Vera Bradley Inc. (VRA) Q3 2021 Earnings Call Transcript

Vera Bradley Inc. (NASDAQ: VRA) Q3 2021 earnings call dated Dec. 09, 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:

Oliver Chen — Cowen — Analyst

Mark Altschwager — Robert W. Baird — Analyst

Steve Marotta — C.L. King and Associates — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Eric Beder — SCC Research — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley Third Quarter Conference Call. [Operator Instructions] As a reminder, today’s conference call is being recorded.

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

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. Good morning, everyone, and thank you for joining us on today’s call. John Enwright, our CFO, also joins me today. Our quarterly results once again significantly exceeded last year’s earnings performance as well as our expectations. We expanded our gross margin rate primarily through sales of cotton masks and controlled promotional activity and we diligently managed our expenses achieving meaningful expense leverage.

Our multi-brand strategy is proving to be powerful. Customers are changing the way they shop and we have responded. Our digital competencies are becoming increasingly important, especially in this quickly evolving environment. Somewhat fortuitously, last year, we acquired digitally-native Pura Vida and began working on critical Vera Bradley technology infrastructure and e-commerce site improvements, necessary to position the company for future success. Those are the enhancements went live several months ago.

Our consolidated e-commerce business was very strong in the third quarter, reflecting growth from both Vera Bradley and Pura Vida. Even as our stores were reopened during the third quarter, our Vera Bradley Digital business grew nearly 50% year-over-year and Pura Vida’s e-commerce sales grew over 17% for the quarter despite disruptions in the supply chain. E-commerce sales comprised over a third of total sales for the quarter.

By staying laser-focused on the customer and by controlling what we can’t control, we have proven we can drive strong results and position ourselves to emerge a stronger and more resilient company despite facing ongoing headwinds. Our results were achieved through the innovation, teamwork and determination of our entire organization. Even while working remotely, our teams have demonstrated flexibility in decision-making, created new products and marketing initiatives and added efficiency to the organization. And our focus on cash management has driven us to think of creative ways to drive sales, expand margins and reduce expenses.

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 third quarter. As a reminder, financial results have been consolidated to include the July 2019 Pura Vida acquisition. This is the first quarter since the acquisition that the year-over-year quarters are comparable.

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 third quarter income statement numbers exclude intangible asset amortization. The non-GAAP income statement numbers for the prior year third quarter exclude the Pura Vida acquisition-related charges and technology re-platforming expenses.

Consolidated net revenues totaled $124.8 million for the current year third quarter compared to $127.5 million in the prior year third quarter. Excluding charges, Vera Bradley Incorporated’s non-GAAP consolidated net income was $10.2 million or $0.30 per diluted share for the third quarter compared to $6.9 million or $0.20 per diluted share last year.

Vera Bradley Direct segment revenues totaled $78.2 million compared to $78.4 million in the prior year third quarter. E-commerce sales growth of 48.8% offset the 19.1% decline in comparable store sales for the quarter. Store traffic continues to be negatively impacted by the pandemic. The company closed 10 full-line stores and opened six factory outlet stores in the last 12 months.

Vera Bradley Indirect segment revenues totaled $22.3 million compared to $24.1 million in the prior year third quarter, reflecting a reduction in orders primarily related to the pandemic and in the number of specialty and department store accounts. Pura Vida segment revenues totaled $24.3 million compared to $25 million in the prior year third quarter, a 17.2% growth in e-commerce sales nearly offset the sale to wholesale accounts, which were negatively affected by the pandemic.

Third quarter consolidated gross profit totaled $73.8 million or 59.1% of net revenues compared to $74.1 million or 58.1% of net revenues in the prior year on a non-GAAP basis. The company expanded its gross margin in the quarter primarily through sales of cotton masks and controlled promotional activity.

On a non-GAAP basis, consolidated third quarter SG&A expense totaled $59.4 million or 47.6% of net revenues compared to $64 million or 50.2% of net revenues. Current year SG&A expenses were lower than the prior year due to both temporary and permanent expense reductions related to the pandemic. On a non-GAAP basis, current year third quarter consolidated operating income totaled $14.4 million or 11.6% compared to $10.1 million or 7.9% of net revenues last year.

The uncertainties continuing related to COVID-19 make fourth quarter financial performance extremely difficult to predict. As a result, we are not providing forward-looking guidance. For the fourth quarter, we believe our inventories are well positioned and marketing initiatives will drive traffic and sales. However, third quarter performance should not be considered a predictor of future performance. We are facing certain headwinds in the fourth quarter, including the continued impact of COVID-19 on store traffic and capacity limitations in stores. Net sales may not be as strong for the fourth quarter and freight is a fairly significant headwind for all retailers as the consumer over indexes to e-commerce. Shippers are applying surcharges to each package during peak season and we have elected to absorb that cost and not pass along to the consumer.

Now, let me turn to the balance sheet. Net capital spending for the third quarter and nine months totaled $900,000 and $5.2 million respectively. Capital expenditures are expected to total between $6 million to $7 million for the year, primarily related to technology and logistic enhancements as well as new factory stores.

Cash, cash equivalents and investments as of October 31st, 2020 totaled $77.3 million compared to $48.8 million at the end of last year’s third quarter. We have $30 million of borrowings outstanding on our $75 million credit facility at the end of the quarter. Quarter end inventory is $141.6 million compared to $134 million at the end of the third quarter last year. Current year inventory was higher than the prior year, primarily due to receipts accelerated into the third quarter from the fourth quarter. We expect year-over-year inventory to be relatively flat at fiscal year-end.

Rob?

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, John. Now let’s shift to an update on our two brands. We believe the way that customers live and work has radically and permanently changed. Both Vera Bradley and Pura Vida are particularly well suited with our purpose-driven casual, comfortable and fun positioning that dovetails perfectly into this consumer shift. We remain focused on propelling both brands forward through innovation and product and marketing, supported by state-of-art technology. Our new cloud-based technology platform is allowing us to respond to the rapidly changing environment and to harness customer data and feedback earlier and more instantaneously to drive this innovation.

First, let me update you on Vera Bradley. Let’s start with product. I am very proud of the fabric and product innovation being driven by our talented design, creative and product development teams. We have a robust fabric innovation pipeline in place to continually update our cotton collection to develop new fabric offerings and to build on our platform of sustainable fabrics. This pipeline is important to our existing customers and helps us attract new customers to the brand. Our full-line offerings have performed well and our recycled reactive collections continue to gain traction and are highly rated by our customers. In the recent introduction, our ultra-light fabrication has been a popular addition to our factory stores. Stay tuned for more fabric innovation over the next 12 to 24 months.

We also continue to introduce differentiated styles and silhouettes, providing our customers beautiful solutions in all facets of the life. One key focus is our hands-free products like our sling backpacks and cross bodies as they have become increasingly important to our customers, particularly during the pandemic. Our long-term focus continues to be on building on our dominance in our three core franchise areas of youth campus, every day and travel.

Our travel segment has held up relatively well during this period. Our product focus on soft travel items like our duffel and weekender collection for car trips or weekend getaways, it’s proving to be more resilient than the hard luggage market in general. We continue to innovate and travel. For example, we are launching our ReActive lay flat travel backpack, which takes our award-winning lay flat functionality into our core backpack category.

A great example of innovation has been our cotton mask, which once again drove meaningful revenue in gross margin dollars for us during the quarter. We have continued to improve our offerings with new features, style, sizes, patterns and solids and we are happy to provide our customers and the communities we serve with much needed personal protective equipment and provide a bit of Vera Bradley’s signature color and fun in the process.

Net sales softened as we progress through the third quarter but still comprised approximately 10% of Vera Bradley’s total sales. While we expect the sales of masks will continue to soften in the fourth quarter and beyond, we are beginning to experience recovery in the core business, which is offset the mask volume decline in third quarter. Our trend light, colors and patterns continue to be important to our customers. Paisley remained our number one brand, but our customers are also drawn to our emotional novelty prints and smaller soon-to-sell out capsule collections. These always add excitement to our assortments and a sense of urgency for our customers to shop. Our Best in Show Dog Print launched in the third quarter was a fan favorite and even topped last year’s wildly popular Cat’s Meow pattern.

This holiday season comes with a focus on gifting and cozy and a combination of festive and whimsical patterns like Merry Mischief in coordinating classics and neutral textures like our Teddy Fleece and Cozy Plaid. We are offering an expanded assortment with customer favorites like blankets, slippers and cold weather accessories and we expanded cozy into more apparel like lounge wear robes, puffer jackets and fleece. These items have sold out quickly.

Our collaborations in strategic partnerships continue to engage existing and new customers expand our reach, increase brand awareness, generate media attention and provide opportunities for us to strategically test and ultimately enter new product categories. We are continually approached by well-known brands with collaboration and partnership opportunities, which speak to the strength and wide appeal of the Vera Bradley brand. In August, we launched our newest Disney collection on verabradley.com and our second annual collaboration with Crocs.

In October, we introduced our signature masks and 1982 Backpacks in Target stores and on target.com. And earlier this month, we were able to replenish and add to our extraordinarily popular Vera Bradley plus Harry Potter collaboration that originally launched in July and sold out quickly and look for more exciting collaborations in 2021.

Let me switch to marketing and customer engagement. Our talented digital and marketing teams have completely transformed the way we communicate and engage with our customers and touch the communities we serve. As we focus on reinforcing our position as an ESG organization, we continue to strengthen our community support and charitable efforts under the umbrella of VB Cares, particularly through organizations that could profoundly improve the lives of women and children. Even though we were unable to hold any large fundraising events this year, through the generosity of our associates, customers and other supporters, we were able to raise $1.4 million to support lifesaving research at the Vera Bradley Foundation Center for Breast Cancer Research at the Indiana University School of Medicine, bringing the total rates to date in support of breast cancer research is $36 million.

Additionally, we are continuing our yearlong support of other impactful organizations like New Hope Girls and Blessings in a Backpack. Another aspect of BSG and our VB Cares focus is caring for our associates. We are so thankful for all of our associates and are especially grateful to those that have served on the frontlines making sure our customers have safe and exceptional experiences day in and day out, especially during the pandemic. We were once again thrilled to award a quarterly bonus of up to $500 based on hours worked to each distribution center store and customer service associates for their continued contribution and devotion to Vera Bradley during this extraordinary time. Over the last two quarters, we have paid over $800,000 in well-deserved bonuses to our front line associates.

In the third quarter, we successfully launched our new verabradley.com site, which allowed us to improve our customers’ online buying experience and offer enhanced content to guide purchasing. We added a number of key site capabilities and have experienced a triple-digit improvement in revenue attributed to our search engine optimization. Our digital and marketing teams have been successful in accelerating digital and customer growth. Our well-timed investments in customer data science, business analytics and AI positioned us well as we have navigated through the pandemic, allowing up to collect and analyze data and respond to customer changes and adjust marketing spend in an agile way.

Using our data-centric program buying, we have significantly increased our paid media efficiency and revenue attributable to paid media during the quarter. We continue to see strong performance from our digital media optimization. Our return on ad spend in the quarter improved double-digits, led by campaigns like washable handbags and totes, which have resonated with customers as they are managing through the pandemic.

Earned media remained strong during the third quarter with over 3.3 billion impressions. We had exceptional media coverage of our mass effort supporting communities and healthcare workers, Breast Cancer Awareness Month and our foundation efforts and our brand collaborations and partnerships. We rolled out customer journey centered activations with high response rates, including a welcome journey for new Harry Potter customers and for mask purchasers new to our brand.

Vera Bradley has always been a brand about connecting with people and we continue to see best in the industry engagement rates on Facebook and Instagram. Our second launch with Crocs continued partnership with Disney in collaboration with Warner Brothers for Harry Potter gave our customers plenty to talk about in the quarter. This has helped our customers have a community to connect with in these difficult times and a way to find some fun and bright moments. This engagement has increased both followers and sales with third quarter revenue attributable to social media up triple-digits year-over-year.

Our store and wholesale teams continue to drive results through innovation and creativity. Although our digital business is becoming a larger portion of our revenues, both factory and full line stores continue to be an important part of our omni-channel strategy. We continue to focus on enhancing and reinventing the customer experience in both our full line and factory stores. While the pandemic and mandated capacity limits have challenged store traffic, we are using customer data to strengthen relationships by offering appointment shopping, particularly for our top customers, face time and social selling, buy online, pickup in store and curbside pickup where possible. Appointment selling was very successful generating nearly 10% of our full line revenues in the quarter.

Our loyal customer retention at the end of third quarter is actually better than it was at the same time last year. This is a testament to our new digital and data analytics programs, our customers’ love for the brand and our associates’ devotion to our customers. We have created more excitement in six Vera Bradley full line stores by adding Pura Vida shop-in shops after a successful test in Birmingham, Alabama. We will continue to leverage opportunities for both brands and we’ll be rolling out a Vera Bradley plus Pura Vida Charity Bracelet program at Vera Bradley next year.

In the factory stores, we are testing line-busting technology in several high traffic locations, offering customers the opportunity to scan the QR code and receive a text message, what is their time to return to the store. They may also scan a QR code to review our electronic lookbook and decide what they would like to buy while waiting in line.

In the aggregate, our factory stores continue to outperform our full-line stores compared to last year as customers felt more comfortable shopping in outdoor centers than in closed malls. Our customer satisfaction scores are consistently industry-leading despite pandemic-related disruptions. We are striving to create a seamless shopping experience no matter where she chooses to shop. Our omni-channel customers are our most valuable, on average spending 3 times more than the single channel shoppers.

We have opened six new factory stores and expanded and renovated one factory store this year. We continue to focus on improving the productivity of our full-line stores. We have permanently closed seven full-line stores so far this year and expect to close five more by year end. This will bring our total full-line closings to 38 since the beginning of fiscal 2018 and we expect to close approximately 10 additional locations next year. On the wholesale side of the business, Amazon is our highest volume and fastest growing account. As Amazon continues to grow, we have put resources against this business to optimize our inventory assortments, assure pricing integrity and drive volume.

Now let’s talk about Pura Vida. We remain excited about the potential of our Pura Vida brand. Pura Vida’s year-over-year third quarter e-commerce revenues grew over 17% despite significant supply chain disruptions that impacted sales early in the quarter. As inventory normalized, e-commerce growth substantially accelerated in the back half of the quarter. Using Vera Bradley’s global sourcing expertise, we have quickly strengthened Pura Vida’s supply chain, diversifying raw material sourcing and adding three additional production facilities in countries outside of El Salvador. Of course, total revenues were also affected by sale to the wholesale channel, which are beginning to recover as specialty stores reopen and start to reorder. During the third quarter, we were able to divert some wholesale inventory into our e-commerce channel.

At Pura Vida, innovation in product is first and foremost. We continually introduce new styles of the Pura Vida signature cord bracelets and style packs and we have continued to add to our popular metal, mood and semiprecious collections, which are at a higher price point than our traditional string bracelets. This category expansion and product diversification is working.

In fact, nearly 50% of Pura Vida’s e-commerce business in the third quarter was comprised of jewelry categories other than the traditional spring bracelets, underscoring the brand’s lifestyle appeal. Pura Vida’s fall launches were a success. Our celestial collection was a big winner, once again proving that beyond the beat styles resonate with our customers.

Earrings and necklaces continued in popularity as we further expanded our above-the-keyboard offerings for those not only living but working from home. Personalization is a continuing popular trend. Customers can personalize their signature cord bracelets by choosing the color combination or charm special to them. Our engravable collection launched earlier this year has taken off with customers loving the customization of bar necklaces, rings or coin bracelets. We have expanded the styles of engravable planks, including those embellished with birth stones or with zodiac signs. And we have added a thinner necklace where both sides can be customized with engraving.

Pura Vida signature charity bracelets will always be an integral part of the Pura Vida lifestyle and continue to be a growing category as they are so special to our loyal cost-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 many amazing causes that are cherished by our customers. We developed two styles for Suicide Prevention Month in September and partnered with Boarding for Breast Cancer, selling four styles of Breast Cancer Awareness Month in October. The expansion of the charm 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. To-date, Pura Vida has donated over $2.8 million to more than 200 charities.

For holiday, we have an expanded offering of gift sets and fun Advent calendars packed with 12 days of surprises. It’s super sparkly style pack from one of our most well-known influencers, Aspen Haggard [Phonetic], our bigger collection of engravable jewelry and even more charms including zodiac and wildlife charity trails.

Pura Vida is continuing to expand on the distribution front. Earlier this year, we launched our Canada Shopify fulfillment capabilities and began 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 is not only allowing us to serve those customers but extend our reach to others. Although we are early in our international expansion, we believe there are more opportunities ahead. Our first Pura Vida retail store that was scheduled to open this year was delayed due to the pandemic. We expect to open this exciting retail concept in San Diego next year. Pura Vida is truly expert in engaging customers, building loyalty and introducing new devotees into the Pura Vida lifestyle. Our monthly bracelet and jewelry clubs and Shore Club program are all creative ways to connect our customers with our products and lifestyle and cultivate loyalty.

During the quarter, earned media was strong with healthy returns and spend and Pura Vida doubled its SMS list from last year to 1.2 million active subscribers, which drove meaningful revenue. On the marketing front, Pura Vida’s social media engagement is strong. Pura Vida remains one of the most highly engaged brands in the accessory space in 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. A lot of Pura Vida’s marketing strategy and overall success is driven by its devoted group of brand ambassadors and close to 150,000 active micro influencers. These passionate advocates help us spread the Pura Vida movement showing their devotion to the brand while scoring perks along the way. These ambassadors and influencers create compelling and exciting content, create buzz about our product and share that excitement with their followers and fans. Like our holiday collaboration with Aspen Haggard [Phonetic], we have several more exciting influencer product launches lined up in the months ahead.

TikTok has taken off with 115,000 Pura Vida followers. TikTok feature influencers on bailing boxes showing sneak peaks of new items, promoting giveaways and giving tutorials. TikTok generates interest in followers with creative engaging content and drive sales by linking the Pura Vida online store and occasionally offering special promotional codes. Speaking of TikTok, we have moved the much anticipated launch of the Pura Vida bracelet influencer style pack with the reigning queen of TikTok, Charli D’Amelio, to spring 2021 due to production delays. We want to make sure we have enough product to execute and we are sure will be an incredibly successful launch.

Charli TikTok followers had grown by 20 million fans in just over three months to an astounding $100 million. And she has over 34 million Instagram followers. Her target demographic that’s perfectly with the Pura Vida brand and we are thrilled with the upcoming partnership. We believe the strength of the Pura Vida business underscores the opportunity for discovering other small high growth potential brands like Pura Vida with unique product to marketing position that could become part of the Vera Bradley family brand.

Now more than ever, I am confident that we are in the right space with our purpose-driven casual, comfortable and fun lifestyle brands at both Vera Bradley and Pura Vida. Both brands have unique growth opportunities particularly as our focus is on customers who live beyond the major city centers and its customer base is growing as they migrate from big cities to smaller communities. We are positioned well for the future.

Operator, we will now open up the call to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we will now take our first question, it comes from Oliver Chen of Cowen. Please go ahead, sir.

Oliver Chen — Cowen — Analyst

Thanks so much everybody. Appreciate it. So, the margins are really strong, but the direct was a little lighter than what we had modeled. What are you seeing in terms of the comp store sales and traffic trends and/or I’m sure there’s a fair bit of volatility? And how has inventory trended in that channel relative to your expectations?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. Thanks, Oliver. From a traffic perspective, in the third quarter, we saw improvement obviously from the second quarter in both the factory and full-line channels. Factory was better than the full-line channel. So we saw better traffic getting to our stores as we opened up our stores, right, in earnest in the back half of third quarter. But from an inventory perspective, I think we’re well positioned from an inventory perspective for both brands. We have — outside of the beginning of this third quarter, Pura Vida got back into inventory late in the quarter and ultimately, I think, accelerated their sales [Phonetic] first part of the quarter was a little bit challenging from an inventory position perspective. In regards to stores at the Vera Bradley brand, we were well positioned in inventory for the full quarter.

Oliver Chen — Cowen — Analyst

Okay. And as we think about the comp and model the comp, what are some dynamics that you saw on conversion versus check size in the quarter that we just had? And any thoughts going forward? Will traffic continue to get better? Hopefully there’s added visibility on the reopening.

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. So, from a conversion perspective, conversion was definitely up in all channels whether that is e-commerce, whether that is the fashion, whether that is full-line because of individuals who came out to shopping, really came out to buy. So we saw conversion increase. We also saw kind of ADS, we the actual check go up. People were buying a little bit more but we actually also saw the AUR go down a little bit based on the fact that our mass square portion of the purchase at a $8 price point that’s going to bring AUR down.

As we look into the fourth quarter, I think it’s really — it’s going to be some challenges in the stores, it’s going to be associated with capacity as all retailers kind of deal with the capacity constraints of certain states or certain cities in regards to what they’re doing in regards to COVID-19. But the hope as we move into next year would be that the vaccine will allow kind of the stores and malls to open up to get traffic back to where we thought it would be as we entered into this year. But as you can imagine, factory stores from a traffic perspective, people still feel a little bit more comfortable going to kind of outside malls versus inside malls.

Oliver Chen — Cowen — Analyst

And then, Pura Vida, all the details and strategy are helpful. I know you called out supply chain in wholesale as being factors. Could you elaborate on when those might have better visibility in terms of timing and improvement on those features of Pura Vida?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. So, from a supply chain perspective, we have corrected some of the challenges that we had. And Rob mentioned in his prepared remarks that we are now working with additional vendors to help kind of on the supply chain that we are not only can fully reliant on the El Salvador plant. From a wholesale perspective, we — our stores opened up, as we look at this thing we think that’s why we will see a correction from a wholesale perspective for Pura Vida.

Oliver Chen — Cowen — Analyst

Okay. And Rob, on product for fourth quarter and then next year, which products would you prioritize as most impactful to an outlook in terms of…

Robert Wallstrom — President, Chief Executive Officer and Director

In terms of, I guess, what is — are you specifically regarding Pura Vida or Vera Bradley about?

Oliver Chen — Cowen — Analyst

Vera Bradley brand.

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. Yeah, I think, with Vera Bradley, I think there’s a lot of innovation coming. So, in fourth quarter, I think what becomes really important is, everything that we do around fleece and home and cozy, obviously it’s really important in this time and year kind of all of our holiday patterns. But we’re seeing now with hands-free being really important as we moved through the fourth quarter. We think that will continue into next year. And then, if we look at next year continuing with our collaboration we now believe which is really important and then continuing with our fabric innovation. And those are two things that become really important kind of across categories.

The thing that’s been interesting is, if we’ve watched our youth travel and everyday business, we were expecting to see a lot more suppression in the travel business. And it’s basically trended more similar to the rest of our business. So that’s been encouraging to see because we’re more in that soft travel, car travel category, which is held up better than kind of that hard luggage air travel. And so that’s been encouraging to see. Back-to-school was difficult back in August, but we saw some strength coming in September. And obviously we’re hopeful as we move through next year and get to back-to-school, but it will be in full return hopefully by the time we get to next fall.

Oliver Chen — Cowen — Analyst

Thank you very much. Best regards. Happy holidays.

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, Oliver.

John Enwright — Executive Vice President and Chief Financial Officer

Thanks, Oliver.

Operator

Our next question comes from Mark Altschwager of Baird. Please go ahead.

Mark Altschwager — Robert W. Baird — Analyst

Thanks. Good morning, everyone. Just following up on the fourth quarter for a moment, and you mentioned that I think sales might not be as strong in the fourth quarter versus the third quarter. Understanding that the environment is tough to predict here, but it is something you could expand upon that a bit and you see that primarily conservatism related to store capacity. I guess with consumers focus shifting to gifting may be most of a headwind related to back-to-school.

I would think that continued sequential improvement, it might be possible. So maybe just talk a little bit more about the puts and takes there? And how you’re thinking about holiday?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. I think that the holiday season, right? This holiday is definitely not like any other, right? I think what we have seen in retail in general and we have seen in our numbers is consumers move forward some of their spending. We had a very, very strong start to November. We were feeling very good. Obviously Black Friday, you can tell from all of the market reports, while there is suppression in store traffic as of Black Friday and so we will just watch and see how it plays out over December.

I think a couple of days in fourth quarter that are out there is that, as COVID started pulling back on capacity issues that caused a little bit of texture in some of our stores and in some of those capacity pullbacks had been pretty large and so that has been a pressure that we have seen in fourth quarter that we do not see as much in third quarter.

And then the second question just can become with the e-commerce as we move through the earlier shipping, right, and all of retail some of the businesses moved on e-comm and how that impacts that last week before Christmas will people get back out in the stores. There’s just still a little bit of uncertainty out there and so we will watch how that works through.

And then the other thing just from an earnings standpoint, right, there are shipping surcharges and additional pressure in fourth quarter that we haven’t had the rest of the year. So those are kind of the three key points, right? The reduction in capacity in stores, once the e-commerce shipping, deadline ship off what happens with the customer and third the surcharges, and so those are the things we are watching in fourth quarter that are unique.

But it’s not that we think that there is an underlying weakness with the consumer or what we are seeing going on. We think the consumer is continuing to respond to novelty and innovation and so we see it just is kind of navigating through this COVID holiday and then moving into next year and hopefully next year momentum will continue to pick up.

Mark Altschwager — Robert W. Baird — Analyst

Okay. That’s really helpful. Thank you. And then, on the marketing front, can you talk about how you are engaging with some of the new customers you have acquired with the mask sales over the last couple of quarters. Are they coming back to purchase other categories? I guess, what is that behavior looked like in terms of repeat business as the last couple of months have progressed?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. No. It’s been very encouraging, both the new customers that we brought in through our mask business, as well as customers that we have brought into Harry Potter. We have very specific marketing journey to get to both of those customers to really engage them with the brand more deeply and widely. We have seen really good response from those customers in terms of coming back. So we are encouraged that we will be able to keep all those customers we have gained.

Mark Altschwager — Robert W. Baird — Analyst

Got it. Got it. Thanks. And then, I guess, last one for me just bigger picture, Rob, you discussed this permanent shift in consumer behavior in a multi-year journey in terms of evolving what the store base looks like. But any changes to how you are thinking about that in the medium-term just in terms of stores versus digital? And for the outlook business specifically, isn’t your approach evolving for online outlet relative to store outlet business, any high level thoughts there would be great? Thanks.

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. In terms of overall, right, the journey we have kind of been on we have been — we had talked about reducing hours full line store fleet, as you see we are projecting to continue to do that next year and we will watch in the mall development very closely to see what happens and in enclosed malls going forward.

On the outlet front store, we still feel that there’s opportunity in the outlet channel. We have — we are very happy with overall how the outlet channel has been performing, customers are coming back faster to the outlets and they are coming back to the enclosed malls. So we see that as an opportunity. We still are very cautious about moving the online outlet onto a digital platform just because of making that off priced product more highly accessible and so we still primarily see our factored business as a brick-and-mortar strategy.

Mark Altschwager — Robert W. Baird — Analyst

Great. Thanks so much and best of luck.

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, Mark.

John Enwright — Executive Vice President and Chief Financial Officer

Thanks, Mark.

Operator

[Operator Instructions] Our next question comes from Steve Marotta of C.L. King and Associates. Please go ahead.

Steve Marotta — C.L. King and Associates — Analyst

Good morning, Rob and John. As far as the recent COVID hotspots and you mentioned, of course, it’s negatively affecting capacity in the stores, is it having any effect on the e-commerce activity in those areas? In other words, you find that if people can’t get in the stores e-commerce is going up or because of the restrictions and people not feeling very good about anything that sales are going down in those areas as well?

Robert Wallstrom — President, Chief Executive Officer and Director

I think that overall it’s definitely not as quick as you slow downed the stores and then all passed on the e-commerce as they got e-commerce helps offset some of that, which I think we have seen in the industry and we’ve seen in our channels over this year. But as you — as areas start to spike, we do see just consumers starting to pull back particularly for the first few weeks the things change, right, everybody I think begins to rebalance their life and we see a short-term impact. And then usually with time, those things begin to medicate.

John Enwright — Executive Vice President and Chief Financial Officer

And the only thing I would add to that — to Mark’s question a minute ago is, from the factory perspective when capacity goes down from a factory perspective, we don’t have an outlet from an e-commerce perspective for those customers to buy.

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah.

Steve Marotta — C.L. King and Associates — Analyst

Okay. I understand. And Rob, maybe you can provide a little bit of your outlook for fiscal ’21, not obviously from a guidance standpoint but just from what you see as the trajectory of the consumer over the course of the year as the vaccine opens the economy back up again as specific guidelines are reduced, obviously it’s going to be good for your business in some respect. Do you think there will be different styles that will be utilized? How do you best prepare and capitalize on the reopening and the timing of the reopening?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. I think, the first half of the year, right, it’s definitely going to be continuing to navigate in a pretty dynamic environment. I think we’re all hopeful that as we get summer, there’s some normalcy starting to come back. And I think both brands are well positioned. If you think about what we expect to bounce back disproportionally would be things like summer travel. So that whole travel piece of business whether it’s in our travel categories or Pura Vida with all their beach lifestyle and people getting back to beaches and getting out and doing all that. I think the second big one that we expect to really pop back strongly is back-to-school. And I think there’s a lot of impacts from that. There’s — the Vera Bradley business in terms of the back-to-school business obviously this year, I think there’s a lot of pent up demand. So we are hopeful there.

And secondly, Pura Vida, they do a lot of products around fundraisers and schools and teams and people come use their customizer pack to do fundraisers. And obviously this year, since a lot of that did not happen that business were softer. We think that that’s a real opportunity to bounce back next year. So there could be a lot of positive momentum in the back half of next year as travel and school kind of pop back and return.

Steve Marotta — C.L. King and Associates — Analyst

That’s very helpful. Thank you.

Operator

Our next question is a follow-up question from Oliver Chen of Cowen. Please go ahead.

Oliver Chen — Cowen — Analyst

Hi. Thank you. A few more just on the shipping and what you are seeing with the shipping deadlines. Is that then limiter to some of the revenue growth and/or as you look at elasticity as issues although you are taking the surcharge? I mean, has there been any consumer differences with cancellations and/or timing? And would also — this is very hard to forecast, but as you look forward with mask, how are you thinking about planning inventories in that situation and that being a big part of the business currently? Thank you.

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. I think, from the shipping deadlines, I think we’ve been managing through shipping deadlines capacity well. I’m sure you have seen some of the headlines out there that we were able to secure our capacity needs with UPS and we’re managing through that. So we don’t have any disproportionate delays here. We have actually been encouraged by how shipping and logistics piece has been working from just on time performance. That’s not really the issue. There is the surcharge issue, which there is expense associated with that.

I think the bigger question is when the shipping cut-off happened and so much of the business has moved to e-commerce is what does the consumer do from that kind of shipping cut-off of approximately 12/15 through 12/25, right, that 10-day window as she go back out to store like she has traditionally or not. I think that’s the big question mark as we move through the holiday.

John Enwright — Executive Vice President and Chief Financial Officer

And in regards to masks, right, I call the Aspen mask [Phonetic]. We do think masks are going to continue to base price as a percentage of total sales. We do — we think they are going to be an important part of business for the fourth quarter and we think into the first quarter, but how it plays out after that, we are unsure.

Oliver Chen — Cowen — Analyst

Yeah.

John Enwright — Executive Vice President and Chief Financial Officer

Yeah.

Oliver Chen — Cowen — Analyst

Okay. And Rob, on Amazon, which you called out in the prepared remarks and pricing integrity, what are some of the key guardrails that you have there and what are the main benefits and opportunities that offset some of the risk factors of partnering and deepening the relationship with Amazon?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. I think, one, really building kind of a strategic partnership with Amazon was really important, with really dedicated resources people who really understood the channel. And we worked on making sure that we were pulling back on either counterfeit product that was available digitally out in the world and pulling that back to a lot of activities we’ve been doing there which helps with price stability, making sure that we’re working with our other wholesale partners to make sure that they are maintaining price integrity.

And doing all of those things has really helped us manage the price integrity on Amazon. And I think it’s just in this new world really being on top of data and management making quick decisions day in and day out has made that partnership effective.

The other thing that we’ve really used Amazon for is, key category penetration, right, there is so many people shopping on Amazon when people are looking for things like backpacks or masks or kind of category type of conversations. We want to be part of that search, part of the conversation and we can really pick-up new customers that way, which is the reason why we have really lean into it and we have been very happy with that partnership today.

Oliver Chen — Cowen — Analyst

Thank you. And finally, on the promotional environment, as you have been seeing it, how have you been seeing it and how has your merchandise margins been relative to your expectations? And what you’re seeing in terms of being competitive relative to competitors as well?

John Enwright — Executive Vice President and Chief Financial Officer

So, with regards to merchandise margins, they are meeting really kind of our expectations. We haven’t — from a bureaucratic perspective, we haven’t been significantly more promotional. In the third quarter, we are controlling the promotionality. As we look into the fourth quarter, we’re just being — we’re looking at kind of what others are doing and they’re trying to ensure that we play in the appropriate space. But as we have introduced kind of Vision 2020, we want to continue to drive full price selling versus kind of just revert back to kind of our time. So we are being thoughtful in kind of how we are promotional throughout the season. But we want to make sure that we don’t leave any opportunity uncovered.

Oliver Chen — Cowen — Analyst

And just finally, you’ve been a pioneer with using a lot of the data in AI for personalization and algorithms internally. What’s the latest there in terms of like results that you’ve seen from implementing that technology in the organization?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. I think that what we’ve seen, one, is as we have seen a real acceleration of our consumer growth and kind of that 25 to 40-year-old category and a lot of that has been a very specific targeted marketing. We also think as we moving forward as we are continuing to diversify our customer base, really using a lot of very specific algorithms to really target consumers is really going to help us really talk to each one individually.

You can imagine that with our very diverse product portfolio from the color and style standpoint, there’s a lot of regionality, there is a lot of specificity in terms of ages. And as we have been doing that, we have been seeing much higher returns on our ad spent and we think that with time we are going to continue get smarter and continue to get more and more targeted on our costs — not only our product development but also on our marketing and what is available.

John Enwright — Executive Vice President and Chief Financial Officer

Yeah. As we brought in new customers from masks, got new role kind of Harry Potter, we have been able to get their repeat purchases that’s better than average based on kind of specific earnings. So that’s been helpful.

Oliver Chen — Cowen — Analyst

Thank you very much. Best regards.

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, Oliver.

Operator

Our next question comes from Dana Telsey of Telsey Advisory Group. Please go ahead.

Dana Telsey — Telsey Advisory Group — Analyst

Hi. Good morning, everyone. Just wanted to get a little bit more color on Pura Vida. How you are speaking about the operating margins go forward in that business and also how you are thinking about planning it for 2021. And just to follow-up on the expenses, when you think about your fixed cost structure now versus pre-COVID, how much of the leverage do you see is impacting margins as the core business recover from COVID?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. From Pura Vida, we are still very excited about what the growth opportunity is in front of us with Pura Vida. A lot of initiatives are ahead of us. We think that from an operating margin, we believe that Pura Vida can continue to kind of begin at high-teens — mid-to-high-teens operating margin. So we still feel very good about that business. From the expense standpoint, I’ll let John touch some color on that one.

John Enwright — Executive Vice President and Chief Financial Officer

Yeah. So from an expense perspective, we have a lot of fixed costs there. We saw some savings associated with certain items in the second and third quarter that we likely won’t see kind of in the fourth quarter and some of those savings you can think of as our personal savings as we took some reductions in salaries or other furlough positions that we took. If you think about kind of core savings that we think we can see kind of into next year you can think of that as a discretionary savings and it’s likely in the low single-digit as a percentage of total expense base that we think will be permanent savings on a go-forward basis.

Dana Telsey — Telsey Advisory Group — Analyst

Got it. And then, when you think about the partnerships like with Disney, what’s coming up that we should be marking our calendars for?

Robert Wallstrom — President, Chief Executive Officer and Director

We haven’t put the other launch date out there. But what I can tell you is that we have a very robust pipeline next year that is both with character releases, a lot of exciting news that’s going to be coming. So we will continue to build on our partnerships with Disney, continue to build on our partnerships with Harry Potter and you will also be seeing that Pura Vida being taking advantage of a lot of licensing opportunities next year.

So those are the seven things we’re doing on kind of the character licensing side. And additionally we are continuing to do collaboration work like we have done this year and we have some exciting things in mind next year. So stay tuned.

Dana Telsey — Telsey Advisory Group — Analyst

Got it. And just lastly any more learnings on the Project Novus side?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. I think, our big learnings there is just continuing to become more responsive and technology and data-driven. And then everything that we did around that project was so that we can move more rapidly. We can make changes more rapidly. We’ve seen in our prepared remarks you heard the comments, we will make about the improvements in SEO and how we just really are able to move quicker, right, with our new infrastructure platform more able to make changes and how we execute and what we learn in probably a matter of days versus what might have been months before and that will just over time we will get smarter and better and better.

I think that’s one of the big things in this new world with technology and data. Now it’s not a destination so to speak. It’s kind of a journey, right? You keep getting better and better the more, the more you learn and you really build up a competitive advantage. And that’s what we are working on.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks, Dana.

John Enwright — Executive Vice President and Chief Financial Officer

Thanks, Dana.

Operator

[Operator Instructions] Our next question comes from Eric Beder of SCC Research. Please go ahead.

Eric Beder — SCC Research — Analyst

Good morning.

Robert Wallstrom — President, Chief Executive Officer and Director

Good morning, Eric.

John Enwright — Executive Vice President and Chief Financial Officer

Good morning.

Eric Beder — SCC Research — Analyst

Hi. During Q4, you’ve been a lot more aggressive in terms of apparel, and it’s not the store — in the Vera Bradley stores, but with outer wear, pajamas, robes, and I think the response has been pretty positive. Is that kind of a one-off holiday thing or should we be thinking about that as a potential category or some level of expansion going forward?

Robert Wallstrom — President, Chief Executive Officer and Director

Thanks for the question, Eric. Yeah, during fourth quarter, we definitely have expanded some of our apparel offerings really focusing on kind of key item areas. And we’ve been very, very happy with the response from the consumer. And we do think that’s an area that you will see continued development. One thing that we have always believed in both of these brands is that both brands are truly lifestyle brands. It not just a product they are actually our lifestyle. So we think that there is opportunity to have category expansion in both brands.

Eric Beder — SCC Research — Analyst

Okay. And speaking of that category, when you put a Pura Vida store-in-store at our Vera Bradley store, did you tell us how — what kind of — how big is this in terms of the physical store and what are they selling in there beyond, I guess, the core, are they selling the entire Pura Vida line. How does that worked right now?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. We’re still — we’re working on all of the final design. We have identified a location. So, it is about an 800 square foot space. So it’s kind of on the smaller store footprint, which we think is a great opportunity for Pura Vida. Within a jewelry store, you don’t need as much space therefore you get a much higher sales per square foot to make it more profitable in the long run.

In terms of the assortment, it really is going to be focusing on kind of a fairly broad assortment. As you have seen the metal jewelry business continues to be exceptionally strong, so that would be a big part of the assortment supported by the string bracelet business, but also some of these other exciting initiatives they have planned for next year that we will be talking more about on the next call, some of the new initiatives we will be launching in the store too.

John Enwright — Executive Vice President and Chief Financial Officer

Eric, your question also in regards to the store and the store foot in the Vera Bradley stores or is it on specific to the Pura Vida new location?

Eric Beder — SCC Research — Analyst

I think what you described is Pura Vida new location.

John Enwright — Executive Vice President and Chief Financial Officer

Yeah.

Eric Beder — SCC Research — Analyst

How big is the inside of Vera Bradley — like Vera Bradley shop as far as I guess?

John Enwright — Executive Vice President and Chief Financial Officer

I think it’s a shop-in shop in Vera Bradley. We are testing a few different things. So, we are testing in Birmingham. We gave a couple hundred square feet to Pura Vida and that was kind of a focused assortment on kind of their best-selling metal and string bracelets to kind of get a test up. We are rolling it out to additional stores and some of those presentations might be tighter.

One thing that’s really great about Pura Vida is with the way they wall units work and how much product you can get in a very small square footage, you don’t necessary need a lot of space. And so we are going to test a few different sizes, some of them might be 100 square feet, some of them might just be 12 linear speed of wall space, but it will be exciting to watch all that response. And then the charity bracelet program that will be in all of our stores will even be a tighter assortment, but we think it’s a real opportunity.

What’s been exciting is, we’ve seen a good response from our consumers, not only in the full-line stores but also in our factory stores buying full price product, whether it’s been with Pura Vida or whether it’s been in some of our collaborations that we tested by Harry Potter that we put in some of our factory stores. So we think there’s a real opportunity to take advantage of some of this with all the traffic that’s going to our factory stores.

Eric Beder — SCC Research — Analyst

Okay. And finally, on ReActive, you have had open for almost a year, next month it will be a year approximately. What other — I know it’s been caught up unfortunately in the whole flow of everything else. But what kind of — is it attracting the consumer you expected or are you expecting to be as aggressive with all the patterns of the pieces as you did in 2020? What do you expect to see ReActive kind of over the next, I guess, somewhat normalized year next year?

Robert Wallstrom — President, Chief Executive Officer and Director

Yeah. We’ve been very happy with the ReActive performance, right? There were really two key elements of ReActive. One was really our first — moving into sustainability. And the consumers really responded to that messaging. And we’ve seen the younger customer really be attracted to that messaging. You’re going to see us. We have made a real commitment to moving our full-line assortments to a sustainable fabric platform as we move forward. So more exciting announcements next year, we think that’s critically important and we’ve been very happy with the response.

The second piece of ReActive was just the more active lifestyle. And obviously, we’ve seen the consumer this year continue to get more casual, get more active. And I think we’ll continue to be leaning in that and how do we use ReActive to even have a stronger foothold in the active space.

Eric Beder — SCC Research — Analyst

Great. Thanks. Good luck with the holiday — rest of the holiday.

Robert Wallstrom — President, Chief Executive Officer and Director

Thank you, Eric.

John Enwright — Executive Vice President and Chief Financial Officer

Thanks, Eric.

Operator

It appears we have no further questions at this time. I would now like to turn the conference back to Rob Wallstrom for any additional or closing remarks.

Robert Wallstrom — President, Chief Executive Officer and Director

Yes. Thank you so much for joining us on today’s call. I’m excited to have the opportunity to lead such a great team of talented, agile and innovative associates who are passionate about our brand and our customers. Vera Bradley, Inc. is not authentic, iconic, lifestyle company with two powerful brands and devoted customers. We are committed to continual innovation in product and customer engagement. We have a strong balance sheet and ample liquidity and we are fully committed to advancing our ESG and stakeholder focus and to create long-term shareholder value.

Once again, we have proven that by working together, we can thrive even when facing unrelenting headwinds. We are poised to emerge a stronger company with an exciting future. Thank you for your time and interest in Vera Bradley, Inc. We hope you can join us for our fiscal year end call on March 10th, 2021.

Operator

[Operator Closing Remarks]