.

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, Rick.

John Enwright — Executive Vice President and Chief Financial Officer

Thanks, Rick.

Operator

There are no further questions at this time. I would like to turn the conference back over to Rob Wallstrom for any closing remarks.

Robert Wallstrom — President, Chief Executive Officer and Director

Well, thank you very much for joining us on today’s call. Vera Bradley, Inc. is an authentic, iconic lifestyle Company with two powerful brands and passionate, emotionally connected customers. We are focused on continual innovation and improvements in product, customer engagement, and technology. We have strong cash flow, a solid balance sheet, and ample liquidity. We are fully committed to continuing our long-term commitment to all stakeholders with a strong ESG focus.

This quarter demonstrates that we can not only survive but thrive in this environment. We have a talented and engaged team that is agile, tenacious and innovative. We could not be prouder of how the team has worked together to address the challenges and create new ways to do business and reach our customers. We are poised to emerge a stronger, more agile company. Thank you for your interest in Vera Bradley, Inc. and our two powerful brands. We hope you can join us on our third quarter call on December 9.

Operator

[Operator Closing Remarks]