Vera Bradley Designs, Inc
Vera Bradley, Inc. (Form: 10-K, Received: 04/02/2014 10:48:04)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________ 
FORM 10-K
_____________________________________________ 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 1, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From              to             
Commission File Number: 001-34918
_____________________________________________ 
VERA BRADLEY, INC.
(Exact name of registrant as specified in its charter)
 _____________________________________________ 
Indiana
 
27-2935063
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
2208 Production Road, Fort Wayne, Indiana
 
46808
(Address of principal executive offices)
 
(Zip Code)
(877) 708-8372
(Registrant’s telephone number, including area code)
_____________________________________________  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock
 
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
 _____________________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
x
 
 
 
 
 
 
 
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
The aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant as of August 2, 2013 was $489,409,014 .
The registrant had 40,685,249 shares of its common stock outstanding as of April 2, 2014 .
_____________________________________________  
DOCUMENT INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy statement for the 2014 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.


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Forward-Looking Statements
This annual report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical or current fact included in this report are forward-looking statements. Forward-looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance, and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “might,” “will,” “should,” “can have,” and “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates, and financial results, our plans and objectives for future operations, growth, initiatives, or strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
possible adverse changes in general economic conditions and their impact on consumer confidence and consumer spending;
possible inability to predict and respond in a timely manner to changes in consumer demand;
possible loss of key management or design associates or inability to attract and retain the talent required for our business;
possible inability to maintain and enhance our brand;
possible inability to successfully implement our growth strategies or manage our growing business;
possible inability to successfully open and operate new stores as planned
We derive many of our forward-looking statements from our operating plans and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.
For a discussion of these risks and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to “Risk Factors” in Item 1A of this report.
We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.

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PART I
 
In this Form 10-K, references to “Vera Bradley,” “we,” “our,” “us” and the “Company” refer to Vera Bradley, Inc. and its subsidiaries, including Vera Bradley Designs, Inc. The fiscal years ended February 1, 2014 (“fiscal 2014”) and January 28, 2012 (“fiscal 2012”) were each 52-week periods. The fiscal year ending February 2, 2013 ("fiscal 2013") was a 53-week period. The fiscal year ending January 31, 2015 (“fiscal 2015”) will be also be a 52-week period.

Item 1.        Business
Our Company
Vera Bradley is a leading designer, producer, marketer, and retailer of stylish and highly functional accessories for women. Our products include a wide offering of handbags, accessories, and travel and leisure items. Over our 30-year history, Vera Bradley has become a true lifestyle brand that appeals to a broad range of consumers. Our brand positioning emphasizes the high quality, distinctive and vibrant styling, and functional design of our products. New designs help keep the brand fresh and our customers continually engaged.
We generate revenues by selling products through two reportable segments: Direct and Indirect. As of February 1, 2014 , our Direct segment consisted of sales of Vera Bradley products through our 84 full-price and 15 outlet stores in the United States; 13 department store locations in Japan; our websites, verabradley.com and verabradley.co.jp; and our annual outlet sale in Fort Wayne, Indiana. As of February 1, 2014 , our Indirect segment consisted of sales of Vera Bradley products to approximately 3,100 specialty retailers, substantially all of which are located in the United States, as well as select department stores and third party e-commerce sites. For financial information about our reportable segments, refer to Note 14 of the Notes to Consolidated Financial Statements set forth in Part II, “Item 8. Financial Statements and Supplementary Data,” of this report.
Our History
Barbara Bradley Baekgaard and Patricia Miller founded the Company in 1982 in Fort Wayne, Indiana, after recognizing a lack of stylish travel accessories in the market. Within weeks, the friends created Vera Bradley, named after Ms. Bradley Baekgaard’s mother, and began manufacturing and marketing their distinctive products. The founders, together with past and present members of the executive management team, have been instrumental in our growth and success. The following timeline sets forth a summary of significant milestones in Vera Bradley’s history:
1982
Barbara Bradley Baekgaard and Patricia Miller launched Vera Bradley by introducing three products: the handbag, the sports bag, and the duffel bag.
 
 
 
1987
Ernst & Young honored our Co-Founders with an “Entrepreneur of the Year” award.
 
 
 
1991
To accommodate the increasing number of attendees, we relocated our annual outlet sale from a tent in our parking lot to its present location at the Allen County War Memorial Coliseum Exposition Center in Fort Wayne, Indiana.
 
 
 
1998
We founded our primary philanthropy, the Vera Bradley Foundation for Breast Cancer.
 
 
 
1999
Our products were being sold in all 50 states through Indirect retailers.
 
 
 
2005
We launched the Vera Bradley Visual Merchandising Program, providing our retail partners a framework for presenting the brand and merchandising our products in a consistent manner.
 
 
 
2006
We launched our e-commerce business through our website, verabradley.com.
 
 
 
2007
We opened a state-of-the-art distribution facility in Roanoke, Indiana. In September, we also opened our first full-price store at the Natick Collection, in greater Boston.


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2009
We opened our first outlet store at Chicago Premium Outlets in Aurora, Illinois.
 
 
 
2010
We completed our initial public offering.
 
 
 
2011
We entered the Japanese market, opened the Vera Bradley Design Center in Roanoke, Indiana, and launched our products in 65 Dillard’s locations.
 
 
 
2012
We completed the 200,000 square-foot expansion of the distribution facility in Roanoke, Indiana; increased our presence to all Dillard’s locations; and launched a relationship with Von Maur, and are carried in all of their locations.
 
 
 
2013
We launched the Vera Bradley for Disney Collection at the Florida World of Disney Store and migrated verabradley.com to a more responsive design, providing an enhanced shopping experience and optimal product viewing regardless of the device being used to shop.

The passion for design and customer service established by our founders has driven our growth over the past 30 years and remains the cornerstone of Vera Bradley today. Chief Creative Officer, Ms. Bradley Baekgaard continues to be responsible for our day-to-day creative functions, including product development and store design. Ms. Miller retired in October 2012 as our National Spokesperson, but continues to serve on the Board of Directors.
Evolution of Our Business
Beginning in 2005, we embarked on a series of strategic initiatives designed to take advantage of the growing interest in the Vera Bradley brand. These initiatives were designed to strengthen and enhance our business and operating model, expand our demographic and geographic market opportunity, and position us for future growth. The core components of these initiatives included the following:
Merchandising Strategy.  To appeal to a broader range of consumers, we developed a mix of pattern and product offerings specifically targeted at different consumer demographics and refined our product release strategy to expand our product portfolio. In addition, we substantially enhanced our visual merchandising strategy, focusing on a consistent presentation of Vera Bradley as a lifestyle brand. In fiscal 2012, we established a dedicated merchant function and elevated the role of marketing to work more collaboratively with the design team to continue improving our process of bringing products to market.
Multi-Channel Distribution Capability.  In 2006, we initiated a Direct channel strategy that was designed to expand our brand presence and broaden our consumer demographic while complementing the growing Indirect segment of our business. The first step in establishing the Direct segment of our business was selling directly to consumers through verabradley.com beginning in 2006. In fiscal 2014, we had more than 69 million visits to verabradley.com. In September 2007, we opened our first full-price store. As of February 1, 2014, we operated 84 full-price stores and 15 outlet stores in the United States, and 13 department store locations in Japan.
Infrastructure Investment . Beginning in 2005, we made a series of investments to strengthen our supply chain capabilities, information systems, and product development processes, resulting in substantial cost savings and a more flexible and scalable operating structure. During this period, we shifted our production from a primarily domestic manufacturing model to a more cost-effective global sourcing platform. In 2007, we opened a state-of-the-art distribution facility in Roanoke, Indiana, which was doubled in size to approximately 400,000 square feet as a result of an expansion that was completed in fiscal 2013.
In March 2014, the Company refined its strategic initiatives by unveiling its comprehensive five-year strategic plan, designed to drive improved financial performance and shareholder value over the long-term. The vision is to build on the Company's rich heritage and establish Vera Bradley as a premium lifestyle brand that is relevant to the future, expanding our customer reach and growing our customer connections.

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Our Brand
For over 30 years, we have created, developed, and solidified a true lifestyle brand that resonates with a broad range of female consumers. Employees, family members, and friends are often depicted throughout our advertising in fun, friendly, and family-oriented settings, accentuating our brand image in an authentic manner. Our visual merchandising strategy, particularly in our full-price stores, seeks to create the feeling of home. We believe that our lifestyle brand is well positioned to extend into complementary product categories. The strength of our brand is demonstrated during our annual outlet sale in Fort Wayne, Indiana, a sales event that attracts tens of thousands of highly enthusiastic shoppers from across the country.
Our brand positioning emphasizes the high quality, distinctive and vibrant styling, and functional design of our products. At the same time, our releases of new patterns and styles keep the brand fresh, inspire our customers to express their individuality and sense of style in a colorful way, and encourage multiple purchases. We also provide consumers a consistently fresh set of patterns, styles, and products from which to choose that fit with different ages, wardrobes, seasons, and personalities.
We offer a broad assortment of products that meet our customers’ different functional needs, including: handbags, such as purses, totes, and specialty bags; accessories, such as wallets, wristlets, smartphone cases, technology accessories, and eyewear; and travel and leisure items, such as weekend bags, duffel bags, and garment bags. We believe this combination of patterns, styles, and products allows us to appeal to all age brackets, including teens, young women, mature women, mothers, and grandmothers. Although our customers represent a broad range of demographic segments, our market research has shown that they generally have a common attitude toward the brand: Vera Bradley is a colorful way of allowing them to express their individuality and sense of style.
Competitive Strengths
We believe the following competitive strengths differentiate us within the marketplace and provide a strong foundation for our future growth:
Strong Brand Identity and Positioning.  We believe the Vera Bradley brand is highly recognized for its distinctive and vibrant style. Vera Bradley is positioned in the market as a lifestyle brand that inspires consumers to express their individuality and sense of style. We have also positioned our brand to highlight the high quality and functional attributes of our products. The Vera Bradley brand is more price accessible than many competing brands, which allows us to attract a wide range of consumers and inspire repeat purchases.
Exceptional Customer Loyalty. We believe that as consumers become familiar with the Vera Bradley brand and begin using our products, they become loyal and enthusiastic brand advocates. We believe enthusiasm for our brand inspires repeat purchases and helps us expand our customer base. Our customers often purchase our products as gifts for family members and friends, who, in turn, become loyal customers.
Product Development Expertise.  Our product development team combines an understanding of consumer preferences with a knowledge of color, fashion, and style trends to design our products. Our highly creative design associates utilize a disciplined product design process that seeks to maximize the productivity of our product releases and drive consumer demand.
Dynamic Multi-Channel Distribution Model.  We offer our products through a diverse choice of shopping options across channels that are intimate, highly shop-able, fun, and characteristic of our brand. Whether they are at a Vera Bradley store, a specialty retail store, a department store, or verabradley.com, we believe consumers have an opportunity to find the brand in places that match their unique shopping interests. Our multi-channel distribution model enables us to maximize brand exposure and customer access to our products.
Established Network of Indirect Retailers.  Our Indirect business consists of an established and diverse network of over 3,100 specialty retailers and department store partners. This channel of gift, apparel and accessories, travel, and other specialty retailers, located throughout the United States, provides a strong foundation for our growth. Our Indirect retailers include some of the brand’s strongest advocates, and their passion has been instrumental in the development of our brand.
Distinctive Retail Stores.  Our stores provide a shopping experience that is uniquely “Vera Bradley.” We bring the Vera Bradley brand to life in our stores through visual presentation of our wide range of product offerings, the stylish, inviting décor of our stores, and personalized service from our friendly and knowledgeable sales associates. We believe the distinctive shopping experience and personalized service encourage repeat visits and multiple purchases.

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Unique Company Culture. We were founded in 1982 by two friends, Barbara Bradley Baekgaard and Patricia Miller, who built our company around their passion for design and commitment to customer service. We believe our founders created a unique company culture that attracts passionate and motivated employees who are excited about our products and our brand. Our employees share our founders’ commitment to Vera Bradley customers. We believe that a fun, friendly, and welcoming work environment fosters creativity and collaboration and that, by empowering our employees to become personally involved in product design, testing, and marketing, they become passionate and devoted brand advocates.
Experienced Management Team.  Our senior management team led by Robert Wallstrom, our Chief Executive Officer, has extensive experience across a diverse range of disciplines in product design, merchandising, marketing, store operations and development, supply chain management, and finance.
Growth Strategies
In March 2014, the Company unveiled its comprehensive five-year strategic plan, designed to drive improved financial performance and shareholder value over the long-term. We intend to achieve this vision through the following three key elements:
Product.  We will begin offering an elevated product assortment, which will extend our price offering and build aspiration by creating “halo” product in new fabrications that build on our core assortment. We will work to stabilize the business by “majoring in the majors,” making a bigger impact in the classifications Vera Bradley is known for and what we do best, like travel, backpacks, bags, and accessories. We will also invest in emerging growth and brand-enhancing opportunities that will strengthen the core of the future, such as scarves and jewelry.
Our product assortment will be more focused and more narrowed in the short term by paring the number of signature patterns launched each year and reducing the style count. We will add more solids to the assortment to showcase our signature patterns even more and add career elements into our assortment, which we believe will help expand our customer base. Every product launch will not be treated equally - as they generally are today - and will have a predetermined lifecycle. We will pursue brand extensions that will enhance our position as a lifestyle brand via a structured approach.
Distribution Channels. We will shape Vera Bradley into a tightly integrated multi-channel business by growing our Direct distribution channel (including full-line stores, factory outlet stores, and e-commerce), right-size and work to strengthen the performance in our gift channel, and further develop our department store and other Indirect channel relationships.
We continue to have a long-term vision of around 300 full-line and 100 factory outlet Vera Bradley stores. We plan to add 13 new full-line stores in fiscal 2015 and believe we can accelerate that pace beginning in fiscal 2016 to add approximately 20 to 25 new stores per year for at least the next four years. We expect to add at least seven new outlet stores in fiscal 2015. We believe that we can accelerate this growth rate going forward to approximately 10 to 15 new stores per year for at least the next four years. Furthermore, within three years, we expect approximately 40% of the product in the outlet channel to be made specifically for our outlets, growing to approximately 70% in a five-year time frame. We believe this made-for-outlet (“MFO”) strategy is a profitable financial model which should drive both sales and gross margins. E-commerce will be a key part of the foundation to support our brand and marketing strategies. Our eventual goal is for the e-commerce experience to mirror the in-store shopping experience by segregating our full-line and factory outlet product onto different sites.
We will be placing greater focus on our department store relationships and we will continue to explore other expansion opportunities in the department store space, especially since this is the number one destination for career handbag purchasing. The Indirect specialty gift channel is the heritage of our business and remains very important to us. We will continue to add select accounts while discontinuing unproductive accounts. While the specialty gift business is rapidly becoming a much smaller percentage of our total revenue base, it is still an important piece of our business, and we are working hard to stabilize this channel by narrowing our product assortments, changing the order cycle, and doing a better job of segmenting our assortments by door.
Marketing.  Our marketing goal will be to generate excitement and desire for the aspirational Vera Bradley brand, attracting new customers while continuing to foster strong connections with our loyal fan base. We plan to build a cohesive brand story that connects with our target customers, and more of our marketing will be allocated to the “halo” brand-enhancing assortments and less to what is already well-known. We will advertise the brand in relevant national magazines and leverage our database and insights to conduct more segmented, and even personalized, digital and direct mail marketing.
Our Product Release Strategy
We introduce new patterns seasonally. Within each season, we generally introduce two to four patterns. These patterns are incorporated into the designs of a wide range of products, including handbags, accessories, and travel and leisure items, that are part of the core seasonal release. These product assortments each season can be classic styles, updates to older designs, or new product introductions.

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To keep our assortment current and fresh and to focus our inventory investments on our best performers, we discontinue patterns at regular intervals. We sell our remaining inventory of retired products primarily through our website, outlet stores, and at our annual outlet sale.
Our Products
The following chart presents net revenues generated by each of our three product categories and other revenues as a percentage of our total net revenues for fiscal 2014 , 2013 , and 2012 :
 
 
 
Fiscal Year Ended
 
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
Handbags
 
40.0
%
 
40.4
%
 
43.1
%
Accessories
 
30.1
%
 
31.7
%
 
32.2
%
Travel and Leisure Items
 
14.8
%
 
14.7
%
 
15.2
%
Other (1)
 
15.1
%
 
13.2
%
 
9.5
%
Total (2)
 
100.0
%
 
100.0
%
 
100.0
%
(1)
Includes primarily home, merchandising, freight, and licensing revenues.
(2)
Excludes net revenues generated by our annual outlet sale.
Handbags. Handbags are a core part of our product offerings and are the primary component of every seasonal assortment. The category consists of classic and new styles developed by our product development team to meet consumer demand and drive repeat purchases. Our handbag product category extends beyond handbags to include totes and specialty bags such as crossbodies, baby bags, backpacks, and laptop portfolios. Handbags play a prominent role in our visual merchandising, and we focus on showcasing the different patterns, colors, and features of each bag.
Accessories. Accessories, our second largest revenue category, include technology accessories and fashion accessories such as wallets, wristlets, eyeglass cases, cosmetics cases, and paper and gift products. Our accessories are attractively priced and allow the consumer to include some color in her wardrobe, even if tucked into another bag. Our product development team consistently updates the accessories assortment based on consumer demand and fashion trends.
Travel and Leisure Items. Our travel and leisure product category includes duffel bags, garment bags, rolling luggage, and travel accessories, such as travel cosmetic cases. The first Vera Bradley product offering included duffel bags, which consistently have been a strong performer. We believe their popularity, as well as the appeal of our other travel and leisure items, results from our vibrant designs, functional styles, and lightweight fabrications.
Product Development
We have implemented a fully integrated and cross-functional product development process that aligns design, market research, merchandise management, sales, marketing, and sourcing. Product development is a core capability that makes our products unique and provides us with a competitive advantage. Our designs and aesthetics set our products apart and drive customer loyalty. Our product development team mixes an understanding of the needs of our target customers, with knowledge of upcoming color and fashion trends, to design new collections as well as new product categories that will resonate in the market.
We typically begin the development stage of our products in the Vera Bradley portfolio 12 – 18 months in advance of their release. The development of each new pattern includes the design of an overall print, a complementary fabric backing, and three sizes of coordinating trim materials. To seek fresh perspectives, we collaborate with independent designers to create unique patterns for each season. We oversee the development and exercise the final approval of all patterns and designs. Once developed, we generally copyright each pattern, including the print, fabric backing and coordinating trim. We believe that great design is not only central to our product development efforts, but also is a fundamental part of our brand development and growth strategies. In the past several years, we have made investments to evolve and integrate our product development expertise, including opening a design office in New York City, as well as opening a design center in Roanoke, Indiana.
Our product development team works to ensure that new collections contain an assortment of products and styles that are in line with both fashion trends and customer needs and regularly updates classic styles to enhance functionality. In addition, we actively pursue opportunities to expand our product offerings through new line and brand extensions. Our product development team monitors fashion trends and customer needs by attending major trend shows in Europe and the United States, subscribing to trend monitoring services, and engaging in comparison-shopping.

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Our product development team is also responsible for assortment planning, pricing, forecasting, promotional development, and product lifecycle management. Forecasting is based on seasonal market research and in-store testing. We gather seasonal market research through a variety of methodologies, including scheduled interviews and online and in-person surveys. We conduct seasonal in-store testing by releasing test products in our full-price stores and evaluating their success in the marketplace prior to product introduction on a larger scale. The team assures that we offer a broad range of patterns, fabrics, styles, and functionality features in a cost-effective manner. We believe that with our cross-functional, collaborative approach, we are able to introduce and sell our merchandise in a way that clearly communicates the Vera Bradley brand and the Vera Bradley lifestyle.
Marketing
We believe that the growth of our brand and our business is influenced by our ability to introduce and sell our merchandise in a way that clearly conveys the Vera Bradley lifestyle. We use marketing as a critical tool in our efforts to promote our brand.
Direct Mail. The seasonal Vera Bradley catalogs are key vehicles for promoting the brand and product portfolio. Each catalog is sent to a targeted customer mailing list. In addition to distributing the catalog, we produce and distribute a number of other marketing pieces, including postcards and mini-mailers. We believe our direct mail media generate excitement and awareness about the brand and seasonal introductions and allow us to reach both new and loyal customers in their homes.
Advertising. We employ print and outdoor advertising to increase overall brand awareness. Our advertisements are placed primarily in national magazines that have a readership similar to our target demographics. These publications have recently included Seventeen, InStyle, Better Homes and Gardens, and Real Simple . We continually assess our advertising strategies and tactics.
Public Relations and Product Placement. Vera Bradley has received considerable exposure in the press, including in publications such as InStyle, O the Oprah Magazine, Good Housekeeping, Southern Living, and The New York Times . In addition, we have expanded our marketing efforts to promote product placement in feature-length films and on prime-time television shows such as Modern Family and New Girl .
Social Media and Online Marketing. In recent years, we have greatly increased traffic to verabradley.com and have increased awareness of our brand through online marketing and social networking sites. We have captured more than 2.8 million customer e-mail addresses in our online customer file, with many of these customers providing age, occupation, and location data. This captured information provides us with deeper insight into the products and categories that are in the highest demand, and allows us to better target our customers with appropriate messages. As of February 1, 2014 , we had approximately 1.6 million Facebook fans, over 65 thousand Twitter followers, and over 7.9 million visits to our blog, The Inside Stitch . We believe these media not only connect us with our fans, but also allow us to target them through cross-channel marketing.
Seasonality
Because Vera Bradley products are frequently given as gifts, Vera Bradley has historically realized, and expects to continue to realize, higher sales and operating income in the fourth quarter of its fiscal year, which includes the holiday months of November and December. In addition, fluctuations in sales and operating income in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting retail sales. Over the last several years, we have achieved higher levels of growth in the non-holiday quarters, which has reduced these seasonal fluctuations.
Channels of Distribution
We distribute our products through our Direct and Indirect segments. This multi-channel distribution model not only enables us to have operational flexibility, but also maximizes the methods by which we can access potential customers.
Direct Segment
Full-Price Stores. We have developed a retail presence through our full-price stores, all located in the United States, which provides us with a format to showcase the image and products of Vera Bradley. As of February 1, 2014, we operated 84 full-price stores averaging approximately 1,800 square feet per store. Our stores are designed to create a feeling of home with a high standard of visual merchandising. The welcoming nature of our full-price stores provides our customers with a comfortable shopping experience in a setting that showcases our merchandise and conveys the Vera Bradley lifestyle. Our sales associates are passionate about our products and customer service, which, we believe, translates into a superior shopping experience.

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E-Commerce. In 2006, we began selling our products through the verabradley.com website. The objective of verabradley.com is to provide both a mechanism for marketing directly to consumers and a storefront where consumers can find the entire Vera Bradley collection. In fiscal 2013, we invested in upgrades to our website allowing for a more user friendly homepage, enabling us to ship to over 13 international countries, and enhancing the checkout experience. In fiscal 2014, we migrated our website to a responsive design in order to provide a better shopping experience for our customers by providing an optimal viewing experience regardless of the device being used to shop. We had over 69 million visits to verabradley.com during fiscal 2014.
Outlet Stores. Our outlet stores are a vehicle for selling retired merchandise at discounted prices, while maintaining brand integrity. We believe our outlet stores are an integral part of our distribution strategy, as this format provides an additional channel of distribution for our products and enables us to better target value-oriented customers. Our outlet stores average approximately 3,000 square feet per store. As of February 1, 2014, we operated 15 outlet stores.
International . We launched a marketing campaign to connect with the Japanese consumer on April 18, 2011. This campaign included seven temporary pop-up stores in several department stores including Isetan Shinjuku and Marui Yurakucho located across Tokyo and Kyoto. The international channel includes the Japanese website verabradley.co.jp launched in fiscal 2012. As of February 1, 2014, we operated 13 Japanese department store locations.
Annual Outlet Sale. Our annual outlet sale is held in the Allen County War Memorial Coliseum Exposition Center in Fort Wayne, Indiana. The annual outlet sale is an important tradition for Vera Bradley, has many loyal followers, and is an opportunity for us to sell our retired merchandise at discounted prices in a brand-right fashion. We attracted approximately 68 thousand attendees to our 2013 annual outlet sale.
Store Location Selection Strategy
Our store location decisions are made case by case, depending on the retail strategy we have developed for the particular market. This includes actual and planned penetration in both Indirect and Direct segments, as well as existing e-commerce demand. At this time, we do not believe any market has been fully penetrated. We believe that expansion of our store base complements our Indirect segment by increasing brand awareness and reinforcing our brand image. In addition to analyzing store economics, we pay particular attention to the location within the shopping center, the size and shape of the space, and desirable co-tenancies. Along with seeking co-tenants that we believe share our target customer, we seek a balanced mix of moderate and high-end retailers to encourage high levels of traffic. Our target full-price store size is approximately 1,800 square feet, but we are able to work with spaces as small as 1,000 square feet or, depending on our market strategy and relevant economic factors, spaces as large as 2,800 square feet.
Store Operations
The focus of our store operations is providing consumers with a comfortable shopping experience. We strive to make the experience interactive through special store events, such as showcasing newly launched products or celebrating our namesake’s birthday. Our customer service philosophy emphasizes friendly service, merchandise knowledge, and passion for the brand. Consequently, an essential requirement for the success of our stores is our ability to attract, train, and retain talented, highly motivated district managers, store managers, and sales associates. Our district and store managers are our primary link to the consumer, and we continually invest in their development.
Store Economics
We believe that our innovative retail concept and distinctive retail experience contribute to the success of our stores, most of which generate strong productivity and returns. We expect our full-price stores to average approximately 1,800 square feet per store, and we expect to invest approximately $0.4 million per new store, consisting of inventory costs, pre-opening costs, and build-out costs, less tenant-improvement allowances. New full-price stores generate on average between $1.2 million and $1.4 million in net revenues during the first twelve months, and the payback on our investment is expected to occur in less than 18 months.
Indirect Segment
As of February 1, 2014, we had approximately 3,100 Indirect retailer partners, the majority of which were specialty retailers with whom we have had long-standing relationships. The top 30% of our specialty retailers account for over 70% of revenue from our specialty retailers. No single account represented more than 5% of total Indirect net revenues in fiscal 2014, with the top ten accounts representing in the aggregate less than 24% of total Indirect net revenues. The majority of our Indirect retailers have been customers for over five years. In fiscal 2012, we launched our products in the department store channel.


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Sales Force
We believe that having an in-house sales force results in more consistent brand presentation and messaging, enhanced support for our Indirect retailers, and a more predictable, scalable, and cost-efficient business model. As of February 1, 2014, our sales team consisted of 84 in-house, full-time sales consultants. The compensation structure for our sales consultants consists of a combination of fixed pay and sales-based incentives.
In addition to acquiring new and growing existing accounts, our sales consultants serve as a support center for our Indirect retailers by assisting and educating them in areas such as merchandising and visual presentation, marketing of the brand, product selection, and inventory management. Our sales consultants also participate in our semi-annual product introduction and education event for our Indirect retailers. Our visual merchandising program provides our sales consultants with a framework to guide our Indirect retailers regarding optimal product placement and display that is intended to reinforce the message that our brand is distinct from those of our competitors.
Manufacturing and Supply Chain Model
Our manufacturing and supply chain model is designed to maximize flexibility in order to meet shifting demands in the market. Our model utilizes offshore raw material suppliers and a blend of offshore and domestic manufacturing. We place a strong emphasis on continuous improvement and have employed lean manufacturing concepts. Our broad-based, multi-country manufacturing and supply chain model is designed to achieve efficient, timely, and accurate order fulfillment while maintaining appropriate levels of inventory.
Our sourcing strategy is part of the larger cross-functional product development process. The overall objective for our sourcing team is to build and sustain collaborative partnerships throughout our supply chain, with a focus on identifying appropriate countries and partners to manufacture our products. The sourcing team leverages its expertise in negotiation, relationship management, and change management to maintain a strong global supply chain.
We strive to maintain the appropriate balance of inventory to enable us to provide a high level of service to our customers, including prompt and accurate delivery of our products. We have an active sales and operations planning process that helps us balance the supply and demand issues that we encounter in our business, optimize our inventory levels, and anticipate inventory needs. We have also integrated our planning, forecasting, and segmentation processes under one function called Merchandise Planning and Allocation.
The majority of our products are cotton-based. Our other products are made primarily from specialty fabrics (including nylon and microfiber) and paper. We source our materials from various suppliers in Asia, with the majority coming from China and South Korea. Our global supply chain and purchasing teams work together with select suppliers enabling us to optimize the mix of cost, lead time, quality, and reliability within our global supply network. All of our suppliers must comply with our quality standards, and we use only a limited number of pre-approved suppliers who have demonstrated a commitment to delivering the highest quality products. In December 2008, we opened an office in Dongguan, China, which enables us to increase our control over the manufacturing and supply chain process and monitor compliance with our quality standards.
A significant majority of our finished goods products are manufactured externally overseas. These products are made by a variety of global manufacturers located primarily in China. We are not dependent upon any single manufacturer for our products. When determining the size of orders placed with our manufacturers, we take into account forward-looking demand, lead times for specific products, current inventory levels, and minimum order quantity requirements. Overseas production has resulted in substantial cost savings and a reduction of capital investment. With the oversight of our office in China and our independent contractors, we believe these financial benefits have been realized without sacrificing the level of quality inherent in our products or service to our customers.
The remainder of our products are manufactured in the United States to provide flexibility in our supply chain. This production, almost all of which is internal to Vera Bradley, enables us to manufacture a finished product in two weeks. This capability allows us to respond quickly to shifts in marketplace demand and changes in consumer preferences. In fiscal 2014, approximately 6.1% of our units were produced in our domestic manufacturing facility.
Distribution Center
In 2007, we consolidated our warehousing and shipping functions into one, 217,320 square-foot distribution center, located in Roanoke, Indiana. In fiscal 2013, we completed a 200,000 square-foot expansion of the distribution facility. This highly automated, computerized facility allows Vera Bradley employees to receive information directly from the order-collection center and quickly identify the products and quantities necessary for a particular order. The recent expansion resulted in capacity gains in the areas of inbound receiving, inventory storage, order fulfillment, value-add processing and shipping. The facility’s advanced technology enables us to more accurately process and pack orders, as well as track shipments and inventory.

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We believe that our systems for the processing and shipment of orders from our distribution center have enabled us to improve our overall customer service through enhanced order accuracy and reduced turnaround time.
We strive to maintain the appropriate balance of inventory to enable us to provide a high level of service to our customers, including prompt and accurate delivery of our products. We have an active Merchandise Planning and Allocation function that strives to balance the supply and demand issues that we encounter in our business, optimize our inventory levels, and anticipate inventory needs.
Our products are shipped primarily via FedEx and common carriers to our stores, our Indirect retailers, and directly to our customers who purchase through our website. We believe we are positioned well to support the order fulfillment requirements of our growing business, including business generated through our website.
Management Information Systems
We believe that high levels of automation and technology are essential to maintain our competitive position. We maintain computer hardware, systems applications, and networks to enhance and accelerate the design process, to support the sale and distribution of our products to our customers, and to improve the integration and efficiency of our operations. Our management information systems are designed to provide, among other things, comprehensive order processing, production, accounting, and management information for the product development, retail, sales, marketing, manufacturing, distribution, finance, and human resources functions of our business. We use several systems, including MICROS-Retail, SAP, JDA, and SCALE, for our information technology requirements.
Competition
We face strong competition in each of the product lines and markets in which we compete. We believe that all of our products are in similar competitive positions with respect to the number of competitors they face and the level of competition within each product line. Due to the number of different products we offer, it is not practicable for us to quantify the number of competitors we face. Our products compete with other branded products within their product categories and with private label products sold by retailers. In our Indirect business, we compete with numerous manufacturers, importers, and distributors of handbags, accessories, and other products for the limited space available for the display of such products to the consumer. Moreover, the general availability of contract manufacturing allows new entrants access to the markets in which we compete, which may increase the number of competitors and adversely affect our competitive position and our business. In our Direct business, we compete against other independent retailers, department stores, catalog retailers, gift retailers, and Internet businesses that engage in the retail sale of similar products.
The market for handbags, in particular, is highly competitive. Our competitors include not only established companies that are expanding their production and marketing of handbags, but also frequent new entrants to the market. We directly compete with wholesalers and direct sellers of branded handbags and accessories, such as Coach, Nine West, Liz Claiborne, Dooney & Bourke, Kate Spade, and Michael Kors.
In varying degrees, depending on the product category involved, we compete on the basis of design (aesthetic appeal), quality (construction), function, price point, distribution, and brand positioning. We believe that our primary competitive advantages are consumer recognition of our brand, customer loyalty, product development expertise, and our widespread presence through our multi-channel distribution model. Some of our competitors have achieved significant recognition for their brand names or have substantially greater financial, distribution, marketing, and other resources than we do. Further, we may face new competitors and increased competition from existing competitors as we expand into new markets and increase our presence in existing markets.
Copyrights and Trademarks
The development of each new pattern includes the design of an overall print, a complementary fabric backing, and coordinating trim materials. Once developed, we generally copyright each pattern, including the print, fabric backing, and coordinating trim. We currently have in excess of 650 copyrights.
We also own all of the material trademark rights used in connection with the production, marketing, and distribution of all of our products, both in the United States and in the other countries in which our products are principally sold. Our trademarks include “Vera Bradley.” We aggressively police our trademarks and copyrights and pursue infringers and counterfeiters both domestically and internationally. Our trademarks will remain in existence for as long as we continue to use and renew them on their expiration dates. We have no material patents.

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Employees
As of February 1, 2014, we had approximately 2,900 employees. Of the total, 1,850 were engaged in retail selling positions, 350 were engaged in manufacturing functions, 35 were engaged in product design, and 325 were engaged in corporate support and administrative functions. The remaining employees were engaged in other aspects of our business. None of our employees are represented by a union. We believe that our relations with our employees are good, and we have never encountered a significant work stoppage.
Government Regulation
Many of our imported products are subject to existing or potential duties, tariffs, or quotas that may limit the quantity of products that we may import into the United States and other countries or impact the cost of such products. To date, we have not been restricted by quotas in the operation of our business, and customs duties have not comprised a material portion of the total cost of a majority of our products. In addition, we are subject to foreign governmental regulation and trade restrictions, including U.S. retaliation against prohibited foreign practices, with respect to our product sourcing and international sales operations.
We are subject to federal, state, local, and foreign laws and regulations governing environmental matters, including the handling, transportation, and disposal of our products and our non-hazardous and hazardous substances and wastes, as well as emissions and discharges into the environment, including discharges to air, surface water, and groundwater. Failure to comply with such laws and regulations could result in costs for corrective action, penalties, or the imposition of other liabilities. Compliance with environmental laws and regulations has not had a material effect upon our earnings or financial position. If we violate any laws or regulations, however, it could have a material adverse effect on our business or financial performance.
Executive Officers
The following table sets forth certain information concerning each of our executive officers:
 
Name
 
Age
 
Position(s)
Robert Wallstrom
 
48
 
Chief Executive Officer, President and Director
Barbara Bradley Baekgaard
 
75
 
Co-Founder, Chief Creative Officer, and Director
Kevin J. Sierks
 
41
 
Executive Vice President – Chief Financial Officer
Sue Fuller
 
39
 
Executive Vice President – Chief Merchandising Officer
Kimberly F. Colby
 
52
 
Executive Vice President – Design
C. Roddy Mann
 
44
 
Executive Vice President – Strategy & Operations
Anastacia S. Knapper
 
39
 
Senior Vice President – General Counsel and Corporate Secretary
David O. Thompson
 
49
 
Senior Vice President – Multi-Channel Commerce
Robert Wallstrom has served as our Chief Executive Officer, President and Director since November 2013. Prior to joining Vera Bradley, Mr. Wallstrom served as President of Saks Fifth Avenue’s OFF 5TH division from 2007 until November 2013. Previously, he was Group Senior Vice President and General Manager of Saks’ flagship New York store from 2002 to 2007, where he articulated a vision to return the store to its luxury heritage and dramatically improve merchandising, service and the in-store experience. Prior to joining Saks, Mr. Wallstrom held a variety of roles of increasing responsibility at Macy’s Inc. from 1987 to 1995 and began his career in 1983 at J. W. Robinson department stores.
Barbara Bradley Baekgaard co-founded Vera Bradley in 1982 and has served as a director since then. From 1982 through June 2010, she also served as Co-President. From the outset, Ms. Bradley Baekgaard has provided leadership and strategic direction in our brand’s development by providing creative vision to areas such as marketing, product design, assortment planning, and the design and visual merchandising of our stores. In May 2010, she was appointed Chief Creative Officer. She currently serves as a board member of the Indiana University Cancer Center Development and the Vera Bradley Foundation for Breast Cancer.
As Co-Founder of Vera Bradley, Ms. Bradley Baekgaard serves a key leadership role on our board of directors and provides the board with a broad array of institutional knowledge and historical perspective as well as an in-depth knowledge of business strategy, branding, product development, and store design.

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Kevin J. Sierks has served as our Chief Financial Officer since February 2014. Mr. Sierks joined the Company as the Vice President – Controller and Chief Accounting Officer in December 2011, and also served as the Interim Chief Financial Officer starting in January 2013. Prior to joining Vera Bradley, from 2007 to 2011 Mr. Sierks served as Vice President – Controller at Biomet, Inc., a large orthopedic medical device company. Mr. Sierks previously served as Director of Accounting and U.S. Shared Services at Boston Scientific Corporation from 2005 to 2007. From 2002 to 2005, Mr. Sierks served as Director of Financial Reporting and Business Development at Guidant Corporation, which was acquired by Boston Scientific Corporation in 2006. Formerly, Mr. Sierks was with Deloitte & Touche from 1995 to 2002, departing as an Audit Manager. Mr. Sierks is a Certified Public Accountant.
Sue Fuller has served as our Executive Vice President – Chief Merchandising Officer since January 2014. Prior to joining Vera Bradley, Ms. Fuller served as Senior Vice President, General Merchandise Manager of Carhartt, Inc. from July 2010 through November 2013. Between 2005 and July 2010, she served in various roles of increasing responsibility with Kohl’s Department Stores, including Director, Product Development for Juniors Private Label. She gained prior experience with L.L. Bean, Lands’ End and Polo Ralph Lauren.
Kimberly F. Colby has served as our Executive Vice President – Design since 2005. From 2003 through 2005, she served as our Vice President of Design. From 1989 to 2003, Ms. Colby served as our Design Director responsible for Marketing and Product Development. Ms. Colby’s professional history includes retail advertising, public relations, direct mail creative direction and management, special event planning, and interior design.
C. Roddy Mann has served as our Executive Vice President – Strategy and Operations since February 2014. From April 2010 to February 2014, Mr. Mann served as our Executive Vice President – Strategy and Business Development. Mr. Mann is responsible for the development of our strategies and new business opportunities in both our Indirect and Direct channels, as well as manufacturing and distribution. From 2007 to April 2010, Mr. Mann served as our Vice President – Strategy, Sales and Marketing. From 2006 to 2007, he served as Vice President – Strategic Initiatives. Prior to joining Vera Bradley, Mr. Mann was a Vice President at LakeWest Group, a consulting firm based in Cleveland, Ohio, from 1999 to 2006. In 2006, in a consulting capacity, Mr. Mann assisted us with the development of our Direct retail store strategy and execution plans.
Anastacia S. Knapper has served as our Senior Vice President – General Counsel, Corporate Secretary since February 2014. Ms. Knapper joined the Company in 2011 as the Vice President – General Counsel, Corporate Secretary. Prior to joining Vera Bradley, Ms. Knapper served as the Vice President – General Counsel, Corporate Secretary for CTS Corporation from January 2011 to November 2011 and the Vice President – General Counsel, Corporate Secretary for Haynes International, Inc. from August 2006 to December 2010. Formerly, Ms. Knapper was with Ice Miller LLP from August 2000 to August 2006, where she departed as a Senior Associate.
David O. Thompson has served as our Senior Vice President - Multi-Channel Commerce since 2013. From 2008 to 2013, Mr. Thompson served as Vice President – Direct Sales. Prior to joining Vera Bradley, Mr. Thompson was a Senior Consultant, Manager and Vice President at LakeWest Group from 1998 to 2008. Prior to working at LakeWest Group, he served in various retail positions at OfficeMax, based in Cleveland, Ohio, and Bradlees, based in Braintree, Massachusetts. With over 20 years of experience in the retail industry, Mr. Thompson has expertise in retail operations, web operations, business process improvements, and information technology in traditional retail, catalog and e-commerce channels.

Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website, www.verabradley.com, as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission (“SEC”). No information contained on our website is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K.

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Item 1A.    Risk Factors
You should carefully consider all of the information in this report, particularly the following factors, which could materially affect our business, financial condition, and results of operations in future periods. The risks described below are not the only risks that we face. Additional risks not currently known to us, or that we currently deem to be immaterial, also may materially adversely affect our business, financial condition, and results of operations in future periods.
Risks Related to Our Business
If we are unable to successfully implement our growth strategies or manage our growing business, our future operating results could suffer.
The success of our growth strategies, alone or collectively, will depend on various factors, including the appeal of our product designs, retail presentation to consumers, competitive conditions, and economic conditions. If we are unsuccessful in implementing some or all of our strategies or initiatives, our future operating results could be adversely impacted.
Successful implementation of our strategies will require us to manage our growth. To manage our growth effectively, we will need to continue to increase production while maintaining strict quality control. We also will need to continue to improve and invest in our systems and processes to keep pace with planned increases in demand. We could suffer a decline in sales if our products do not continue to meet our quality control standards or if we are unable to respond adequately to increases in customer demand for our products.
We are continuing to invest in our specialty retailers to support them in growing along with Vera Bradley. This channel will continue to evolve over time as we balance the channel dynamics between the specialty retailers, department stores, our Direct stores, and e-commerce. We sell our wholesale merchandise primarily to specialty retailers and department stores substantially located in the United States and extend credit based on an evaluation of each customer’s financial condition, without requiring collateral. However, the financial difficulties of a specialty retail customer could cause us to limit or eliminate our business with that customer.
Changes in general economic conditions, and their impact on consumer confidence and consumer spending, could adversely impact our results of operations.
Our performance is subject to general economic conditions and their impact on levels of consumer confidence and consumer spending. In recent years, consumer confidence and consumer spending deteriorated significantly, influenced by fluctuating interest rates and credit availability, changing fuel and other energy costs, fluctuating commodity prices, higher levels of unemployment and consumer debt levels, reductions in net worth based on market declines, home foreclosures and reductions in home values, general uncertainty regarding the overall future economic environment, and weather and weather-related phenomenas. Consumer purchases of discretionary items, including our merchandise, generally decline during periods when disposable income is adversely affected or there is economic uncertainty, and this could adversely impact our results of operations. In the event of another significant economic downturn, we could experience lower than expected net revenues, which could force us to delay or slow the implementation of our growth strategies and adversely impact our results of operations.
Our inability to predict and respond in a timely manner to changes in consumer demand could adversely affect our net revenues and results of operations.
Our success depends on our ability to gauge the fashion tastes of our customers and to provide merchandise that satisfies consumer demand in a timely manner. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. We cannot assure you that we will be able to continue to develop appealing patterns and styles or meet changing consumer demands in the future. If we misjudge the market for our products, we may be faced with significant excess inventories for some products and missed opportunities for other products. In addition, changes to our product assortment, as well as the availability and breadth of pattern assortment may not gain consumer acceptance. Merchandise misjudgments could adversely impact our net revenues and results of operations.
We may not be able to successfully open and operate new stores as planned, which could adversely impact our results of operations.
Our continued growth will depend on our ability to successfully open and operate new stores. We plan to open approximately 20 to 25 new stores during each of the next five fiscal years. Our ability to successfully open and operate new stores depends on many factors, including our ability to:
identify suitable store locations, the availability of which may be uncertain;

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negotiate acceptable lease terms, including desired tenant improvement allowances;
hire, train, and retain store personnel and management;
assimilate new store personnel and management into our corporate culture;
source and manufacture inventory; and
successfully integrate new stores into our existing operations and information technology systems.
The success of new store openings may also be affected by our ability to initiate marketing efforts in advance of opening our first store in a particular region. Additionally, we will encounter pre-operating costs and we may encounter initial losses while new stores commence operations, which could strain our resources and adversely impact our results of operations.
Our business depends on a strong brand. If we are unable to maintain and enhance our brand, then we may be unable to sell our products, which could adversely impact our results of operations.
We believe that the brand image that we have developed has contributed significantly to the success of our business. We also believe that maintaining and enhancing the Vera Bradley brand is critical to maintaining and expanding our customer base. Maintaining and enhancing our brand may require us to make substantial investments in areas such as product design, store operations, and community relations. These investments might not succeed. If we are unable to maintain or enhance our brand image, our results of operations could be adversely impacted.
Our results of operations could suffer if we lose key management or design associates or are unable to attract and retain the talent required for our business.
Our performance depends largely on the efforts and abilities of our senior management and product development teams. These executives and design associates have substantial experience in our business and have made significant contributions to our growth and success. Although we have entered into employment agreements with Mr. Wallstrom and certain of our other executive officers, including Ms. Fuller and Mr. Sierks, we may not be able to retain the services of such individuals in the future. The unexpected loss of services of these individuals could have adverse impacts on our business and results of operations. As our business grows and we open new stores, we will need to attract and retain additional qualified employees and develop, train, and manage an increasing number of management-level, sales, and other employees. Competition for qualified employees is intense. We cannot assure you that we will be able to attract and retain employees as needed in the future.
Our results of operations are subject to quarterly fluctuations, which could adversely affect the market price of our common stock.
Our quarterly results of operations may fluctuate significantly as a result of a variety of factors, including, among other things:
the timing of new store openings;
net revenues and profits contributed by new stores;
increases or decreases in comparable-store sales;
shifts in the timing of holidays, particularly in the United States and China;
changes in our merchandise mix;
timing of sales to Indirect retailers; and
the timing of new pattern releases and new product introductions.
As a result of these quarterly fluctuations, we believe that comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of our future performance. Any quarterly fluctuations that we report in the future may not match the expectations of market analysts and investors. This could cause the trading price of our common stock to fluctuate significantly.

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A data security or privacy breach could damage our reputation and our relationships with our customers, expose us to litigation risk and adversely affect our business.
We are dependent on information technology systems and networks, including the Internet, for a significant portion of our Direct store sales, including our e-commerce operations and retail business credit card transaction authorization and processing. We are also responsible for storing data relating to our customers and employees and rely on third parties for the operation of our e-commerce websites and for the various social media tools and websites we use as part of our marketing strategy. As part of our normal course of business, we often collect, retain, and transmit certain sensitive and confidential customer information, including credit card information, over public networks. There is a significant concern by consumers and employees over the security of personal information transmitted over the Internet, consumer identity theft and user privacy. Despite the security measures we currently have in place, our facilities and systems and those of our third party service providers may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. Any electronic or physical security breach involving the misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information, including penetration of our network security, whether by us or by a third-party, could disrupt our business, severely damage our reputation and our relationships with our customers, expose us to risks of litigation and liability and adversely affect our business and results of operations. Since we do not control third-party service providers and cannot guarantee that no electronic or physical computer break-ins and security breaches will occur in the future, any perceived or actual unauthorized disclosure of personally identifiable information regarding our customers or website visitors could harm our reputation and credibility, reduce our e-commerce net sales, impair our ability to attract website visitors and reduce our ability to attract and retain customers. We may also incur significant costs in complying with the various applicable state, federal and foreign laws regarding unauthorized disclosure of personal information.
Our business could suffer if our computer systems and websites are disrupted or cease to operate effectively.
We are dependent on our computer systems to record and process transactions and manage and operate our business, including in designing, marketing, manufacturing, importing, tracking and distributing our products, processing payments, and accounting for and reporting results. We also utilize an automated replenishment system to facilitate the processing of basic replenishment orders, the movement of goods through distribution channels, and the collection of information for planning and forecasting. In addition, we have e-commerce and other Internet websites in the U.S. and Japan. Given the complexity of our business and the significant number of transactions that we engage in on an annual basis, it is imperative that we maintain constant operation of our computer hardware and software systems. Despite our preventative efforts, our systems are vulnerable from time to time to damage or interruption from, among other things, security breaches, computer viruses or power outages. Any material disruptions in our information technology systems could have a material adverse effect on our business, financial condition and results of operations.
Our inability to meet market expectations of comparable-store sales could cause our stock price to decline.
We may not be able to sustain the levels of comparable-store sales that we have experienced in the recent past. If our future comparable-store sales fail to meet market expectations, then the price of our common stock could decline. Also, the aggregate results of operations of our stores have fluctuated in the past and will fluctuate in the future. Numerous factors influence comparable-store sales, including fashion trends, competition, national and regional economic conditions, pricing, inflation, the timing of the release of new merchandise and promotional events, changes in our merchandise mix, inventory shrinkage, marketing programs, changes in consumer shopping trends towards on-line shopping, and weather conditions. In addition, many companies with retail operations have been unable to sustain high levels of comparable-store sales during and after periods of substantial expansion. These factors may cause our comparable-store sales results to be lower in the future than in recent periods or lower than expectations, either of which could result in a decline in the price of our common stock.
We are subject to risks associated with leasing substantial amounts of space, including future increases in occupancy costs.
We currently own our distribution and design center facilities. We lease our corporate headquarters, our other offices, and all of our store locations. We typically occupy our stores under operating leases with terms of ten years. We have been able to negotiate favorable rental rates in recent years due in part to the state of the economy and high vacancy rates within some shopping centers, but there is no assurance that we will be able to continue to negotiate such favorable terms. Some of our leases have early cancellation clauses, which permit the lease to be terminated by us or the landlord if certain sales levels are not met in specific periods or if the shopping center does not meet specified occupancy standards. In addition to requiring future minimum lease payments, some of our store leases provide for the payment of common area maintenance charges, real property insurance, and real estate taxes. Many of our lease agreements have escalating rent provisions over the initial term and any extensions. As we expand our store base, our lease expense and our cash outlays for rent under lease agreements will increase. Our substantial operating lease obligations could have significant negative consequences, including:

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requiring that a substantial portion of our available cash be applied to pay our rental obligations, thus reducing cash available for other purposes;
increasing our vulnerability to general adverse economic and industry conditions;
limiting our flexibility in planning for or reacting to changes in our business or industry; and
limiting our ability to obtain additional financing.
Any of these consequences could place us at a disadvantage with respect to our competitors. We depend on cash flow from operating activities to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities to fund these expenses and needs, we may not be able to service our lease expenses, grow our business, respond to competitive challenges, or fund our other liquidity and capital needs, which would harm our business.
Additional sites that we lease may be subject to long-term non-cancelable leases if we are unable to negotiate our current standard lease terms. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease, including paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under the lease. Our inability to enter new leases or renew existing leases on acceptable terms or be released from our obligations under leases for stores that we close would, in any such case, affect us adversely.
We operate in a competitive market. Our competitors might develop products that are more popular with consumers than our products.
The market for handbags, accessories, and travel and leisure items is competitive. Our competitive challenges include:
attracting consumer traffic;
sourcing and manufacturing merchandise efficiently;
competitively pricing our products and achieving customer perception of value;
maintaining favorable brand recognition and effectively marketing our products to consumers in diverse market segments;
developing designs that appeal to a broad range of demographic and age segments;
developing high-quality products; and
establishing and maintaining good working relationships with our Indirect retailers.
In our Indirect business, we compete with numerous manufacturers, importers, and distributors of handbags, accessories, and other products for the limited space available for the display of such products to the consumer. In our Direct business, we compete against other gift and specialty retailers, department stores, catalog retailers, and Internet businesses that engage in the retail sale of similar products. Moreover, the general availability of contract manufacturing allows new entrants easy access to the markets in which we compete, which may increase the number of competitors and adversely affect our competitive position and our business.
We rely on various contract manufacturers to produce a significant majority of our products and generally do not have long-term contracts with our manufacturers. Disruptions in our contract manufacturers’ systems, losses of manufacturing certifications, or other actions by these manufacturers could increase our cost of sales, adversely affect our net revenues, and injure our reputation and customer relationships, thereby harming our business.
Our various contract manufacturers produce a significant majority of our products. We generally do not enter into long-term formal written agreements with our manufacturers and instead transact business with each of them on an order-by-order basis. In the event of a disruption in our contract manufacturers’ systems, we may be unable to locate alternative manufacturers of comparable quality at an acceptable price, or at all. Identifying a suitable manufacturer is an involved process that requires us to become satisfied with the prospective manufacturer’s quality control, responsiveness and service, financial stability, and labor practices. Any delay, interruption, or increased cost in the manufactured products that might occur for any reason, such as the lack of long-term contracts or regulatory requirements and the loss of certifications, power interruptions, fires, hurricanes, war, or threats of terrorism, could affect our ability to meet customer demand for our products, adversely affect our net revenues, increase our cost of sales, and hurt our results of operations. In addition, manufacturing disruption could injure our reputation and customer relationships, thereby harming our business.


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We rely on various suppliers to supply a significant majority of our raw materials. Disruption in the supply of raw materials could increase our cost of goods sold and adversely affect our net revenues.
We generally do not enter into long-term formal written agreements with our suppliers and typically transact business with each of them on an order-by-order basis. As a result, we cannot assure that there will be no significant disruption in the supply of fabrics or raw materials from our current sources or, in the event of a disruption, that we would be able to locate alternative suppliers of materials of comparable quality at an acceptable price, or at all.
We rely on a single distribution facility for all of the products we sell. Disruption to that facility could adversely impact our results of operations, and expansion of that facility could have unpredictable adverse effects.
Our distribution operations are currently concentrated in a single, company-owned distribution center in Fort Wayne, Indiana. Any significant disruption in the operation of the facility due to natural disaster or severe weather, or events such as fire, accidents, power outages, system failures, or other unforeseen causes, could devalue or damage a significant portion of our inventory and could adversely affect our product distribution and sales until such time as we could secure an alternative facility. If we encounter difficulties with our distribution facility or other problems or disasters arise, we cannot ensure that critical systems and operations will be restored in a timely manner or at all, and this would have a material adverse effect on our business. In addition, our growth could require us to further expand our current facility, which could affect us adversely in ways that we cannot predict.
The cost of raw materials could increase our cost of sales and cause our results of operations to suffer.
Fluctuations in the price, availability, and quality of fabrics or other raw materials used to manufacture our products, as well as the price for labor, marketing, and transportation, could have adverse impacts on our cost of sales and our ability to meet our customers’ demands. In particular, fluctuations in the price of cotton, our primary raw material, could have an adverse impact on our cost of sales. In addition, because a key component of our products is petroleum-based, the cost of oil affects the cost of our products. Upward movement in the price of oil in the global oil markets would also likely result in rising fuel and freight prices, which could increase our shipping costs. In the future, we may not be able to pass all or a portion of higher costs on to our customers.
Our business is subject to the risks inherent in global sourcing and manufacturing activities.
We source our fabrics primarily from manufacturers in China and South Korea and outsource the production of a significant majority of our products to companies in Asia. We are subject to the risks inherent in global sourcing and manufacturing, including, but not limited to:
exchange rate fluctuations and trends;
availability of raw materials;
compliance with labor laws and other foreign governmental regulations;
compliance with U.S. import and export laws and regulations;
disruption or delays in shipments;
loss or impairment of key manufacturing sites;
product quality issues;
political unrest; and
natural disasters, acts of war and terrorism, changing macroeconomic trends, and other external factors over which we have no control.
Significant disruption of manufacturing for any of the above reasons could interrupt product supply and, if not remedied in a timely manner, could have an adverse impact on our results of operations. Additionally, we do not have complete oversight over our contract manufacturers. Violation of labor or other laws by those manufacturers, or the divergence of a contract manufacturer’s labor or other practices from those generally accepted as ethical in the United States or in other markets in which we may in the future do business, could also draw negative publicity for us and our brand, diminishing the value of our brand and reducing demand for our products.

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Our ability to source our products at favorable prices, or at all, could be harmed, with adverse effects on our results of operations, if new trade restrictions are imposed or if existing trade restrictions become more burdensome.
A significant majority of our products are currently manufactured for us in Asia. The United States and the countries in which our products are produced have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations or may adversely adjust prevailing quotas, duties, or tariffs. Countries impose, modify, and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions, which make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, which include embargoes, safeguards, and customs restrictions, could increase the cost or reduce the supply of products available to us or could require us to modify supply chain organization or other current business practices, any of which could harm our results of operations.
We may be subject to unionization, work stoppages, slowdowns or increased labor costs.
Currently, none of our employees are represented by a union. Nevertheless, our employees have the right at any time under the National Labor Relations Act to organize or affiliate with a union. If some or all of our workforce were to become unionized, our business would be exposed to work stoppages and slowdowns as a unionized business. If, in addition, the terms of the collective bargaining agreement were significantly more favorable to union workers than our current pay-and-benefits arrangements, our costs would increase and our results of operations would suffer.
We rely on independent transportation providers for substantially all of our product shipments.
We currently rely on independent transportation service providers for substantially all of our product shipments. Our utilization of these delivery services, or those of any other shipping companies that we may elect to use, is subject to risks, including increases in fuel prices, which would increase our shipping costs, employee strikes and inclement weather, which may impact the shipping company’s ability to provide delivery services sufficient to meet our shipping needs.
If for any reason we were to change shipping companies, we could face logistical difficulties that might adversely affect deliveries, and we would incur costs and expend resources in the course of making the change. Moreover, we might not be able to obtain terms as favorable as those received from the service providers that we currently use, which in turn would increase our costs. We also would face shipping and distribution risks and uncertainties associated with any expansion of our distribution facility and related systems.
We face various risks as an e-commerce retailer.
Business risks relating to e-commerce sales include the need to keep pace with rapid technological change, internet security risks, risks of system failure or inadequacy, governmental regulation, and taxation. We have contracted with several different companies to maintain and operate various aspects of our e-commerce business and are reliant on them and their ability to perform their tasks, as well as their operational, privacy, and security procedures and controls as they affect our business. If the independent contractors on which we rely fail to perform their tasks, we could incur liability or suffer damages to our reputation, or both.
Our copyrights, trademarks and other proprietary rights could conflict with the rights of others, and we may be inhibited from selling some of our products. If we are unable to protect our copyrights and other proprietary rights, others may sell imitation brand products.
We believe that our registered copyrights, registered and common law trademarks, and other proprietary rights have significant value and are critical to our ability to create and sustain demand for our products. Although we have not been inhibited from selling our products in connection with intellectual property disputes, we cannot assure you that obstacles will not arise as we expand our product line and extend our brand as well as the geographic scope of our sales and marketing. We also cannot assure you that the actions taken by us to establish and protect our proprietary rights will be adequate to prevent imitation of our products or infringement of our rights by others. The legal regimes of some foreign countries, particularly China, may not protect proprietary rights to the same extent as the laws of the United States, and it may be more difficult for us to successfully challenge the use of our proprietary rights by others in these countries. The loss of copyrights, trademarks, and other proprietary rights could adversely impact our results of operations. Any litigation regarding our proprietary rights could be time consuming and costly.

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Prior to the completion of the Reorganization, we were treated as an “S” Corporation under Subchapter S of the Internal Revenue Code, and claims of taxing authorities related to our prior status as an “S” Corporation could harm us.
Upon the completion of the Reorganization in fiscal 2011, our “S” Corporation status terminated automatically and we became subject to increased federal and state income taxes. If the unaudited, open tax years in which we were an “S” Corporation are audited by the Internal Revenue Service, and we are determined not to have qualified for, or to have violated, our “S” Corporation status, we will be obligated to pay back taxes, interest, and penalties, and we do not have the right to reclaim tax distributions we have made to our shareholders during those periods. These amounts could include taxes on all of our taxable income while we were an “S” Corporation. Any such claims could result in additional costs to us and could have a material adverse effect on our results of operations and financial condition.
Fluctuations in our tax obligations and effective tax rate may result in volatility of our operating results and stock price.
We are subject to income taxes in many U.S. and certain foreign jurisdictions. We record tax expense based on our estimates of future payments, which includes reserves for uncertain tax positions in multiple tax jurisdictions. At any one time, many tax years are subject to audit by various taxing jurisdictions. Further, possible changes in federal, state, local, and non-U.S. tax laws bearing upon our revenues, income, property, or other aspects of our operations or business would, if enacted, affect our results of operations in ways and to a degree that we cannot currently predict.
Additional indebtedness may decrease business flexibility and increase borrowing costs.
As of February 1, 2014, we had no outstanding borrowings under our amended and restated credit agreement, compared to $15.0 million outstanding under our former credit facility as of February 2, 2013. Future indebtedness, if any, could have the effect, among other things, of:
reducing the availability of cash flow from operations to fund working capital, capital expenditures and other general corporate purposes;
increasing our vulnerability to adverse general economic and industry conditions;
limiting our ability to adapt to changes in our business and the industry in which we operate; and
placing us at a competitive disadvantage compared to companies that have less debt.
We plan to use cash provided by operating activities to fund our expanding business and execute our growth strategies and may require additional capital, which may not be available to us.
Our business relies on cash provided by operating activities as our primary source of liquidity. To support our growing business and execute our growth strategies, we will need significant amounts of cash from that source. If our business does not generate cash flow from operating activities sufficient to fund these activities, and if sufficient funds are not otherwise available to us from our existing revolving credit facility, we will need to seek additional capital, through debt or equity financings, to fund our growth. If new sources of financing are required, but are insufficient or unavailable, then we will be required to modify our growth and operating plans based on available funding, if any, which would inhibit our growth and could harm our business.
Our Indirect business could suffer as a result of bankruptcies or operational or financial difficulties of our Indirect retailers.
We do not enter into long-term agreements with any of our Indirect retailers. Instead, we enter into a number of purchase order commitments with our customers for each of our lines every season. A decision by a significant number of Indirect retailers, whether motivated by competitive conditions, operational or financial difficulties, reduced access to capital, or otherwise, to decrease or eliminate the amount of merchandise purchased from us or to change their manner of doing business with us could adversely impact our results of operations. Although we recommend retail sale prices for our products to our Indirect retailers, we do not provide dealer allowances or other economic incentives to support those prices. Possible promotional pricing or discounting by Indirect retailers in response to softening retail demand could have a negative effect on our brand image and prestige, which might be difficult to counteract as the economy improves.
We sell our Indirect merchandise primarily to specialty retail stores across the United States and extend trade credit based on an evaluation of each Indirect retailer’s financial condition, usually without requiring collateral. Perceived financial difficulties of a customer could cause us to curtail or eliminate business with that customer. Pending the resolution of a relationship with a financially troubled Indirect retailer, we might assume credit risk that we would otherwise avoid relating to our receivables from that customer. Inability to collect on accounts receivable from our Indirect retailers would adversely impact our results of operations.

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There are claims made against us from time to time that can result in litigation or regulatory proceedings, which could distract management from our business activities and result in significant liability or damage to our brand image.
As a growing company with expanding operations, we increasingly face the risk of litigation and other claims against us. Litigation and other claims may arise in the ordinary course of our business and include employee claims, custom and duty claims, commercial disputes, intellectual property issues, product-oriented allegations, and slip and fall claims. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant management time. Litigation and other claims against us could result in unexpected expenses and liability, as well as materially adversely affect our operations and our reputation.
Health care reform could adversely affect the Company’s business.
In 2010, Congress enacted comprehensive health care reform legislation which, among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and health care benefits. Due to the breadth and complexity of the health reform legislation, the current lack of implementing regulations and interpretive guidance, and the phased-in nature of the implementation, it is difficult to predict the overall effect of the legislation and related regulations on the business over the coming years. Possible adverse effects of the health reform legislation include increased costs, exposure to expanded liability and requirements for the Company to revise ways in which it conducts business.
Risks Related to the Securities Markets and Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell shares at or above the price at which you purchase them.
The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:
actions by other shopping mall or lifestyle center tenants;
weather conditions, particularly during the holiday shopping period;
the financial projections that we may choose to provide to the public, any changes in these projections or our failure for any reason to meet these projections;
the public’s response to press releases or other public announcements by us or others, including our filings with the SEC and announcements relating to litigation;
the speculation about our business in the press or the investment community;
future sales of our common stock by our significant shareholders, officers and directors;
our entry into new markets;
strategic actions by us or our competitors, such as acquisitions or restructurings; and
changes in accounting principles.
These and other factors may result in a lower market price of our common stock, regardless of our actual operating performance. As a result, our common stock may trade at prices significantly below the offering price.
In addition, the stock markets, including The Nasdaq Global Select Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many retail companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

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Because a limited number of shareholders control a large percentage of the voting power of our common stock, investors may have limited ability to determine the outcome of shareholder votes.
Michael Ray (former CEO and Ms. Bradley Baekgaard's son in-law), Robert Hall, Barbara Bradley Baekgaard, Joan Hall (Mr. Hall’s wife and Ms. Bradley Baekgaard’s daughter), Patricia R. Miller and P. Michael Miller, directly or indirectly, beneficially own and have the ability to exercise voting control over, in the aggregate, 43.6% of our outstanding shares of common stock. As a result, these shareholders are able to exercise significant influence over all matters requiring shareholder approval, including the election of directors, any amendments to our second amended and restated articles of incorporation and significant corporate transactions. This concentrated ownership of outstanding common stock may limit your ability to influence corporate matters, and the interests of these shareholders may not coincide with our interests or your interests. As a result, we may take actions that you do not believe to be in our interests or your interests and that could depress our stock price. In addition, this significant concentration of stock ownership may adversely affect the trading price of our common stock should investors perceive disadvantages in owning shares of common stock in a company that has such concentrated ownership.
Our actual operating results may differ significantly from our guidance.
From time to time, we release guidance regarding our future performance that represents our management’s estimates as of the date of release. This guidance, which consists of forward-looking statements, is prepared by our management and is qualified by, and subject to, the assumptions and the other information contained or referred to in the release. Our guidance is not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our independent registered public accounting firm nor any other independent expert or outside party compiles or examines the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.
Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed, but are not intended to represent that actual results could not fall outside of the suggested ranges. The principal reason that we release this data is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from the guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future that the data are forecast. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it.
Anti-takeover provisions in our organizational documents and Indiana law may discourage or prevent a change in control, even if a sale of the company would be beneficial to our shareholders, which could cause our stock price to decline and prevent attempts by shareholders to replace or remove our current management.
Our second amended and restated articles of incorporation and amended and restated bylaws contain provisions that may delay or prevent a change in control, discourage bids at a premium over the market price of our common stock, harm the market price of our common stock and diminish the voting and other rights of the holders of our common stock. These provisions include:
dividing our board of directors into three classes serving staggered three-year terms;
authorizing our board of directors to issue preferred stock and additional shares of our common stock without shareholder approval;
prohibiting shareholder action by written consent
prohibiting our shareholders from calling a special meeting of shareholders;
prohibiting our shareholders from amending our amended and restated bylaws; and
requiring advance notice for raising business matters or nominating directors at shareholders’ meetings.

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As permitted by our second amended and restated articles of incorporation and amended and restated bylaws, our board of directors also has the ability, should they so determine, to adopt a shareholder rights agreement, sometimes called a “poison pill,” providing for the issuance of a new series of preferred stock to holders of common stock. In the event of a takeover attempt, this preferred stock would give rights to holders of common stock (other than the potential acquirer) to buy additional shares of common stock at a discount, leading to the dilution of the potential acquirer’s stake. The adoption of a poison pill, or the board’s ability to do so, can have negative effects such as those described above.
As an Indiana corporation, we are governed by the Indiana Business Corporation Law (as amended from time to time, the “IBCL”). Under specified circumstances, certain provisions of the IBCL related to control share acquisitions, business combinations and constituent interests may delay, prevent or make more difficult unsolicited acquisitions or changes of control of us. These provisions also may have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that shareholders might deem to be in their best interest.

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Item 1B.    Unresolved Staff Comments
None.
 
Item 2.        Properties
The following table sets forth the location, use, and size of our manufacturing, distribution, and corporate facilities as of February 1, 2014 . The leases on the leased properties expire at various times through 2016, subject to renewal options.
 
Location
 
Primary Use
 
Square Footage
 
Leased /Owned
Fort Wayne, Indiana
 
Corporate headquarters
 
27,287

 
Leased*
Roanoke, Indiana
 
Design center and showroom
 
39,269

 
Owned**
Roanoke, Indiana
 
Warehouse and distribution
 
418,500

 
Owned***
Fort Wayne, Indiana
 
Support staff
 
66,886

 
Leased
Fort Wayne, Indiana
 
Sewing and quilting
 
125,356

 
Leased
New York, New York
 
Product design and showroom
 
2,505

 
Leased
Dongguan City, China
 
China office
 
6,962

 
Leased
Atlanta, Georgia
 
Showroom
 
5,172

 
Leased
Dallas, Texas
 
Showroom
 
1,782

 
Leased
 *
This property is owned by Milburn, LLC, a leasing company in which Barbara Bradley Baekgaard owns a 50% interest and Patricia R. Miller and P. Michael Miller each own a 25% interest. See Item 13, “Certain Relationships and Related Transactions, and Director Independence,” of this report for additional information regarding this property.
**
This property was purchased from Great Dane Realty, LLC, a company owned by Barbara Bradley Baekgaard, in December 2013. See Item 13, “Certain Relationships and Related Transactions, and Director Independence,” of this report for additional information regarding this property.
***    The 200,000 square-foot expansion of the distribution facility was completed in fiscal 2013.
As of February 1, 2014 , we also leased 105 store locations in the United States, including 6 store locations opened or to be opened in fiscal 2015. See below for more information regarding the locations of our open stores as of February 1, 2014 .
We consider these properties to be in good condition generally and believe that our facilities are adequate for our operations and provide sufficient capacity to meet our anticipated requirements. The properties in the above table are used by both the Direct segment and Indirect segment, excluding the two showrooms which are used exclusively by the Indirect segment.

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Store Locations
Our full-price stores are located primarily in high-traffic regional malls, lifestyle centers, and mixed-use shopping centers across the United States. The following table shows the number of full-price and outlet stores we operated in each state as of February 1, 2014 :
 
State
 
Total Number  of
Full-Price Stores
 
Total Number of
Outlet Stores
 
State
 
Total Number  of
Full-Price Stores
 
Total Number of
Outlet Stores
Alabama
 
1

 

 
Michigan
 
3

 

Arizona
 
2

 

 
Minnesota
 
2

 

California
 
4

 

 
Missouri
 
2

 
1

Colorado
 
1

 

 
New Jersey
 
6

 

Connecticut
 
2

 

 
New York
 
7

 
2

Delaware
 
1

 

 
North Carolina
 
2

 

Florida
 
4

 
2

 
Ohio
 
2

 

Georgia
 
3

 

 
Oklahoma
 
2

 

Hawaii
 
1

 

 
Pennsylvania
 
4

 
2

Illinois
 
5

 
1

 
Rhode Island
 
1

 

Indiana
 
2

 
1

 
Tennessee
 
2

 
1

Iowa
 
1

 

 
Texas
 
11

 
2

Kansas
 
1

 

 
Virginia
 
1

 
2

Kentucky
 
1

 

 
Washington
 
1

 

Maryland
 
4

 

 
Wisconsin
 
1

 

Massachusetts
 
4

 
1

 
Totals
 
84

 
15

We lease all of our stores. Lease terms generally range from five to ten years with options to renew for varying terms. The leases generally provide for a fixed minimum rental plus contingent rent, which is determined as a percentage of sales in excess of specified levels.
 
Item 3.        Legal Proceedings
We may be involved from time to time, as a plaintiff or a defendant, in various routine legal proceedings incident to the ordinary course of our business. In the ordinary course, we are involved in the policing of our intellectual property rights. As part of our policing program, from time to time we file lawsuits in the United States and abroad, alleging acts of trademark counterfeiting, trademark infringement, trademark dilution, and ancillary and pendent state and foreign law claims. These actions often result in seizure of counterfeit merchandise and negotiated settlements with defendants. Defendants sometimes raise as affirmative defenses, or as counterclaims, the purported invalidity or unenforceability of our proprietary rights. We believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business or financial condition.
 
Item 4.        Mine Safety Disclosure
Not Applicable

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PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the NASDAQ Global Select Market under the symbol “VRA”. The following table sets forth the high and low sales prices of our common stock, as reported by the NASDAQ Global Select Market, for each quarterly period in our two most recent fiscal years:
 
 
 
High
 
Low
Fiscal 2014 Quarter ended:
 
 
 
 
February 1, 2014
 
$
25.72

 
$
21.85

November 2, 2013
 
23.37

 
17.27

August 3, 2013
 
26.33

 
19.50

May 4, 2013
 
27.15

 
20.90

Fiscal 2013 Quarter ended:
 
 
 
 
February 2, 2013
 
$
30.25

 
$
22.00

October 27, 2012
 
31.00

 
20.22

July 28, 2012
 
26.38

 
18.91

April 28, 2012
 
39.48

 
26.00

As of March 25, 2014, we had approximately 25 registered shareholders of record. The number of shareholders of record is based upon the actual number of shareholders registered at such date and does not include holders of shares in “street names” or persons, partnerships, associations, corporations, or other entities identified in security position listings maintained by depositories.
Dividends
Our common stock began trading on October 21, 2010, following our initial public offering. Since that time, we have not declared any cash dividends, and we do not anticipate declaring any cash dividends in the foreseeable future.
Prior to our initial public offering, as an “S” Corporation, we distributed annually to our shareholders amounts sufficient to cover their tax liabilities, due to the income that flowed through the shareholders’ tax returns. Additional amounts were distributed from time to time to our shareholders at the discretion of the board of directors. During fiscal 2011, we paid distributions of $132.8 million to our shareholders, which included a final distribution (resulting from the termination of our “S” Corporation status) of 100% of our undistributed taxable income from the date of our formation through October 2, 2010.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information regarding equity securities authorized for issuance under our equity compensation plans as of February 1, 2014 :
 
Plan Category
 
Number of
Securities to Be
Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights (a)
 
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights (b) ($)
 
Number of  Securities
Remaining Available for
Future Issuance Under
the Equity
Compensation Plans
(Excluding Securities
Reflected in Column
(a)) (c)
Equity compensation plans approved by security holders (1)
 
400,029

 

 
5,675,972

Equity compensation plans not approved by security holders
 

 

 

Total
 
400,029

 

 
5,675,972

(1)
Approved before our initial public offering.

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Stock Performance Graph
The graph set forth below compares the cumulative shareholder return on our common stock between October 21, 2010 (the date of our initial public offering), and February 1, 2014, to the cumulative return of (i) the S&P 500 Index and (ii) the S&P 500 Apparel, Accessories, and Luxury Goods Index over the same period. This graph assumes an initial investment of $100 on October 21, 2010, in our common stock, the S&P 500 Index, and the S&P 500 Apparel, Accessories, and Luxury Goods Index and assumes the reinvestment of dividends, if any. The graph also assumes that the initial price of our common stock on October 21, 2010, was the initial public offering price of $16.00 per share and that the initial prices of the S&P 500 Index and the S&P 500 Apparel, Accessories, and Luxury Goods Index on October 21, 2010, were the closing prices on the previous trading day.
The comparisons shown in the graph below are based on historical data. We caution that the stock price performance presented in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from The NASDAQ Stock Market website; we do not assume responsibility for any errors or omissions in such information.

Company/Market/Peer Group
 
10/21/2010
 
1/29/2011
 
1/28/2012
 
2/2/2013
 
2/1/2014
Vera Bradley, Inc.
 
$
100.00

 
$
211.56

 
$
214.56

 
$
161.25

 
$
150.12

S&P 500 Index
 
$
100.00

 
$
108.89

 
$
114.69

 
$
134.89

 
$
162.28

S&P 500 Apparel, Accessories, and Luxury Goods Index
 
$
100.00

 
$
110.58

 
$
157.90

 
$
146.75

 
$
170.15


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I tem 6.        Selected Financial Data
The following tables present selected consolidated financial and other data as of and for the years indicated. The selected income statement data for the most recent three fiscal years presented and the selected balance sheet data as of February 1, 2014 and February 2, 2013 are derived from our audited consolidated financial statements included in Item 8 of this report. The selected income statement data for the fiscal years ended January 29, 2011 , and January 29, 2010 , and selected balance sheet data as of January 28, 2012 , January 29, 2011 , and January 29, 2010 , are derived from our audited consolidated financial statements that are not included elsewhere in this report. The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read this selected consolidated financial and other data in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report.
 
 
 
Fiscal Year Ended (1)
($ in thousands, except per share data and as otherwise indicated)
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
 
January 29,
2010
Consolidated Statement of Income Data:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
536,021

 
$
541,148

 
$
460,843

 
$
366,057

 
$
288,940

Cost of sales
 
240,589

 
232,867

 
203,220

 
156,910

 
137,803

Gross profit
 
295,432

 
308,281

 
257,623

 
209,147

 
151,137

Selling, general, and administrative expenses
 
205,957

 
204,412

 
169,427

 
163,053

 
116,168

Other income
 
4,776

 
6,277

 
7,975

 
7,225

 
10,743

Operating income
 
94,251

 
110,146

 
96,171

 
53,319

 
45,712

Interest expense, net
 
382

 
679

 
1,147

 
1,625

 
1,604

Income before income taxes
 
93,869

 
109,467

 
95,024

 
51,694

 
44,108

Income tax expense (2)
 
35,057

 
40,597

 
37,103

 
5,496

 
889

Net income
 
$
58,812

 
$
68,870

 
$
57,921

 
$
46,198

 
$
43,219

Basic weighted-average shares outstanding  (3)
 
40,599

 
40,536

 
40,507

 
36,813

 
35,441

Diluted weighted-average shares outstanding  (3)
 
40,648

 
40,571

 
40,542

 
36,851

 
35,441

Basic net income per share (3)
 
$
1.45

 
$
1.70

 
$
1.43

 
$
1.25

 
$
1.22

Diluted net income per share (3)
 
1.45

 
1.70

 
1.43

 
1.25

 
1.22

Net Revenues by Segment:
 
 
 
 
 
 
 
 
 
 
Direct
 
$
326,217

 
$
292,564

 
$
225,287

 
$
151,118

 
$
96,111

Indirect
 
209,804

 
248,584

 
235,556

 
214,939

 
192,829

Total
 
$
536,021

 
$
541,148

 
$
460,843

 
$
366,057

 
$
288,940

Store Data (4) :
 
 
 
 
 
 
 
 
 
 
Total stores open at end of year
 
99

 
76

 
56

 
39

 
27

Comparable-store sales (decrease) increase (5)
 
(5.7
)%
 
3.4
%
 
10.9
%
 
25.8
%
 
36.4
%
Total gross square footage at end of year
 
207,096

 
156,310

 
113,504

 
74,426

 
50,506

Average net revenues per gross square foot  (6)
 
$
887

 
$
1,083

 
$
1,042

 
$
851

 
$
615

 

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Table of Contents

 
 
As of
($ in thousands)
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
 
January 29,
2010
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
59,215

 
$
9,603

 
$
4,922

 
$
13,953

 
$
6,509

Working capital
 
186,543

 
145,641

 
106,234

 
91,919

 
61,238

Total assets
 
332,927

 
277,319

 
219,513

 
206,039

 
153,752

Long-term debt, including current portion
 

 
15,095

 
25,184

 
67,017

 
30,136

Shareholders’ equity
 
255,147

 
194,255

 
124,007

 
64,322

 
77,893

(1)
The Company utilizes a 52-53 week fiscal year. Fiscal years 2014, 2012, 2011 and 2010 consisted of 52 weeks. Fiscal 2013 consisted of 53 weeks.
(2)
On October 3, 2010, we converted from an “S” Corporation to a “C” Corporation for income-tax purposes and became subject to corporate level federal and state income taxes at prevailing corporate rates.
(3)
Adjusted all historical share and per share information to reflect this stock split.
(4)
Includes full-price and outlet stores. Our first full-price store opened in September 2007 and our first outlet store opened in November 2009.
(5)
Comparable-store sales are the net revenues of our stores that have been open at least 12 full fiscal months as of the end of the period. Increase or decrease is reported as a percentage of the comparable-store sales for the same period in the prior fiscal year. Remodeled stores are included in comparable-store sales unless the store was closed for a portion of the current or comparable prior period or the remodel resulted in a significant change in square footage. Calculation excludes e-commerce sales and sales for the 53 rd week in fiscal 2013.
(6)
Dollars not in thousands. Average net revenues per gross square foot are calculated by dividing total net revenues for our stores that have been open at least 12 full fiscal months as of the end of the period by total gross square footage for those stores.

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Table of Contents

Item 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this report, particularly under the headings “Risk Factors,” “Selected Financial Data” and “Business.” This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity, and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See “Forward-Looking Statements.” These forward-looking statements are subject to numerous risks and uncertainties, including those described under “Risk Factors.” Our actual results could differ materially from those suggested or implied by any forward-looking statements.
Executive summary
Below is a summary of our strategic progress and financial highlights:
Strategic Progress
We successfully opened 23 new full-price and outlet stores during the year in both current and underpenetrated markets.
Over 69 million people visited verabradley.com, an 11% increase over the prior year. We consistently rank among the top in number of annual website visits compared to our most closely related peer companies.
In August, we announced the expansion of our current design and distribution centers, both of which are located just outside of Fort Wayne, Indiana, to create a company campus for the majority of our office personnel increasing efficiency and ease of collaboration.
In September, we launched the Vera Bradley for Disney Collection at the Florida World of Disney Store.
We migrated our website to a responsive design in order to provide a better shopping experience for our customers by providing an optimal viewing experience regardless of the device being used to shop.
We contributed approximately $1 million to the Vera Bradley Foundation supporting breast cancer research.

Financial Highlights
Net revenues decreased 0.9% to $536.0 million in fiscal 2014 compared to $541.1 million in fiscal 2013 .
Direct segment sales increased 11.5% to $326.2 million in fiscal 2014 compared to $292.6 million in fiscal 2013 . Comparable store net sales for fiscal 2014 decreased 5.7%.
Indirect segment sales decreased 15.6% to $209.8 million in fiscal 2014 compared to $248.6 million in fiscal 2013 .
Gross profit was $295.4 million (55.1% of net revenue) in fiscal 2014 compared to $308.3 million (57.0% of net revenue) in fiscal 2013 .
Selling, general and administrative expenses were $206.0 million (38.4% of net revenue) in fiscal 2014 compared to $204.4 million (37.8% of net revenue) in fiscal 2013 .
Operating income was $94.3 million (17.6% of net revenue) in fiscal 2014 compared to $110.1 million (20.4% of net revenue) in fiscal 2013 .
Net income was $58.8 million in fiscal 2014 compared to $68.9 million in fiscal 2013 .
Diluted net income per share decreased 14.7% to $1.45 in fiscal 2014 from $1.70 in fiscal 2013 .
Cash and cash equivalents were $59.2 million at February 1, 2014 .
Cash generated from operations was $87.9 million in fiscal 2014 and was used to fund capital expenditures of $22.9 million and pay down debt by $15.0 million in fiscal 2014 .

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Table of Contents

How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures.
Net Revenues
Net revenues reflect revenues from the sale of our merchandise and from distribution and shipping and handling fees, less returns and discounts. Revenues for the Direct segment reflect sales through our full-price and outlet stores, department store locations in Japan, our websites, verabradley.com and verabradley.co.jp, and our annual outlet sale in Fort Wayne, Indiana. Revenues for the Indirect segment reflect sales to Indirect specialty retailers and department stores.
Comparable-Store Sales
Comparable-store sales are calculated based upon our stores that have been open at least 12 full fiscal months as of the end of the reporting period. Remodeled stores are included in comparable-store sales unless the store was closed for a portion of the current or comparable prior period or the remodel resulted in a significant change in square footage. Some of our competitors and other retailers calculate comparable or “same store” sales differently than we do. As a result, data in this report regarding our comparable-store sales may not be comparable to similar data made available by other companies. Comparable store sales do not include e-commerce sales.
Measuring the change in year-over-year comparable-store sales allows us to evaluate how our store base is performing. Various factors affect our comparable-store sales, including:
Overall economic trends;
Consumer preferences and fashion trends;
Competition;
The timing of our releases of new patterns and collections;
Changes in our product mix;
Pricing;
The level of customer service that we provide in stores;
Our ability to source and distribute products efficiently;
The number of stores we open and close in any period; and
The timing and success of promotional and advertising efforts.
Gross Profit
Gross profit is equal to our net revenues less our cost of sales. Cost of sales includes the direct cost of purchased and manufactured merchandise, distribution center costs, operations overhead, duty, and all inbound freight costs incurred. The components of our reported cost of sales may not be comparable to those of other retail and wholesale companies. Gross profit can be impacted by changes in volume, fluctuations in sales price, operational efficiencies, such as leveraging of fixed costs, promotional activities, such as free shipping, and commodity prices such as cotton, and labor in Asia.
Selling, General, and Administrative Expenses (SG&A)
SG&A expenses include selling; advertising, marketing, and product development; and administrative. Selling expenses include Direct business expenses such as store expenses, employee compensation, and store occupancy and supply costs, as well as Indirect business expenses consisting primarily of employee compensation and other expenses associated with sales to Indirect retailers. Advertising, marketing, and product development expenses include employee compensation, media costs, creative production expenses, marketing agency fees, new product design costs, public relations expenses, and market research expenses. A portion of our advertising expenses may be reimbursed by Indirect retailers, and such amount is classified as other income. Administrative expenses include employee compensation for corporate functions, corporate headquarters occupancy costs, consulting and software expenses, and charitable donations.

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Table of Contents

Other Income
We support many of our Indirect retailers’ marketing efforts by distributing certain catalogs and promotional mailers to current and prospective customers. Our Indirect retailers reimburse us for a portion of the cost to produce these materials. Reimbursement received is recorded as other income. The related cost to design, produce, and distribute the catalogs and mailers is recorded as SG&A expense. Other income also includes proceeds from the sales of tickets to our annual outlet sale and the gain on the sale of certain life insurance policies.
Operating Income
Operating income equals gross profit less SG&A expenses plus other income. Operating income excludes interest income, interest expense, and income taxes.
Results of Operations
The following tables summarize key components of our consolidated results of operations for the last three fiscal years, both in dollars and as a percentage of our net revenues.
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to January 31. As such, fiscal year 2014 ended on February 1, 2014 and reflected a 52-week period; fiscal year 2013 ended on February 2, 2013 and reflected a 53-week period; fiscal year 2012 ended on January 28, 2012 and reflected a 52-week period. The inclusion of the 53 rd  week in fiscal 2013 resulted in incremental net revenues of approximately $4.9 million and approximately $0.02 per diluted share.
 
 
 
Fiscal Year Ended (1)
($ in thousands)
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
Statement of Income Data:
 
 
 
 
 
 
Net revenues
 
$
536,021

 
$
541,148

 
$
460,843

Cost of sales
 
240,589

 
232,867

 
203,220

Gross profit
 
295,432

 
308,281

 
257,623

Selling, general, and administrative expenses
 
205,957

 
204,412

 
169,427

Other income
 
4,776

 
6,277

 
7,975

Operating income
 
94,251

 
110,146

 
96,171

Interest expense, net
 
382

 
679

 
1,147

Income before income taxes
 
93,869

 
109,467

 
95,024

Income tax expense
 
35,057

 
40,597

 
37,103

Net income
 
$
58,812

 
$
68,870

 
$
57,921

Percentage of Net Revenues:
 
 
 
 
 
 
Net revenues
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
 
44.9
%
 
43.0
%
 
44.1
%
Gross profit
 
55.1
%
 
57.0
%
 
55.9
%
Selling, general, and administrative expenses
 
38.4
%
 
37.8
%
 
36.8
%
Other income
 
0.9
%
 
1.2
%
 
1.7
%
Operating income
 
17.6
%
 
20.4
%
 
20.9
%
Interest expense, net
 
0.1
%
 
0.1
%
 
0.3
%
Income before income taxes
 
17.5
%
 
20.2
%
 
20.6
%
Income tax expense
 
6.5
%
 
7.5
%
 
8.1
%
Net income
 
11.0
%
 
12.7
%
 
12.6
%

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Table of Contents

The following tables present net revenues by operating segment, both in dollars and as a percentage of our net revenues, and full-price and outlet store data for the last three fiscal years:
 
 
 
Fiscal Year Ended (1)
($ in thousands, except as otherwise indicated)
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
Net Revenues by Segment:
 
 
 
 
 
 
Direct
 
$
326,217

 
$
292,564

 
$
225,287

Indirect
 
209,804

 
248,584

 
235,556

Total
 
$
536,021

 
$
541,148

 
$
460,843

Percentage of Net Revenues by Segment:
 
 
 
 
 
 
Direct
 
60.9
%
 
54.1
%
 
48.9
%
Indirect
 
39.1
%
 
45.9
%
 
51.1
%
Total
 
100.0
%
 
100.0
%
 
100.0
%
 
 
Fiscal Year Ended
 
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
Store Data (2) :
 
 
 
 
 
 
Total stores open at end of period
 
99

 
76

 
56

Comparable-store sales (decrease) increase (3)
 
(5.7
)%
 
3.4
%
 
10.9
%
Total gross square footage at end of period
 
207,096

 
155,919

 
113,504

Average net revenues per gross square foot (4)
 
$
887

 
$
1,083

 
$
1,042

 
(1)
Fiscal 2013 consisted of 53 weeks. All other fiscal years presented consisted of 52 weeks.
(2)
Includes full-price and outlet stores.
(3)
Comparable-store sales are the net revenues of our stores that have been open at least 12 full fiscal months as of the end of the period. Increase or decrease is reported as a percentage change of the comparable-store sales for the same period in the prior fiscal year. Remodeled stores are included in comparable-store sales unless the store was closed for a portion of the current or comparable prior period or the remodel resulted in a significant change in square footage. Comparable store sales do not include e-commerce sales. Calculation excludes sales for the 53 rd week in fiscal 2013.
(4)
Dollars not in thousands. Average net revenues per gross square foot are calculated by dividing total net revenues for our stores that have been open at least 12 full fiscal months as of the end of the period by total gross square footage for those stores.

Fiscal 2014 Compared to Fiscal 2013
Net Revenues
For fiscal 2014 , net revenues decreased $5.1 million, or 0.9%, to $536.0 million, from $541.1 million for fiscal 2013 , primarily due to an additional 7 days included in fiscal 2013 compared to fiscal 2014, which added net revenues of $4.9 million and decreased volume.
Direct.  For fiscal 2014 , net revenues increased $33.7 million, or 11.5%, to $326.2 million, from $292.6 million for fiscal 2013 . This growth resulted primarily from a $31.0 million increase in revenues at our stores due to 23 additional full-price and outlet stores which is offset by a comparable-store sales decrease of $8.4 million, or 5.7%. E-commerce revenues decreased $0.4 million. The decreases in comparable store and e-commerce sales related to year-over-year declines in traffic, a lower average transaction size, and underperformance of the product offering. The number of our stores grew from 76 at the end of fiscal 2013 to 99 at the end of fiscal 2014 .
Indirect.  For fiscal 2014 , net revenues decreased $38.8 million, or 15.6%, to $209.8 million, from $248.6 million for fiscal 2013 , primarily due to lower orders from the Company’s specialty retailers combined with closing approximately 400 wholesale accounts during the year, through a combination of remediation, natural attrition, and a more selective approach to opening new specialty gift stores.

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Table of Contents

Gross Profit
For fiscal 2014 , gross profit decreased $12.8 million, or 4.2%, to $295.4 million, from $308.3 million for fiscal 2013 . As a percentage of net revenues, gross profit decreased to 55.1% for fiscal 2014, from 57.0% for fiscal 2013 . The decrease in gross margin was due primarily to a $4.8 million i nventory write-down, increased year-over-year promotional activity, as well as the sales mix of lower-margin product.
Selling, General and Administrative Expenses (SG&A)
For fiscal 2014 , SG&A expenses increased $1.5 million, or 0.8%, to $206.0 million, from $204.4 million for fiscal 2013 . As a percentage of net revenues, SG&A expenses were 38.4% and 37.8% for fiscal 2014 and fiscal 2013 , respectively. The increase in SG&A expenses as a percent of net revenues was primarily due to fixed expenses being spread over lower revenues in the Indirect segment, the deleveraging of store operating expenses, and the impact of employee-related expenses from headcount added in the first half of fiscal 2014, partially offset by reductions in variable compensation expense associated with Company performance.
Other Income
For fiscal 2014 , other income decreased $1.5 million, or 23.9%, to $4.8 million, from $6.3 million for fiscal 2013 . The decrease in other income was in line with a decrease in associated advertising costs related to mailers for our specialty retailers.
Operating Income
For fiscal 2014 , operating income decreased $15.9 million, or 14.4%, to $94.3 million, from $110.1 million for fiscal 2013 . As a percentage of net revenues, operating income was 17.6% and 20.4% for fiscal 2014 and fiscal 2013 , respectively. The following table provides additional information about our operating income (in thousands).
 
 
 
Fiscal Year Ended
 
$
Change
 
%
Change
 
 
February 1,
2014
 
February 2,
2013
 
Operating Income:
 
 
 
 
 
 
 
 
Direct
 
$
79,877

 
$
85,059

 
$
(5,182
)
 
(6.1
)%
Indirect
 
84,130

 
101,059

 
(16,929
)
 
(16.8
)%
Less: Unallocated corporate expenses
 
(69,756
)
 
(75,972
)
 
6,216

 
(8.2
)%
Operating income
 
$
94,251

 
$
110,146

 
$
(15,895
)
 
(14.4
)%
Direct . For fiscal 2014 , operating income decreased $5.2 million, or 6.1%. As a percentage of Direct segment net revenues, operating income in the Direct segment was 24.5% and 29.1% for fiscal 2014 and 2013 , respectively. This decrease as a percentage of net revenues in the Direct segment was primarily due to sales of lower-margin product accounting for a higher percentage of total segment revenue, as well as increased promotional activity.
Indirect . For fiscal 2014 , operating income decreased $16.9 million, or 16.8%. As a percentage of Indirect segment net revenues, operating income in the Indirect segment was 40.1% and 40.7% for fiscal 2014 and 2013 , respectively. This decrease as a percentage of net revenues in the Indirect segment resulted primarily from deleveraging of the relatively fixed SG&A expenses against sales declines.
Corporate Unallocated . For fiscal 2014 , unallocated expenses decreased $6.2 million, or 8.2%, primarily as a result of discretionary spending cuts and reductions in variable compensation expense associated with the Company’s financial performance.
Interest Expense, Net. For fiscal 2014 , net interest expense decreased $0.3 million, or 43.7%, to $0.4 million, from $0.7 million in fiscal 2013 . The decrease was due to lower average borrowing levels in fiscal 2014 .
Income Tax Expense. For fiscal 2014 , we recorded income tax expense of $35.1 million at an effective tax rate of 37.3%, compared to 37.1% for fiscal year 2013 .


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Table of Contents

Fiscal 2013 Compared to Fiscal 2012
Net Revenues
For fiscal 2013, net revenues increased $80.3 million, or 17.4%, to $541.1 million, from $460.8 million for fiscal 2012, primarily due to increased volume and an additional 7 days included in fiscal 2013 compared to fiscal 2012, which added net revenues of $4.9 million.
Direct.  For fiscal 2013, net revenues increased $67.3 million, or 29.9%, to $292.6 million, from $225.3 million for fiscal 2012. This growth resulted primarily from a $44.8 million increase in revenues related to additional full-price and outlet stores; a comparable-store sales increase of $3.4 million, or 3.4%, primarily driven by the improved performance of the product assortment and various in-store events to drive traffic; and an $18.9 million increase in e-commerce revenues due to the continued growth in website traffic. The number of our stores grew from 56 at the end of fiscal 2012 to 76 at the end of fiscal 2013.
Indirect.  For fiscal 2013, net revenues increased $13.0 million, or 5.5%, to $248.6 million, from $235.6 million for fiscal 2012, due to growth in the number of department store locations and increased sales volume to our specialty retailers.
Gross Profit
For fiscal 2013, gross profit increased $50.7 million, or 19.7%, to $308.3 million, from $257.6 million for fiscal 2012. As a percentage of net revenues, gross profit increased to 57.0% for fiscal 2013, from 55.9% for fiscal 2012. The increase in gross margin was due primarily to operational efficiencies, lower freight expense, positive channel mix, and lower input costs.
Selling, General and Administrative Expenses (SG&A)
For fiscal 2013, SG&A expenses increased $35.0 million, or 20.6%, to $204.4 million, from $169.4 million for fiscal 2012. As a percentage of net revenues, SG&A expenses were 37.8% and 36.8% for fiscal 2013 and fiscal 2012, respectively. The increase as a percentage of net revenues in SG&A expenses was due primarily to increased headcount expenses and increased store operating expenses.
Other Income
For fiscal 2013, other income decreased $1.7 million, or 21.3%, to $6.3 million, from $8.0 million for fiscal 2012. The decrease in other income was in line with a decrease in associated advertising costs related to mailers for our specialty retailers.
Operating Income
For fiscal 2013, operating income increased $14.0 million, or 14.5%, to $110.1 million, from $96.2 million for fiscal 2012. As a percentage of net revenues, operating income was 20.4% and 20.9% for fiscal 2013 and fiscal 2012, respectively (in thousands).
 
 
 
Fiscal Year Ended
 
$
Change
 
%
Change
 
 
February 2,
2013
 
January 28,
2012
 
Operating Income:
 
 
 
 
 
 
 
 
Direct
 
$
85,059

 
$
68,097

 
$
16,962

 
24.9
%
Indirect
 
101,059

 
93,042

 
8,017

 
8.6
%
Less: Unallocated corporate expenses
 
(75,972
)
 
(64,968
)
 
(11,004
)
 
16.9
%
Operating income
 
$
110,146

 
$
96,171

 
$
13,975

 
14.5
%
Direct . For fiscal 2013, operating income increased $17.0 million, or 24.9%. As a percentage of Direct segment net revenues, operating income in the Direct segment was 29.1% and 30.2% for fiscals 2013 and 2012, respectively. This decrease as a percentage of net revenues in the Direct segment was primarily due to increased store operating expense.
Indirect . For fiscal 2013, operating income increased $8.0 million, or 8.6%. As a percentage of Indirect segment net revenues, operating income in the Indirect segment was 40.7% and 39.5% for fiscals 2013 and 2012, respectively. This increase as a percentage of net revenues in the Indirect segment resulted primarily due to leverage of the relatively fixed SG&A expenses, against sales growth.

36

Table of Contents

Corporate Unallocated . For fiscal 2013, unallocated expenses increased $11.0 million, or 16.9%, primarily as a result of increased corporate personnel and marketing costs.
Interest Expense, Net. For fiscal 2013, net interest expense decreased $0.5 million, or 40.8%, to $0.7 million, from $1.1 million in fiscal 2012. The decrease was due to lower average borrowing levels in fiscal 2013.
Income Tax Expense. For fiscal 2013, we recorded income tax expense of $40.6 million at an effective tax rate of 37.1%, compared to 39.0% for fiscal year 2012. The effective tax rate reduction was primarily related to state income tax credits associated with the completion of our distribution center expansion and discrete items recorded primarily during the third quarter. The impact of these items on the effective tax rate was approximately 1.2% for the fiscal year. During fiscal 2012, there were other permanent items that caused a higher rate which did not recur during fiscal 2013 causing the rate to decrease approximately 0.5% compared to the prior year. The effective tax rate also reflects a loss for the Japanese operations for which a tax benefit was not recognized.

Liquidity and Capital Resources
General
Our primary source of liquidity is cash flow from operations. We also have access to additional liquidity, if needed, through borrowings under our $125.0 million amended and restated credit agreement. Historically, our primary cash needs have been for purchasing inventories, payroll, store rent, capital expenditures associated with opening new stores, buildings, operational equipment, information technology, and debt repayments. The most significant components of our working capital are cash and cash equivalents, purchasing inventories, accounts receivable, accounts payable, and other current liabilities. We do not believe that the expansion of our Direct business will materially increase borrowings under our amended and restated credit agreement, in the near term.
We believe that cash flows from operating activities and the availability of borrowings under our amended and restated credit agreement or other financing arrangements will be sufficient to meet working capital requirements and anticipated capital expenditures for the foreseeable future.
Cash Flow Analysis
A summary of operating, investing, and financing activities is shown in the following table (in thousands):
 
 
 
Fiscal Year Ended
 
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
Net cash provided by operating activities
 
$
87,864

 
$
51,492

 
$
51,516

Net cash used in investing activities
 
(22,862
)
 
(35,893
)
 
(18,836
)
Net cash used in financing activities
 
(15,313
)
 
(10,827
)
 
(41,757
)
Net Cash Provided by Operating Activities
Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation, amortization, deferred taxes, and stock-based compensation, the effect of changes in assets and liabilities, and tenant-improvement allowances received from landlords under our store leases.
Net cash provided by operating activities increased to $87.9 million during fiscal 2014 , as compared to $51.5 million during fiscal 2013. This increase in cash provided by operating activities was primarily driven by a net working capital increase of $44.5 million, as a result of a reduced inventory build of $19.4 million along with an increase in accounts payable of $25.3 million. This increase was partially offset by a decrease in net income of $10.1 million.
Net cash provided by operating activities was $51.5 million in fiscal 2013. Net income increased $10.9 million, non-cash changes in balances increased $12.8 million, and income taxes payable provided an incremental increase of $13.7 million, offset by working capital changes including an incremental inventory build of $24.6 million and an incremental reduction in accounts payable of $12.4 million.
Net cash provided by operating activities was $51.5 million for fiscal 2012 which was primarily driven by our net income during the year.
Net Cash Used in Investing Activities
Investing activities consist primarily of capital expenditures for growth related to new store openings, buildings, operational equipment, and information technology investments.

37


Net cash used in investing activities was $22.9 million in fiscal 2014 , compared to $35.9 million in fiscal 2013 . The $13.0 million decrease in capital expenditures was driven primarily by the expansion of the distribution facility which occurred in fiscal 2013, partially offset by the cost associated with opening of three additional stores during fiscal 2014.
Net cash used in investing activities was $35.9 million in fiscal 2013 , compared to $18.8 million in fiscal 2012 . The $17.1 million increase in capital expenditures was driven primarily by the expansion of the distribution facility.
Capital expenditures for fiscal 2015 are expected to be approximately $40 million, including the corporate campus expansion, build-out of new stores, and continued investment in our systems, including the e-commerce platform.
Net Cash Used in Financing Activities
Net cash used in financing activities was $15.3 million in fiscal 2014 , primarily resulting from $15.0 million net payments under our amended and restated credit agreement.
Net cash used in financing activities was $10.8 million in fiscal 2013 , resulting from $10.0 million net payments under our amended and restated credit agreement.
Net cash used in financing activities was $41.8 million in fiscal 2012 , resulting from the net payments under our amended and restated credit agreement.
Amended and Restated Credit Agreement
On October 4, 2010, Vera Bradley Designs, Inc. entered into an agreement to amend and restate our credit agreement with JPMorgan Chase Bank, as administrative agent, and certain other lenders. The amended and restated credit agreement provides for a revolving credit commitment of $125.0 million and was to mature on October 3, 2015. On June 1, 2012, Vera Bradley Designs, Inc. entered into an amendment to the credit agreement. The amendment extends the maturity date from October 3, 2015 to June 1, 2017. Certain permitted indebtedness covenants were also amended. All borrowings under the amended and restated credit agreement are collateralized by substantially all of the assets of Vera Bradley Design, Inc. The credit agreement is also guaranteed by the Company. The credit agreement requires us to comply with various financial covenants, including a fixed charge coverage ratio of not less than 1.20 to 1.00 and a leverage ratio of not more than 3.50 to 1.00. The agreement also contains various other covenants, including restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions, and asset sales. We were in compliance with these covenants as of February 1, 2014 .
Borrowings under the amended and restated credit agreement bear interest at either LIBOR plus the applicable margin (ranging from 1.05% to 2.05%) or the alternate base rate (as defined in the agreement) plus the applicable margin (ranging from 0.05% to 1.05%). The applicable margin is tied to our leverage ratio. In addition, we are required to pay a quarterly facility fee (as defined in the agreement) ranging from 0.20% to 0.45% of the revolving credit commitment. We had borrowing availability of $125.0 million under the agreement as of February 1, 2014.
Contractual Obligations
We enter into long-term contractual obligations and commitments in the normal course of business, primarily non-cancellable operating leases and debt obligations. As of February 1, 2014 , our contractual cash obligations over the next several periods are as follows:
 
 
 
Payments Due by Period (3)
($ in thousands)
 
Total
 
Less Than
1  Year
 
1 - 3 Years
 
3 - 5 Years
 
More Than
5 Years
Operating leases (1)
 
$
151,967

 
$
19,855

 
$
39,637

 
$
37,331

 
$
55,144

Purchase obligations (2)
 
43,841

 
43,841

 

 

 

Total
 
$
195,808

 
$
63,696

 
$
39,637

 
$
37,331

 
$
55,144

 
(1)
Our store leases generally range from five to ten years with varying renewal options. Our future operating lease obligations would change if we were to extend these leases, or if we were to enter into new operating leases.
(2)
Purchase obligations consist primarily of inventory purchases.
(3)
Due to the uncertainty with respect to the timing of future cash flows associated with our uncertain tax positions at February 1, 2014 , we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $3.1 million of uncertain tax positions have been excluded from the contractual obligations table above.

38


Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing or unconsolidated special purpose entities.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues, and expenses, as well as the disclosures relating to contingent assets and liabilities at the date of the consolidated financial statements. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.
We evaluate the development and selection of our critical accounting policies and estimates and believe that the following policies and estimates involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. Our historical results for the periods presented in the consolidated financial statements, however, have not been materially impacted by such variances. More information on all of our significant accounting policies can be found in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements.
Revenue Recognition
Revenue from the sale of our products is recognized upon customer receipt of the product when collection of the associated receivables is reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed and determinable, and ownership and risk of loss have been transferred to the customer, which, for e-commerce and most Indirect sales, reflects an estimate of shipments that customers have not yet received. The adjustment of these shipments is based on actual delivery dates to the customer. Significant changes in shipping terms or delivery times could materially impact our revenues in a given period.
We reserve for projected merchandise returns based on historical experience and other assumptions that we believe to be reasonable. In the Direct business returns are refunded by issuing the same payment tender of the original purchase and in the Indirect business the customer is issued a credit to its account to apply to outstanding invoices. Merchandise exchanges of the same product at the same price are not considered merchandise returns. Product returns are often resalable through our annual outlet sale or other channels. Additionally, we reserve for other potential product credits and for customer shipments not yet received. The total reserve for returns, customer shipments not yet received, and general credits was $3.7 million and $4.1 million at February 1, 2014 , and February 2, 2013 , respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method. Market is determined based on net realizable value, which includes costs to dispose. Appropriate consideration is given to obsolescence, excess quantities, and other factors, including the popularity of a pattern or product, in evaluating net realizable value. We record valuation adjustments to our inventories, which are reflected in cost of sales, if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. This adjustment calculation requires us to make assumptions and estimates, which are based on factors such as merchandise seasonality, historical trends, and estimated sales and inventory levels, including sell-through of remaining units. In addition, as part of inventory adjustments, we provide for inventory shrinkage based on historical trends from our physical inventory counts. We perform physical inventory counts throughout the year and adjust the shrink provision accordingly.
Inventory adjustments of $8.9 million and $3.5 million were recorded for these matters as of the fiscal years ended February 1, 2014 , and February 2, 2013 , respectively. These adjustments related primarily to raw materials of retired patterns and certain merchandise from the baby gift category, which is being discontinued by the Company, as we have the ability to move retired finished goods through a number of channels, including the annual outlet sale, our website and outlet stores, and through liquidators as needed.

39


Income Taxes
Our effective tax rate is based on our pre-tax income, statutory tax rates, tax laws and regulations, and tax planning opportunities available in the jurisdictions in which we operate. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain based upon one of the following: (1) the tax position is not “more likely than not” to be sustained; (2) the tax position is “more likely than not” to be sustained, but for a lesser amount; or (3) the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. Taxing authorities periodically audit our income tax returns. We believe that our tax filing positions are reasonable and legally supportable. Taxing authorities, however, may take a contrary position. Our results of operations and effective tax rate in a given period could be impacted if, upon final resolution with taxing authorities, we prevail in positions for which we have established reserves, or are required to pay amounts in excess of established reserves.
Valuation of Long-lived Assets
Property, plant, and equipment assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating an asset for recoverability, we estimate the future cash flows expected to result from the use of the asset at the store level, the lowest identifiable level of cash flow, if applicable. If the sum of the estimated undiscounted future cash flows related to the asset is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by an estimated discounted cash flow analysis of the asset. Factors used in the valuation of long-lived assets include, but are not limited to, our plans for future operations, brand initiatives, recent operating results, and projected future cash flows. With respect to our stores, we analyze store economics, location within the shopping center, the size and shape of the space, and desirable co-tenancies in our selection process. Impairment charges are classified in SG&A expenses and were $1.2 million and $0.2 million for the periods ended February 1, 2014 and February 2, 2013, respectively.
The discounted cash flow models used to estimate the applicable fair values involve numerous estimates and assumptions that are highly subjective. Changes to these estimates and assumptions could materially impact the fair value estimates. The estimates and assumptions critical to the overall fair value estimates include: (1) estimated future cash flow generated at the store level; and (2) discount rates used to derive the present value factors used in determining the fair values. These and other estimates and assumptions are impacted by economic conditions and our expectations and may change in the future based on period-specific facts and circumstances. If economic conditions were to deteriorate, future impairment charges may be required.
Transactions with Related Parties
See Item 13, “Certain Relationships and Related Transactions, and Director Independence,” of this report for information regarding transactions with related parties.


40


Item 7A.     Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are subject to interest rate risk in connection with borrowings under our amended and restated credit agreement, which bear interest at variable rates. The amended and restated credit agreement allows for a revolving credit commitment of $125.0 million, bearing interest at a variable rate, based on either LIBOR plus the applicable margin (ranging from 1.05% to 2.05%) or the alternate base rate (as defined in the agreement) plus the applicable margin (ranging from 0.05% to 1.05%). Assuming the amended and restated credit agreement is fully drawn, each quarter point increase or decrease in the interest rate would change our annual interest expense by approximately $0.3 million.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. Although it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial.
Foreign Exchange Rate Risk
We source a majority of our materials from various suppliers in China and South Korea. Substantially all purchases and sales involving foreign persons are denominated in U.S. dollars, and therefore we do not hedge using any derivative instruments. Historically, we have not been impacted materially by changes in exchange rates.


41

Table of Contents

Item 8. Financial Statements and Supplementary Data
Vera Bradley, Inc.
Index to Consolidated Financial Statements
 
Consolidated Statements of Comprehensive Income for the fiscal years ended February 1, 2014, February 2, 2013, and January  28, 2012
Consolidated Statements of Shareholders’ Equity for the fiscal years ended February 1, 2014, February 2, 2013, and January  28, 2012
Consolidated Statements of Cash Flows for the fiscal years ended February 1, 2014, February 2, 2013, and January  28, 2012

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Vera Bradley, Inc.:

We have audited the accompanying consolidated balance sheet of Vera Bradley, Inc. and subsidiaries as of February 1, 2014 and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year ended February 1, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vera Bradley, Inc. and subsidiaries at February 1, 2014, and the consolidated results of their operations and their cash flows for the year ended February 1, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vera Bradley, Inc. and subsidiaries’ internal control over financial reporting as of February 1, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated April 2, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Indianapolis, Indiana
April 2, 2014

43


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Vera Bradley, Inc.:

In our opinion, the consolidated balance sheet as of February 2, 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of two years in the period ended February 2, 2013, present fairly, in all material respects, the financial position of Vera Bradley, Inc. and its subsidiaries at February 2, 2013, and the results of their operations and their cash flows for each of the two years in the period ended February 2, 2013, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP


Indianapolis, Indiana
April 2, 2013


44


Vera Bradley, Inc.
Consolidated Balance Sheets
(in thousands)
 
 
 
February 1,
2014
 
February 2,
2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
59,215

 
$
9,603

Accounts receivable, net
 
27,718

 
34,811

Inventories
 
136,923

 
131,562

Prepaid expenses and other current assets
 
9,952

 
11,016

Deferred income taxes
 
13,094

 
11,348

Total current assets
 
246,902

 
198,340

Property, plant, and equipment, net
 
84,940

 
77,211

Other assets
 
1,085

 
1,768

Total assets
 
$
332,927

 
$
277,319

Liabilities and Shareholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
27,745

 
$
14,853

Accrued employment costs
 
10,586

 
14,162

Other accrued liabilities
 
20,403

 
16,532

Income taxes payable
 
1,625

 
7,094

Current portion of long-term debt
 

 
58

Total current liabilities
 
60,359

 
52,699

Long-term debt
 

 
15,037

Deferred income taxes
 
4,643

 
6,078

Other long-term liabilities
 
12,778

 
9,250

Total liabilities
 
77,780

 
83,064

Commitments and contingencies
 

 

Shareholders’ equity:
 
 
 
 
Preferred stock; 5,000 shares authorized, no shares issued or outstanding
 

 

Common stock; without par value; 200,000 shares authorized, 40,607 and 40,563 shares issued and outstanding, respectively
 

 

Additional paid-in capital
 
78,153

 
75,675

Retained earnings
 
178,002

 
119,190

Accumulated other comprehensive loss
 
(1,008
)
 
(610
)
Total shareholders’ equity
 
255,147

 
194,255

Total liabilities and shareholders’ equity
 
$
332,927

 
$
277,319

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

Vera Bradley, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
 
 
 
Fiscal Year Ended
 
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
Net revenues
 
$
536,021

 
$
541,148

 
$
460,843

Cost of sales
 
240,589

 
232,867

 
203,220

Gross profit
 
295,432

 
308,281

 
257,623

Selling, general, and administrative expenses
 
205,957

 
204,412

 
169,427

Other income
 
4,776

 
6,277

 
7,975

Operating income
 
94,251

 
110,146

 
96,171

Interest expense, net
 
382

 
679

 
1,147

Income before income taxes
 
93,869

 
109,467

 
95,024

Income tax expense
 
35,057

 
40,597

 
37,103

Net income
 
$
58,812

 
$
68,870

 
$
57,921

Basic weighted-average shares outstanding
 
40,599

 
40,536

 
40,507

Diluted weighted-average shares outstanding
 
40,648

 
40,571

 
40,542

Basic net income per share
 
$
1.45

 
$
1.70

 
$
1.43

Diluted net income per share
 
1.45

 
1.70

 
1.43

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

Vera Bradley, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
 
 
 
Fiscal Year Ended
 
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
Net income
 
$
58,812

 
$
68,870

 
$
57,921

Cumulative translation adjustment
 
(398
)
 
(707
)
 
97

Comprehensive income
 
$
58,414

 
$
68,163

 
$
58,018

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

Vera Bradley, Inc.
Consolidated Statements of Shareholders’ Equity
($ in thousands, except share data)
 
 
 
Number of Shares
 
 
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
 
 
Total
Equity
Balance at January 29, 2011
 
40,506,670

 
$
71,923

 
$
(7,601
)
 
$

 
$
64,322

Net income
 

 

 
57,921

 

 
57,921

Recovery of short-swing profit
 

 
76

 

 

 
76

Translation adjustments
 

 

 

 
97

 
97

Restricted shares vested, net of repurchase for taxes
 
50

 
1

 

 

 
1

Stock-based compensation
 

 
1,590

 

 

 
1,590

Balance at January 28, 2012
 
40,506,720

 
$
73,590

 
$
50,320

 
$
97

 
$
124,007

Net income
 

 

 
68,870

 

 
68,870

Translation adjustments
 

 

 

 
(707
)
 
(707
)
Restricted shares vested, net of repurchase for taxes
 
56,336

 
(738
)
 

 

 
(738
)
Stock-based compensation
 

 
2,763

 

 

 
2,763

Tax related benefit of restricted stock units
 

 
60

 

 

 
60

Balance at February 2, 2013
 
40,563,056

 
$
75,675

 
$
119,190

 
$
(610
)
 
$
194,255

Net income
 

 

 
58,812

 

 
58,812

Translation adjustments
 

 

 

 
(398
)
 
(398
)
Stock-based compensation
 

 
2,950

 

 

 
2,950

Restricted shares vested, net of repurchase for taxes
 
43,675