Vera Bradley Designs, Inc
Vera Bradley, Inc. (Form: 10-Q, Received: 09/09/2015 15:45:54)
Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  ___________________________ 
FORM 10-Q
___________________________ 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 1, 2015
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.)
 
 
 
12420 Stonebridge Road,
Roanoke, Indiana
 
46783
(Address of principal executive offices)
 
(Zip Code)
(877) 708-8372
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
 ___________________________ 
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 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 registrant had 37,972,235 shares of its common stock outstanding as of September 9, 2015 .
 



Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
4

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
Item 2.

 
 
 
Item 3.

 
 
 
Item 4.

 
 
 
 
 
 
Item 1A.

 
 
 
Item 2.

 
 
 
Item 6.



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Table of Contents

FORWARD-LOOKING STATEMENTS
This 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 inability to successfully implement our long-term strategic plan;
possible failure of our multi-channel distribution model;
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 inability to successfully open new stores and/or operate current stores as planned;
possible inability to maintain and enhance our brand;
possible loss of key management or design associates or inability to attract and retain the talent required for our business;
possible data security or privacy breaches or disruptions in our computer systems or website; and
possible continued declines in our comparable sales.
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 our Annual Report on Form 10-K for the fiscal year ended January 31, 2015 .
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. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

Vera Bradley, Inc.
Consolidated Balance Sheets
(in thousands)
(unaudited)
 
 
 
August 1,
2015
 
January 31,
2015
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
76,042

 
$
112,292

Accounts receivable, net
 
33,863

 
31,374

Inventories
 
103,921

 
98,403

Income taxes receivable
 
3,199

 
3,208

Prepaid expenses and other current assets
 
10,620

 
9,100

Deferred income taxes
 
13,473

 
13,320

Total current assets
 
241,118

 
267,697

Property, plant, and equipment, net
 
115,013

 
109,003

Other assets
 
1,046

 
584

Total assets
 
$
357,177

 
$
377,284

Liabilities and Shareholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
28,734

 
$
32,906

Accrued employment costs
 
10,264

 
14,595

Other accrued liabilities
 
15,107

 
15,548

Income taxes payable
 
286

 

Total current liabilities
 
54,391

 
63,049

Deferred income taxes
 
6,163

 
5,297

Other long-term liabilities
 
29,057

 
24,467

Total liabilities
 
89,611

 
92,813

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, 40,790 and 40,695 shares issued and 38,595 and 40,074 outstanding, respectively
 

 

Additional paid-in-capital
 
83,023

 
80,992

Retained earnings
 
218,030

 
216,451

Accumulated other comprehensive loss
 
(14
)
 
(15
)
Treasury stock
 
(33,473
)
 
(12,957
)
Total shareholders’ equity
 
267,566

 
284,471

Total liabilities and shareholders’ equity
 
$
357,177

 
$
377,284

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

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Vera Bradley, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Net revenues
 
$
120,724

 
$
118,960

 
$
221,828

 
$
231,157

Cost of sales
 
54,170

 
55,516

 
103,580

 
107,958

Gross profit
 
66,554

 
63,444

 
118,248

 
123,199

Selling, general, and administrative expenses
 
57,351

 
50,663

 
114,963

 
100,708

Other income
 
283

 
465

 
1,230

 
2,042

Operating income
 
9,486

 
13,246

 
4,515

 
24,533

Interest expense, net
 
72

 
24

 
149

 
104

Income from continuing operations before income taxes
 
9,414

 
13,222

 
4,366

 
24,429

Income tax expense
 
3,699

 
5,328

 
2,787

 
9,658

Income from continuing operations
 
5,715

 
7,894

 
1,579

 
14,771

Loss from discontinued operations, net of taxes
 

 
(296
)
 

 
(606
)
Net income
 
$
5,715

 
$
7,598

 
$
1,579

 
$
14,165

Basic weighted-average shares outstanding
 
39,315

 
40,686

 
39,600

 
40,663

Diluted weighted-average shares outstanding
 
39,328

 
40,719

 
39,606

 
40,722

Net income per share - basic
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.15

 
$
0.19

 
$
0.04

 
$
0.36

Discontinued operations
 

 
(0.01
)
 

 
(0.01
)
Net income
 
$
0.15

 
$
0.19

 
$
0.04

 
$
0.35

Net income per share - diluted
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.15

 
$
0.19

 
$
0.04

 
$
0.36

Discontinued operations
 

 
(0.01
)
 

 
(0.01
)
Net income
 
$
0.15

 
$
0.19

 
$
0.04

 
$
0.35

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

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Vera Bradley, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Net income
 
$
5,715

 
$
7,598

 
$
1,579

 
$
14,165

Cumulative translation adjustment
 
(9
)
 
(20
)
 
1

 
(10
)
Comprehensive income
 
$
5,706

 
$
7,578

 
$
1,580

 
$
14,155

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

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Vera Bradley, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
 
Twenty-Six Weeks Ended
 
 
August 1,
2015
 
August 2,
2014
Cash flows from operating activities
 
 
 
 
Net income
 
$
1,579

 
$
14,165

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
 
Depreciation of property, plant, and equipment
 
9,904

 
7,150

Provision for doubtful accounts
 
436

 
(63
)
Loss on disposal of property, plant, and equipment
 
52

 

Stock-based compensation
 
2,515

 
1,962

Deferred income taxes
 
713

 
(2,007
)
Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(2,925
)
 
(895
)
Inventories
 
(5,518
)
 
24,897

Prepaid expenses and other assets
 
(1,982
)
 
704

Accounts payable
 
(5,931
)
 
(11,271
)
Income taxes
 
295

 
(5,477
)
Accrued and other liabilities
 
(136
)
 
3,591

Net cash (used in) provided by operating activities
 
(998
)
 
32,756

Cash flows from investing activities
 
 
 
 
Purchases of property, plant, and equipment
 
(15,359
)
 
(12,231
)
Net cash used in investing activities
 
(15,359
)
 
(12,231
)
Cash flows from financing activities
 
 
 
 
Tax withholdings for equity compensation
 
(484
)
 
(595
)
Repurchase of common stock
 
(19,364
)
 

Other financing activities, net
 
(46
)
 
(47
)
Net cash used in financing activities
 
(19,894
)
 
(642
)
Effect of exchange rate changes on cash and cash equivalents
 
1

 
(7
)
Net (decrease) increase in cash and cash equivalents
 
(36,250
)
 
19,876

Cash and cash equivalents, beginning of period
 
112,292

 
59,215

Cash and cash equivalents, end of period
 
$
76,042

 
$
79,091

Supplemental disclosure of cash flow information
 
 
 
 
Non-cash operating, investing, and financing activities
 
 
 
 
Repurchase of common stock incurred but not yet paid
 
$
1,152

 
$

Property, plant, and equipment expenditures incurred but not yet paid
 
$
607

 
$
3,159

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

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Vera Bradley, Inc.
Notes to the Consolidated Financial Statements
(unaudited)


1.      Description of the Company and Basis of Presentation
The terms “Company” and “Vera Bradley” refer to Vera Bradley, Inc. and its subsidiaries, except where the context requires otherwise or where otherwise indicated.
Vera Bradley is a leading designer of women’s handbags and accessories, luggage and travel items, eyewear, and stationery and gifts. Founded in 1982 by friends Barbara Bradley Baekgaard and Patricia R. Miller, the brand’s iconic designs and versatile styles offer women of all ages a colorful way to accessorize every look.
Vera Bradley offers a unique, multi-channel sales model, as well as a focus on service and a high level of customer engagement. The Company sells its products through two reportable segments: Direct and Indirect. The Direct business consists of sales of Vera Bradley products through the Company’s full-line and factory outlet stores in the United States, verabradley.com, direct-to-consumer eBay sales, and the Company's annual outlet sale in Fort Wayne, Indiana. As of August 1, 2015 , the Company operated 107 full-line stores and 37 factory outlet stores. The Indirect business consists of sales of Vera Bradley products to approximately 2,700 specialty retail locations, substantially all of which are located in the United States, as well as department stores, national accounts, third-party e-commerce sites, the Company's wholesale business in Japan, and third-party inventory liquidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015 , filed with the SEC.
The interim financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly the results for the interim periods presented. All such adjustments are of a normal, recurring nature. The results of operations for the thirteen and twenty-six weeks ended August 1, 2015 , are not necessarily indicative of the results to be expected for the full fiscal year.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company has eliminated intercompany balances and transactions in consolidation.
Fiscal Periods
The Company’s fiscal year ends on the Saturday closest to January 31. References to the fiscal quarters ended August 1, 2015 , and August 2, 2014 , refer to the thirteen-week periods ended on those dates.
Operating Leases and Tenant-Improvement Allowances
The Company has leases that contain rent holidays and predetermined, fixed escalations of minimum rentals. For each of these leases, the Company recognizes the related rent expense on a straight-line basis commencing on the date of initial possession of the leased property. The Company records the difference between the recognized rent expense and the amount payable under the lease as a deferred rent liability. As of August 1, 2015 and January 31, 2015 , deferred rent liability was $10.4 million and $8.9 million , respectively, and is included within other long-term liabilities on the Consolidated Balance Sheets.

The Company receives tenant-improvement allowances from some of the landlords of its leased properties. These allowances generally are in the form of cash received by the Company from its landlords as part of the negotiated lease terms. The Company records each tenant-improvement allowance as a deferred credit and amortizes the allowance on a straight-line basis as a reduction to rent expense over the term of the lease, commencing on the possession date. As of August 1, 2015 and January 31, 2015 , the deferred lease credit liability was $16.7 million and $13.8 million , respectively. Of these amounts, $2.2 million and $1.8 million is included within other accrued liabilities as of August 1, 2015 and January 31, 2015 , respectively; and $14.5 million and $12.0 million is included within other long-term liabilities as of August 1, 2015 and January 31, 2015 , respectively.

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Vera Bradley, Inc.
Notes to the Consolidated Financial Statements
(unaudited)

Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . This guidance states that the disposal of a component of an entity is to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The pronouncement also requires additional disclosures regarding individually significant disposals of components that do not meet the criteria to be recognized as a discontinued operation as well as additional and expanded disclosures. The guidance is effective for all disposals (or classifications as held for sale) of components of an entity and all businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015; it is applied prospectively. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The adoption of this standard did not have a material impact on the Company's Consolidated Financial Statements upon adoption.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers . This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard allows for either a full retrospective or a modified retrospective transition method. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 for all entities by one year to annual periods beginning after December 15, 2017, including interim periods within that reporting period, which for the Company is fiscal 2019. Earlier application is permitted as of the original effective date, annual reporting periods beginning after December 2016, including interim periods within that reporting period. The Company is currently evaluating the impact of this standard, including the transition method, on its consolidated results of operations, financial position and cash flows.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. The guidance is effective for annual or interim reporting periods beginning on or after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The standard allows for either a full retrospective or modified retrospective transition method. The Company does not expect this standard to have an impact on the Company’s Consolidated Financial Statements upon adoption.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs , which modifies the presentation of debt issuance costs in financial statements. Under this new guidance, the Company will be required to present these costs in our condensed consolidated balance sheets as a direct deduction from the related debt liability. The requirements of the new standard will become effective for fiscal years, and interim periods within those fiscal years (including retrospective application), beginning after December 15, 2015; early adoption is permitted. The Company is currently evaluating this guidance and does not expect the application of this standard to have a material impact on the Company’s Consolidated Financial Statements upon adoption.
In July 2015, the FASB issued ASU 2015-11, Inventory , which requires entities to measure inventory at the lower of cost and net realizable value. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. The Company is currently evaluating this guidance and does not expect the application of this standard to have a material impact on the Company’s Consolidated Financial Statements upon adoption.



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Vera Bradley, Inc.
Notes to the Consolidated Financial Statements
(unaudited)

2.    Earnings Per Share
Basic earnings per share is computed based on the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed based on the weighted-average number of common shares outstanding, plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares represent outstanding restricted stock units. The components of basic and diluted earnings per share were as follows (in thousands, except per share data):
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Numerator:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
5,715

 
$
7,894

 
$
1,579

 
$
14,771

Loss from discontinued operations, net of taxes
 

 
(296
)
 

 
(606
)
Net income
 
$
5,715

 
$
7,598

 
$
1,579

 
$
14,165

Denominator:
 
 
 
 
 
 
Weighted-average number of common shares (basic)
 
39,315

 
40,686

 
39,600

 
40,663

Dilutive effect of stock-based awards
 
13

 
33

 
6

 
59

Weighted-average number of common shares (diluted)
 
39,328

 
40,719

 
39,606

 
40,722

Earnings per share - basic:
 
 
 
 
 
 
Continuing operations
 
$
0.15

 
$
0.19

 
$
0.04

 
$
0.36

Discontinued operations
 

 
(0.01
)
 

 
(0.01
)
Net income
 
$
0.15

 
$
0.19

 
$
0.04

 
$
0.35

Earnings per share - diluted:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.15

 
$
0.19

 
$
0.04

 
$
0.36

Discontinued operations
 

 
(0.01
)
 

 
(0.01
)
Net income
 
$
0.15

 
$
0.19

 
$
0.04

 
$
0.35

As of August 1, 2015 and August 2, 2014 , there were an immaterial number of additional shares issuable upon the vesting of restricted stock units that were excluded from the diluted share calculations because they were anti-dilutive.
 
3.    Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
Level 1 – Quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly;
Level 3 – Unobservable inputs based on the Company’s own assumptions.
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.
The carrying amounts reflected on the Consolidated Balance Sheets for cash and cash equivalents, receivables, other current assets, and payables as of August 1, 2015 , and January 31, 2015 , approximated their fair values.



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Vera Bradley, Inc.
Notes to the Consolidated Financial Statements
(unaudited)

4.    Inventories
The components of inventories were as follows (in thousands):
 
 
August 1,
2015
 
January 31,
2015
Raw materials (1)
 
$
1,203

 
$
5,542

Work in process
 

 
470

Finished goods
 
102,718

 
92,391

Total inventories
 
$
103,921

 
$
98,403


(1)
The decrease in raw materials was primarily a result of the Company's finished goods suppliers purchasing and taking ownership of fabric.

5.    Debt
As of August 1, 2015 and January 31, 2015 , the Company had borrowing availability of $125.0 million under its second amended and restated credit agreement.
 
6.    Income Taxes
The provision for income taxes for interim periods is based on an estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. Management judgment is required in projecting ordinary income to estimate the Company’s annual effective tax rate.
The effective tax rate for the thirteen weeks ended August 1, 2015 , was 39.3% , compared to 40.3% for the thirteen weeks ended August 2, 2014 . The year-over year decrease is primarily due to the relative impact of discrete items occurring in the prior year but not the current year.
The effective tax rate for the twenty-six weeks ended August 1, 2015 , was 63.8% , compared to 39.5% for the twenty-six weeks ended August 2, 2014 . The year-over year increase is primarily due to the impact of discrete items, including an increase in income tax reserves for uncertain federal and state tax positions related to research and development tax credits from prior years.

7.    Stock-Based Compensation
The Company recognizes share-based compensation expense, for its awards of restricted stock and restricted stock units, in an amount equal to the fair market value of the underlying stock on the grant date of the respective award.
The Company reserved 6,076,001 shares of common stock for issuance or transfer under the 2010 Equity and Incentive Plan, which allows for grants of restricted stock units, as well as other equity awards.
Awards of Restricted Stock Units
During the thirteen weeks ended August 1, 2015 , the Company granted 36,001 time-based and performance-based restricted stock units with an aggregate fair value of $0.5 million to certain employees under the 2010 Equity and Incentive Plan compared to a total of 60,511 time-based and performance-based restricted stock units with an aggregate fair value of $1.4 million granted in the same period of the prior year.
During the twenty-six weeks ended August 1, 2015 , the Company granted 598,361 time-based and performance-based restricted stock units with an aggregate fair value of $9.5 million to certain employees and non-employee directors under the 2010 Equity and Incentive Plan compared to a total of 278,491 time-based and performance-based restricted stock units with an aggregate fair value of $7.3 million granted in the same period of the prior year. The Company determined the fair value of the awards based on the closing price of the Company’s common stock on the grant date.
The majority of time-based restricted stock units vest and settle in shares of the Company’s common stock, on a one -for-one basis, in equal installments on each of the first three anniversaries of the grant date. Beginning in fiscal 2014, all restricted stock units issued to non-employee directors vest after a one -year period from the grant date. The

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Vera Bradley, Inc.
Notes to the Consolidated Financial Statements
(unaudited)

Company is recognizing the expense relating to these units, net of estimated forfeitures, on a straight-line basis over the vesting period.
Performance-based restricted stock units vest upon the completion of a three -year period of time (cliff vesting), subject to the employee’s continuing employment throughout the three -year performance period and the Company’s achievement of annual net income or earnings per share targets during the three-year performance period. The Company is recognizing the expense relating to these units, net of estimated forfeitures, based on the probable outcome of achievement of the financial targets, on a straight-line basis over three years .
The following table sets forth a summary of restricted stock unit activity for the twenty-six weeks ended August 1, 2015 (units in thousands):
 
 
 
Time-based
Restricted Stock Units
 
Performance-based
Restricted Stock Units
 
 
Number of
Units
 
Weighted-
Average
Grant
Date Fair
Value
(per unit)
 
Number of
Units
 
Weighted-
Average
Grant
Date Fair
Value
(per unit)
Nonvested units outstanding at January 31, 2015
 
248

 
$
26.34

 
217

 
$
26.26

Granted
 
432

 
15.92

 
167

 
15.84

Vested
 
(118
)
 
15.75

 
(8
)
 
16.07

Forfeited
 
(64
)
 
19.07

 
(60
)
 
24.88

Nonvested units outstanding at August 1, 2015
 
498

 
$
20.75

 
316

 
$
21.26

As of August 1, 2015 , there was $8.9 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.1 years.
 
8.    Commitments and Contingencies
The Company is subject to various claims and contingencies arising in the normal course of business, including those relating to product liability, legal, employee benefit, environmental, and other matters. Management believes that it is not reasonably possible that any of these claims will have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
 
9.    Common Stock
On September 9, 2014, the Company’s board of directors approved a share repurchase program (the "2014 Share Repurchase Program") authorizing up to $40.0 million of repurchases of shares of the Company's common stock. The 2014 Share Repurchase Program expires in October 2016.
The Company purchased 1,574,380 shares at an average price of $13.03 per share, excluding commissions, for an aggregate amount of $20.5 million during the twenty-six weeks ended August 1, 2015 . As of August 1, 2015 , there was $6.5 million remaining available to repurchase shares of the Company's common stock under the 2014 Share Repurchase Program. Subsequent to quarter end, the Company purchased 623,633 shares at an average price of $10.47 per share, excluding commissions, which completed the 2014 Share Repurchase Program.
As of August 1, 2015 , the Company held as treasury shares 2,195,365 shares of its common stock at an average price of $15.25 per share, excluding commissions, for an aggregate carrying amount of $33.5 million . The Company’s treasury shares may be issued under the 2010 Equity and Incentive Plan or for other corporate purposes.

12

Table of Contents


Vera Bradley, Inc.
Notes to the Consolidated Financial Statements
(unaudited)

10.    Discontinued Operations
On June 4, 2014, the Company entered into a five -year agreement with Mitsubishi Corporation Fashion Company and Look Inc. to import and distribute Vera Bradley products in Japan. As a result of moving to this wholesale business model, the Company exited its direct business in Japan during the third quarter of fiscal 2015 and the results of operations are reported as discontinued operations. Japan results were previously reported in the Direct segment, which has been restated to exclude the results of the discontinued operations for the periods presented. Following are the Japan results of operations (in thousands):    
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Net revenues
 
$

 
$
1,144

 
$

 
$
2,408

Cost of sales
 

 
529

 

 
1,023

Gross profit
 

 
615

 

 
1,385

Selling, general, and administrative expenses
 

 
1,100

 

 
2,367

Operating loss
 

 
(485
)
 

 
(982
)
Loss on disposal from discontinued operations
 

 

 

 

Loss before income taxes
 

 
(485
)
 

 
(982
)
Income tax benefit
 

 
(189
)
 

 
(376
)
Loss from discontinued operations
 
$

 
$
(296
)
 
$

 
$
(606
)

11.    Restructuring and Other Charges
In the first quarter of fiscal 2016, the Company closed its manufacturing facility located in New Haven, Indiana.
The Company incurred restructuring and other charges during the first quarter of fiscal 2016 of approximately $3.4 million ( $2.1 million after the associated tax benefit), related to the facility closing. These charges include severance and benefit costs of approximately $1.7 million , lease termination costs of approximately $0.7 million , inventory-related charges of approximately $0.6 million , and other associated net costs, which include accelerated depreciation related to fixed assets, of approximately $0.4 million . These charges are reflected in cost of sales in the Company's Consolidated Financial Statements. Management expects that the facility closure will reduce operating costs by approximately $12.0 million annually beginning in the fourth quarter of fiscal 2016. All production from the facility will be absorbed by the Company’s third party manufacturing suppliers.
A summary of charges and related liabilities, associated with the facility closure, are as follows (in thousands):
 
Inventory-Related Charges
 
Lease Termination Costs
 
Severance and Benefits Costs
 
Other
Fiscal 2015 charges
$
2,989

 
$

 
$

 
$
7

Cash payments

 

 

 

Non-cash charges
(2,989
)
 

 

 
(7
)
Liability as of January 31, 2015
$

 
$

 
$

 
$

Fiscal 2016 charges
$
628

 
$
650

 
$
1,673

 
$
484

Cash payments

 
(650
)
 
(1,675
)
 
(198
)
Non-cash charges
(628
)
 

 
2

 
(256
)
Liability as of August 1, 2015
$

 
$

 
$

 
$
30


13

Table of Contents


Vera Bradley, Inc.
Notes to the Consolidated Financial Statements
(unaudited)

Other charges affecting comparability of the financial results for the twenty-six weeks ended August 1, 2015 and August 2, 2014 totaled approximately $3.1 million ( $2.1 million after the associated tax benefit) consisting of charges in the first quarter of fiscal 2016 of $1.3 million in employee severance (reflected in selling, general, and administrative expenses), $1.2 million due to a retail store early lease termination agreement (reflected in selling, general, and administrative expenses), and $0.6 million related to an increase in income tax reserves for uncertain federal and state tax positions related to research and development tax credits (reflected in income tax expense).
12.    Segment Reporting
The Company has two operating segments, which are also its reportable segments: Direct and Indirect. These operating segments are components of the Company for which separate financial information is available and for which operating results are evaluated on a regular basis by the chief operating decision maker in deciding how to allocate resources and in assessing the performance of the segments.
The Direct segment includes the Company’s full-line and factory outlet stores, the Company’s website, verabradley.com, direct-to-consumer eBay sales, and the annual outlet sale. Revenues generated through this segment are driven through the sale of Company-branded products from Vera Bradley to end consumers. The Company exited its direct Japan operations in the third quarter of fiscal 2015. Direct segment results for the current and prior periods presented are reported on a continuing operations basis unless otherwise stated. Discontinued operations are detailed in Note 10 Discontinued Operations of this Quarterly Report on Form 10-Q .
The Indirect segment represents revenues generated through the distribution of Company-branded products to specialty retailers representing approximately 2,700 locations, substantially all of which are located in the United States, as well as key accounts, which include department stores, national accounts, third-party e-commerce sites, the Company's wholesale business in Japan, and third-party inventory liquidation.
Corporate costs represent the Company’s administrative expenses, which include, but are not limited to: human resources, legal, finance, information technology, design, merchandising, and various other corporate-level-activity-related expenses. All intercompany-related activities are eliminated in consolidation and are excluded from the segment reporting.
Company management evaluates segment operating results based on several indicators. The primary or key performance indicators for each segment are net revenues and operating income. Net revenues and operating income information for the Company’s reportable segments during the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014 , respectively, consisted of the following (in thousands):
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Segment net revenues:
 
 
 
 
 
 
 
 
Direct
 
$
83,775

 
$
77,777

 
$
154,208

 
$
149,961

Indirect
 
36,949

 
41,183

 
67,620

 
81,196

Total
 
$
120,724

 
$
118,960

 
$
221,828

 
$
231,157

Segment operating income:
 
 
 
 
 
 
 
 
Direct
 
$
16,557

 
$
17,122

 
$
24,584

 
$
30,880

Indirect
 
14,788

 
15,947

 
24,692

 
31,386

Total
 
$
31,345

 
$
33,069

 
$
49,276

 
$
62,266

Reconciliation:
 
 
 
 
 
 
 
 
Segment operating income
 
$
31,345

 
$
33,069

 
$
49,276

 
$
62,266

Less:
 
 
 
 
 
 
 
 
Unallocated corporate expenses
 
(21,859
)
 
(19,823
)
 
(44,761
)
 
(37,733
)
Operating income
 
$
9,486

 
$
13,246

 
$
4,515

 
$
24,533



14

Table of Contents

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of the Company as of and for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014 . The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 31, 2015 , and our unaudited consolidated financial statements and the related notes included in Item 1 of this Quarterly Report.
Executive Summary
Below is a summary of our strategic progress and financial results for the second quarter of fiscal 2016 (all comparisons are to the second quarter of fiscal 2015 ):
Strategic Progress
We continued progressing product innovation by launching two new fabrications, our Wildwood leather and Preppy Poly collections.
We continued to increase the mix of higher-margin, made-for-outlet product in our factory outlet stores.
We continued to build a more flexible, efficient, and cost-effective supply chain through vendor and country diversification.
We opened six new full-line stores and three new factory outlet stores during the second quarter.
We continued to make significant investments in marketing to modernize our brand and attract new customers.
We enhanced our e-commerce search capabilities.
Financial Summary
Net revenues increased 1.5% to $120.7 million .
Direct segment sales increased 7.7% to $83.8 million . Comparable sales (including e-commerce) decreased 15.0% .
Indirect segment sales decreased 10.3% to $36.9 million .
Gross profit was $66.6 million ( 55.1% of net revenue).
Operating income was $9.5 million .
Income from continuing operations was $9.4 million , or $0.15 per diluted share.
Cash and cash equivalents were $76.0 million at August 1, 2015 .
Capital expenditures for the twenty-six weeks totaled $ 15.4 million .
Repurchases of common stock for the thirteen weeks totaled $13.3 million .

Discontinued Operations
In June 2014, we entered into a five-year agreement with Mitsubishi Corporation Fashion Company and Look Inc. to
import and distribute Vera Bradley products in Japan. As a result of moving to this wholesale business model, we exited our direct business in Japan during the third quarter of fiscal 2015 and are accounting for it as a discontinued operation. Consolidated income statement and Direct segment results for the current and prior periods presented are reported on a continuing operations basis unless otherwise stated.
Restructuring and Other Charges Affecting Comparability of the Year-to-Date Periods ended August 1, 2015 , and August 2, 2014
In the first quarter of fiscal 2016, the Company closed its manufacturing facility located in New Haven, Indiana.
The Company incurred restructuring and other charges during the first quarter of fiscal 2016 of approximately $3.4 million ( $2.1 million after the associated tax benefit), related to the facility closing. These charges include severance and benefit costs of approximately $1.7 million , lease termination costs of approximately $0.7 million , inventory-related charges of approximately $0.6 million , and other associated net costs, which include accelerated depreciation related to fixed assets, of approximately $0.4 million . These charges are reflected in cost of sales in the Company's Consolidated Financial Statements.

15

Table of Contents

Management expects that the facility closure will reduce operating costs by approximately $12.0 million annually beginning in the fourth quarter of fiscal 2016. All production from the facility will be absorbed by the Company’s third party manufacturing suppliers.
Other charges affecting comparability of the financial results for the twenty-six weeks ended August 1, 2015 and August 2, 2014 totaled approximately $3.1 million ( $2.1 million after the associated tax benefit) consisting of charges in the first quarter of fiscal 2016 of $1.3 million in employee severance (reflected in selling, general, and administrative expenses), $1.2 million due to a retail store early lease termination agreement (reflected in selling, general, and administrative expenses), and $0.6 million related to an increase in income tax reserves for uncertain federal and state tax positions related to research and development tax credits (reflected in income tax expense).
See Note 11 to the Notes to the Consolidated Financial Statements, herein, for additional information.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures.
Net Revenues
Net revenues reflect sales of our merchandise and revenue from distribution and shipping and handling fees, less returns and discounts. Revenues for the Direct segment reflect sales through our full-line and factory outlet stores, verabradley.com, direct-to-consumer eBay sales, and our annual outlet sale in Fort Wayne, Indiana. Revenues for the Indirect segment reflect sales to specialty retail partners, department stores, national accounts, third-party e-commerce sites, our wholesale business in Japan, and third-party inventory liquidation.
Comparable Sales
Comparable sales (including e-commerce) are calculated based upon our stores that have been open for at least 12 full fiscal months and net revenues from our e-commerce operations. Comparable store sales are calculated based solely upon our stores that have been open for at least 12 full fiscal months. Remodeled stores are included in comparable sales and 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 sales and comparable store sales may not be comparable to similar data made available by other companies. Non-comparable sales include sales from stores not included in comparable sales or comparable store sales.
Measuring the change in year-over-year comparable sales allows us to evaluate how our store base and e-commerce operations are performing. Various factors affect our comparable sales, including:
Overall economic trends;
Consumer preferences and fashion trends;
Competition;
The timing of our releases of new patterns and collections;
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; commodity prices, such as for cotton; and labor costs.

16

Table of Contents

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.
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.
Operating Income
Operating income is equal to gross profit less SG&A expenses plus other income. Operating income excludes interest income, interest expense, and income taxes.
Income from Continuing Operations
Income from continuing operations is equal to operating income less net interest expense and income taxes.
Loss from Discontinued Operations, Net of Taxes
Loss from discontinued operations, net of taxes, is equal to the loss from the results of operations related to the direct Japan business, which was exited in the third quarter of fiscal 2015, adjusted for the associated tax benefit.
Net Income
Net income is equal to the sum of income from continuing operations and loss from discontinued operations, net of taxes.

17

Table of Contents

Results of Operations
The following tables summarize key components of our consolidated results of operations for the periods indicated, both in dollars and as a percentage of our net revenues ($ in thousands):
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Statement of Income Data:
 
 
 
 
 
 
 
 
Net revenues
 
$
120,724

 
$
118,960

 
$
221,828

 
$
231,157

Cost of sales
 
54,170

 
55,516

 
103,580

 
107,958

Gross profit
 
66,554

 
63,444

 
118,248

 
123,199

Selling, general, and administrative expenses
 
57,351

 
50,663

 
114,963

 
100,708

Other income
 
283

 
465

 
1,230

 
2,042

Operating income
 
9,486

 
13,246

 
4,515

 
24,533

Interest expense, net
 
72

 
24

 
149

 
104

Income from continuing operations before income taxes
 
9,414

 
13,222

 
4,366

 
24,429

Income tax expense
 
3,699

 
5,328

 
2,787

 
9,658

Income from continuing operations
 
5,715

 
7,894

 
1,579

 
14,771

Loss from discontinued operations, net of taxes
 

 
(296
)
 

 
(606
)
Net income
 
$
5,715

 
$
7,598

 
$
1,579

 
$
14,165

Percentage of Net Revenues:
 
 
 
 
 
 
 
 
Net revenues
 
100.0
%
 
100.0
 %
 
100.0
%
 
100.0
 %
Cost of sales
 
44.9
%
 
46.7
 %
 
46.7
%
 
46.7
 %
Gross profit
 
55.1
%
 
53.3
 %
 
53.3
%
 
53.3
 %
Selling, general, and administrative expenses
 
47.5
%
 
42.6
 %
 
51.8
%
 
43.6
 %
Other income
 
0.2
%
 
0.4
 %
 
0.6
%
 
0.9
 %
Operating income
 
7.9
%
 
11.1
 %
 
2.0
%
 
10.6
 %
Interest expense, net
 
0.1
%
 
 %
 
0.1
%
 
 %
Income from continuing operations before income taxes
 
7.8
%
 
11.1
 %
 
2.0
%
 
10.6
 %
Income tax expense
 
3.1
%
 
4.5
 %
 
1.3
%
 
4.2
 %
Income from continuing operations
 
4.7
%
 
6.6
 %
 
0.7
%
 
6.4
 %
Loss from discontinued operations, net of taxes
 
%
 
(0.2
)%
 
%
 
(0.3
)%
Net income
 
4.7
%
 
6.4
 %
 
0.7
%
 
6.1
 %

18



The following tables present net revenues and operating income by operating segment, both in dollars and as a percentage of our net revenues, and store data for the periods indicated ($ in thousands, except as otherwise indicated):
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Net Revenues by Segment:
 
 
 
 
 
 
 
 
Direct
 
$
83,775

 
$
77,777

 
$
154,208

 
$
149,961

Indirect
 
36,949

 
41,183

 
67,620

 
81,196

Total
 
$
120,724

 
$
118,960

 
$
221,828

 
$
231,157

Percentage of Net Revenues by Segment:
 
 
 
 
 
 
 
 
Direct
 
69.4
%
 
65.4
%
 
69.5
%
 
64.9
%
Indirect
 
30.6
%
 
34.6
%
 
30.5
%
 
35.1
%
Total
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 1,
2015
 
August 2,
2014
 
August 1,
2015
 
August 2,
2014
Operating Income by Segment:
 
 
 
 
 
 
 
 
Direct
 
$
16,557

 
$
17,122

 
$
24,584

 
$
30,880

Indirect
 
14,788

 
15,947

 
24,692

 
31,386

Less: Corporate unallocated
 
(21,859
)
 
(19,823
)
 
(44,761
)
 
(37,733
)
Total
 
$
9,486

 
$
13,246

 
$
4,515

 
$
24,533

Operating Income as a Percentage of Net Revenues by Segment:
 
 
 
 
 
 
 
 
Direct
 
19.8
 %
 
22.0
 %
 
15.9
 %
 
20.6
 %
Indirect
 
40.0
 %
 
38.7
 %
 
36.5
 %
 
38.7
 %
Store Data (1) :
 
 
 
 
 
 
 
 
Total stores open at end of period
 
144

 
109

 
144

 
109

Comparable sales (including e-commerce) decrease (2)
 
(15.0
)%
 
(5.3
)%
 
(15.8
)%
 
(6.4
)%
Total gross square footage at end of period (all stores)
 
325,956

 
233,836

 
325,956

 
233,836

Average net revenues per gross square foot (3)
 
$
176

 
$
208

 
$
305

 
$
362

 
(1)
Includes our full-line and factory outlet stores.
(2)
Comparable sales (including e-commerce) are calculated based upon our stores that have been open for at least 12 full fiscal months and net revenues from our e-commerce operations. Increase or decrease is reported as a percentage of the comparable sales for the same period in the prior fiscal year. Remodeled stores are included in comparable sales unless the store was closed for a portion of the current or comparable prior period or the remodel resulted in a significant change in square footage.
(3)
Dollars not in thousands. Average net revenues per gross square foot are calculated by dividing total net revenues for our stores that have been open at least 12 full fiscal months as of the end of the period by total gross square footage for those stores. Remodeled stores are included in average net revenues per gross square foot unless the store was closed for a portion of the period.
Thirteen Weeks Ended August 1, 2015 , Compared to Thirteen Weeks Ended August 2, 2014
Net Revenues
For the thirteen weeks ended August 1, 2015 , net revenues increased $1.7 million , or 1.5% , to $120.7 million , from $119.0 million in the comparable prior-year period.
Direct . For the thirteen weeks ended August 1, 2015 , net revenues in the Direct segment increased $6.0 million , or 7.7% , to $83.8 million , from $77.8 million in the comparable prior-year period. This change resulted from a $17.3 million increase in revenues at our non-comparable stores, which included 19 additional stores in the current year, partially offset by a comparable sales (including e-commerce) decrease of $11.3 million , or 15.0% . The decrease in comparable sales (including e-commerce)

19


includes a 14.7% decrease in e-commerce sales and 1 5.2% decrease in comparable store sales. The declines in comparable store sales and comparable sales (including e-commerce) were primarily due to year-over-year declines in store and e-commerce traffic, partially as a result of reduced promotional activity.
Indirect . For the thirteen weeks ended August 1, 2015 , net revenues in the Indirect segment decreased $4.3 million , or 10.3% , to $36.9 million , from $41.2 million in the comparable prior-year period. The decrease was primarily due to lower average order size from the Company’s specialty retail accounts and a year-over-year reduction in the total number of specialty retail accounts, partially offset by the timing of the Company’s summer product launch (which resulted in approximately $3.7 million of revenues recognized in the second quarter of this year as compared to the first quarter of last year).
Gross Profit
For the thirteen weeks ended August 1, 2015 , gross profit increased $3.2 million , or 4.9% , to $66.6 million , from $63.4 million in the comparable prior-year period. As a percentage of net revenues, gross profit increased to 55.1% for the thirteen weeks ended August 1, 2015 , from 53.3% in the comparable prior-year period. The increase in gross profit as a percentage of net revenues was primarily due to the increased sales of higher-margin made-for-outlet product in the Company’s factory outlet stores, leverage of overhead costs, Fall 2014 cost reductions at the Company's since-closed domestic manufacturing facility, lower levels of liquidation sales, and reduced promotional activity.
Selling, General, and Administrative Expenses
For the thirteen weeks ended August 1, 2015 , SG&A expenses increased $6.7 million , or 13.2% , to $57.4 million , from $50.7 million in the comparable prior-year period. As a percentage of net revenues, SG&A expenses increased to 47.5% for the thirteen weeks ended August 1, 2015 , from 42.6% in the comparable prior-year period. The $6.7 million increase was primarily due to strategic investments which included incremental marketing, new store expenses, and e-commerce investments. SG&A expenses as a percentage of net revenues increased primarily due to the strategic investments, fixed expenses being spread over lower comparable revenues, as well as deleveraging of store operating expenses as a result of lower comparable store sales.
Other Income
For the thirteen weeks ended August 1, 2015 , other income decreased $0.2 million , or 39.1% , to $0.3 million , from $0.5 million in the comparable prior-year period, primarily due to a decrease in reimbursement of co-op mailer expense from Indirect retailers.
Operating Income
For the thirteen weeks ended August 1, 2015 , operating income decreased $3.7 million , or 28.4% , to $9.5 million in the current year, from $13.2 million in the comparable prior-year period. As a percentage of net revenues, operating income was 7.9% and 11.1% for the thirteen weeks ended August 1, 2015 and August 2, 2014 , respectively. The decrease in operating income was due to an increase in selling, general, and administrative expenses and decrease in other income, partially offset by an increase in gross profit, which are described above.
Direct . For the thirteen weeks ended August 1, 2015 , operating income in the Direct segment decreased $0.5 million , or 3.3% , to $16.6 million from $17.1 million in the comparable prior-year period. As a percentage of Direct segment net revenues, operating income in the Direct segment was 19.8% and 22.0% for the thirteen weeks ended August 1, 2015 and August 2, 2014 , respectively. The decrease in operating income was primarily due to strategic investments including new store expenses and e-commerce investments, partially offset by an increase in gross profit as a percentage of net revenues, which is described above.
Indirect . For the thirteen weeks ended August 1, 2015 , operating income in the Indirect segment decreased $1.1 million , or 7.3% , to $14.8 million from $15.9 million in the comparable prior-year period. As a percentage of Indirect segment net revenues, operating income in the Indirect segment was 40.0% and 38.7% for the thirteen weeks ended August 1, 2015 and August 2, 2014 , respectively. The decrease in operating income is primarily due to a decrease in net revenues, partially offset by an increase in gross profit as a percentage of net revenues, which are described above.
Corporate Unallocated . For the thirteen weeks ended August 1, 2015 , unallocated expenses increased $2.1 million , or 10.3% , to $21.9 million from $19.8 million in the comparable prior-year period, primarily due to incremental marketing investments.
Income Tax Expense
The effective tax rate for the thirteen weeks ended August 1, 2015 , was 39.3% , compared to 40.3% for the thirteen weeks ended August 2, 2014 . The year-over-year decrease is primarily due to the relative impact of discrete items occurring in the prior year but not the current year.

20


Income from Continuing Operations
For the thirteen weeks ended August 1, 2015 , income from continuing operations decreased $2.2 million , or 27.6% , to $5.7 million from $7.9 million in the comparable prior-year period.
Loss from Discontinued Operations, Net of Taxes
For the thirteen weeks ended August 2, 2014 , loss from discontinued operations, net of taxes, was $0.3 million reflecting the Company's exit from Japan operations during the third quarter of fiscal 2015.
Net Income
For the thirteen weeks ended August 1, 2015 , net income decreased $1.9 million , or 24.8% , to $5.7 million from $7.6 million in the comparable prior-year period.
Twenty-Six Weeks Ended August 1, 2015 , Compared to Twenty-Six Weeks Ended August 2, 2014
Net Revenues
For the twenty-six weeks ended August 1, 2015 , net revenues decreased $9.4 million , or 4.0% , to $221.8 million , from $231.2 million in the comparable prior-year period.
Direct . For the twenty-six weeks ended August 1, 2015 , net revenues in the Direct segment increased $4.2 million , or 2.8% , to $154.2 million , from $150.0 million in the comparable prior-year period. This change resulted from a $26.7 million increase in revenues at our non-comparable stores, which included 19 additional stores in the current year, which was partially offset by a comparable sales (including e-commerce) decrease of $21.7 million , or 15.8% . The decrease in comparable sales (including e-commerce) includes a 12.4% decrease in e-commerce sales, an 18.3% decrease in comparable store sales, as well as a decrease in total sales at our annual outlet sale compared to the prior year. The declines in comparable store sales and comparable sales (including e-commerce) were primarily due to year-over-year declines in store and e-commerce traffic, partially as a result of reduced promotional activity.
Indirect . For the twenty-six weeks ended August 1, 2015 , net revenues in the Indirect segment decreased $13.6 million , or 16.7% , to $67.6 million , from $81.2 million in the comparable prior-year period, primarily due to lower average order size from the Company’s specialty retail accounts. In addition, there was a year-over-year reduction in the total number of specialty retail accounts.
Gross Profit
For the twenty-six weeks ended August 1, 2015 , gross profit decreased $5.0 million , or 4.0% , to $118.2 million , from $123.2 million in the comparable prior-year period. As a percentage of net revenues, gross profit was consistent at 53.3% for the twenty-six weeks ended August 1, 2015 and the comparable prior-year period. Gross profit included restructuring charges of $3.4 million related to the closure of our manufacturing facility in the first quarter of fiscal 2016, as discussed in more detail in Note 11 to the Notes to the Consolidated Financial Statements herein, offset by increased sales of higher-margin made-for-outlet product in the Company’s factory outlet stores, leverage of overhead costs, Fall 2014 cost reductions at the Company's since-closed domestic manufacturing facility, lower levels of liquidation sales, and reduced promotional activity.
Selling, General, and Administrative Expenses
For the twenty-six weeks ended August 1, 2015 , SG&A expenses increased $14.3 million , or 14.2% , to $115.0 million , from $100.7 million in the comparable prior-year period. As a percentage of net revenues, SG&A expenses increased to 51.8% for the twenty-six weeks ended August 1, 2015 , from 43.6% in the comparable prior-year period. The increase in SG&A expenses for the twenty-six weeks ended August 1, 2015 , included $1.3 million in employee severance expense and $1.2 million in expense related to a retail store early termination agreement that did not occur in the comparable period. The remaining increase was primarily due to strategic investments, which included incremental marketing, new store expenses, and e-commerce investments. SG&A expenses as a percentage of net revenues increased primarily due to the strategic investments, fixed expenses being spread over lower revenues and deleveraging of store operating expenses as a result of lower comparable store sales.
Other Income
For the twenty-six weeks ended August 1, 2015 , other income decreased $0.8 million , or 39.8% , to $1.2 million , from $2.0 million in the comparable prior-year period, primarily due to a decrease in reimbursement of co-op mailer expense from Indirect retailers.

21


Operating Income
For the twenty-six weeks ended August 1, 2015 , operating income decreased $20.0 million , or 81.6% , to $4.5 million in the current year, from $24.5 million in the comparable prior-year period. As a percentage of net revenues, operating income was 2.0% and 10.6% for the twenty-six weeks ended August 1, 2015 and August 2, 2014 , respectively. Operating income for the twenty-six weeks ended August 1, 2015 , was negatively impacted by the $5.9 million in restructuring and other charges described above under “Gross Profit” and “Selling, General, and Administrative Expenses.” The remaining decrease in operating income was due to an increase in selling, general, and administrative expenses and a decrease in other income and gross profit, which are described above.
Direct . For the twenty-six weeks ended August 1, 2015 , operating income in the Direct segment decreased $6.3 million , or 20.4% , to $24.6 million from $30.9 million in the comparable prior-year period. As a percentage of Direct segment net revenues, operating income in the Direct segment was 15.9% and 20.6% for the twenty-six weeks ended August 1, 2015 and August 2, 2014 , respectively. Operating income in the Direct segment was negatively impacted by $3.5 million in aggregate restructuring and other charges related to the closure of our manufacturing facility in the first quarter of fiscal 2016 and a retail store early termination agreement. The remaining decrease was primarily due to strategic investments including new store expenses and e-commerce investments, partially offset by an increase in gross profit as a percentage of net revenues, which is described above.
Indirect . For the twenty-six weeks ended August 1, 2015 , operating income in the Indirect segment decreased $6.7 million , or 21.3% , to $24.7 million from $31.4 million in the comparable prior-year period. As a percentage of Indirect segment net revenues, operating income in the Indirect segment was 36.5% and 38.7% for the twenty-six weeks ended August 1, 2015 and August 2, 2014 , respectively. Operating income in the Indirect segment was negatively impacted by $1.1 million in restructuring charges related to the closure of our manufacturing facility in the first quarter of fiscal 2016. The remaining decrease in operating income is primarily due to a decrease in net revenues, partially offset by an increase in gross profit as a percentage of net revenues, which are described above.
Corporate Unallocated . For the twenty-six weeks ended August 1, 2015 , unallocated expenses increased $7.1 million , or 18.6% , to $44.8 million from $37.7 million in the comparable prior-year period. The increase in unallocated expenses included $1.3 million in employee severance expense. The remaining increase was primarily due to incremental marketing investments.
Income Tax Expense
The effective tax rate for the twenty-six weeks ended August 1, 2015 , was 63.8% , compared to 39.5% for the twenty-six weeks ended August 2, 2014 . The year-over-year increase is primarily due to the impact of discrete items, including an increase in income tax reserves for uncertain federal and state tax positions related to research and development tax credits from prior years.
Income from Continuing Operations
For the twenty-six weeks ended August 1, 2015 , income from continuing operations decreased $13.2 million , or 89.3% , to $1.6 million from $14.8 million in the comparable prior-year period. Included in this decrease were restructuring and other charges of $6.5 million ( $4.2 million after the associated tax benefit), as described in Note 11 to the Notes to the Consolidated Financial Statements herein.
Loss from Discontinued Operations, Net of Taxes
For the twenty-six weeks ended August 2, 2014 , loss from discontinued operations, net of taxes was $0.6 million reflecting the Japan operations which were exited during the third quarter of fiscal 2015.
Net Income
For the twenty-six weeks ended August 1, 2015 , net income decreased $12.6 million , or 88.9% , to $1.6 million from $14.2 million in the comparable prior-year period. Included in this decrease were restructuring and other charges of $6.5 million ( $4.2 million after the associated tax benefit), as described in Note 11 to the Consolidated Financial Statements herein.

22


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 second amended and restated credit agreement. There were no borrowings under this agreement at August 1, 2015. Historically, our primary cash needs have been for merchandise inventories, payroll, store rent, capital expenditures associated with operational equipment, buildings, information technology, opening new stores, and debt repayments. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts receivable, accounts payable, and other current liabilities.
We believe that cash flows from operating activities and the availability of borrowings under our second amended and restated credit agreement or other financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures, share repurchases, and debt payments for the foreseeable future.
Cash Flow Analysis
A summary of operating, investing, and financing activities is shown in the following table (in thousands):
 
 
Twenty-Six Weeks Ended
 
 
August 1,
2015
 
August 2,
2014
Net cash (used in) provided by operating activities
 
$
(998
)
 
$
32,756

Net cash used in investing activities
 
(15,359
)
 
(12,231
)
Net cash used in financing activities
 
(19,894
)
 
(642
)
Net Cash (Used in) Provided by Operating Activities
Net cash (used in) 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 used in operating activities for the twenty-six weeks ended August 1, 2015 , was $1.0 million , compared to net cash provided by operating activities of $32.8 million for the twenty-six weeks ended August 2, 2014 . This decrease was primarily due to a decrease in net income of $12.6 million along with a change in inventory balances that resulted in a $5.5 million use of cash for the twenty-six weeks ended August 1, 2015 , as compared to $24.9 million of cash provided for the twenty-six weeks ended August 2, 2014 .
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.
Net cash used in investing activities was $15.4 million and $12.2 million for the twenty-six weeks ended August 1, 2015 and August 2, 2014 , respectively. The increase in capital expenditures was due primarily to the opening of 19 new stores in the first and second quarter of the current year as compared to ten stores in the comparable prior year period, which was partially offset by reduced spending for the campus consolidation project.
Capital expenditures for fiscal 2016 are expected to be approximately $31.0 million .
Net Cash Used in Financing Activities
Net cash used in financing activities was $19.9 million for the twenty-six weeks ended August 1, 2015 which was primarily related to purchases of shares of the Company's common stock made under the 2014 Share Repurchase Program. This compares to net cash used in financing activities of $0.6 million for the twenty-six weeks ended August 2, 2014 .
Second Amended and Restated Credit Agreement
On July 15, 2015, Vera Bradley Designs, Inc. (“VBD”), a wholly-owned subsidiary of the Company, entered into a Second Amended and Restated Credit Agreement among VBD, the lenders from time to time party thereto, JPMorgan Chase Bank, National Association, as administrative agent, Wells Fargo Bank, National Association, as syndication agent, and KeyBank National Association, as documentation agent (the “Credit Agreement”), which amended and restated our prior credit

23


agreement. The Credit Agreement provides for certain credit facilities to VBD in an aggregate principal amount not to initially exceed $125.0 million, the proceeds of which will be used for general corporate purposes of VBD and its subsidiaries, including but not limited to Vera Bradley International, LLC and Vera Bradley Sales, LLC (collectively, the “Named Subsidiaries”).
Amounts outstanding under the Credit Agreement bear interest, at VBD's option, at a per annum rate equal to either (A) the Alternate Base Rate (“ABR”) plus the Applicable Margin, where the ABR is the highest of (i) the prime rate, (ii) the federal funds rate plus 0.5%, and (iii) Adjusted LIBOR for a one-month interest period plus 1%, and the Applicable Margin is a percentage ranging from 0.00% to 0.70% depending upon the Company's leverage ratio or (B) Adjusted LIBOR plus the Applicable Margin, where Adjusted LIBOR means LIBOR, as adjusted for statutory reserve requirements for eurocurrency liabilities, and Applicable Margin is a percentage ranging from 1.00% to 1.70% depending upon the Company's leverage ratio. Any loans made, or letters of credit issued, pursuant to the Credit Agreement mature on July 15, 2020. As of August 1, 2015 , the Company had borrowing availability of $125.0 million under the agreement.
VBD's obligations under the Credit Agreement are guaranteed by the Company and the Named Subsidiaries. The obligations of VBD under the Credit Agreement are secured by first priority security interests in all of the respective assets of VBD, the Company, and the Named Subsidiaries and a pledge of the equity interests of VBD and the Named Subsidiaries.
The Credit Agreement contains various restrictive covenants, including restrictions on the Company's ability to dispose of assets, make acquisitions or investments, incur debt or liens, make distributions to stockholders or repurchase outstanding stock, enter into related party transactions and make capital expenditures, other than upon satisfaction of the conditions set forth in the Credit Agreement. The Company is also required to comply with certain financial and non-financial covenants, including maintaining a maximum leverage ratio, a minimum ratio of EBITDAR to the sum of interest expense plus rentals (as defined in the Credit Agreement), and a limit on capital expenditures. Upon an event of default, which includes certain customary events such as, among other things, a failure to make required payments when due, a failure to comply with covenants, certain bankruptcy and insolvency events, a material adverse change (as defined in the Credit Agreement), defaults under other material indebtedness, and a change in control, the lenders may accelerate amounts outstanding, terminate the agreement and foreclose on all collateral. The Company was in compliance with these covenants as of August 1, 2015 .
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 requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements. A summary of the Company’s significant accounting policies is included in Note 2 to the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015 .
Certain accounting policies and estimates of the Company are considered critical, as these policies and estimates are the most important to the depiction of the Company’s consolidated financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015 . As of August 1, 2015 , there was no significant change to any of the critical accounting policies and estimates described in the Annual Report.
Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . This guidance states that the disposal of a component of an entity is to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The pronouncement also requires additional disclosures regarding individually significant disposals of components that do not meet the criteria to be recognized as a discontinued operation as well as additional and expanded disclosures. The guidance is effective for all disposals (or classifications as held for sale) of components of an entity and all businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015; it is applied prospectively. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The adoption of this standard did not have a material impact on the Company's Consolidated Financial Statements upon adoption.

24


In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers . This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard allows for either a full retrospective or a modified retrospective transition method. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 for all entities by one year to annual periods beginning after December 15, 2017, including interim periods within that reporting period, which for the Company is fiscal 2019. Earlier application is permitted as of the original effective date, annual reporting periods beginning after December 2016, including interim periods within that reporting period. The Company is currently evaluating the impact of this standard, including the transition method, on its consolidated results of operations, financial position and cash flows.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. The guidance is effective for annual or interim reporting periods beginning on or after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The standard allows for either a full retrospective or modified retrospective transition method. The Company does not expect this standard to have an impact on the Company’s Consolidated Financial Statements upon adoption.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs , which modifies the presentation of debt issuance costs in financial statements. Under this new guidance, the Company will be required to present these costs in our condensed consolidated balance sheets as a direct deduction from the related debt liability. The requirements of the new standard will become effective for fiscal years, and interim periods within those fiscal years (including retrospective application), beginning after December 15, 2015; early adoption is permitted. The Company is currently evaluating this guidance and does not expect the application of this standard to have a material impact on the Company’s Consolidated Financial Statements upon adoption.
In July 2015, the FASB issued ASU 2015-11, Inventory , which requires entities to measure inventory at the lower of cost and net realizable value. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. The Company is currently evaluating this guidance and does not expect the application of this standard to have a material impact on the Company’s Consolidated Financial Statements upon adoption.



25


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of August 1, 2015 , there was no material change in the market risks described in “Quantitative and Qualitative Disclosures About Market Risks” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015 .

ITEM 4.    CONTROLS AND PROCEDURES
At the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and management, including the Chief Executive Officer and the Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of August 1, 2015 .
There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

26

Table of Contents

PART II. OTHER INFORMATION

ITEM 1A.
RISK FACTORS
There has been no material change to our risk factors as previously set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015 .

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On September 9, 2014, the Company’s board of directors approved a share repurchase program (the “2014 Share Repurchase Program”) authorizing up to $40.0 million of repurchases of shares of the Company's common stock. The 2014 Share Repurchase Program expires in October 2016. During the thirteen weeks ended August 1, 2015 , the Company repurchased 1,149,531 shares of the Company's common stock at an average price of $11.60 per share, excluding commissions.
Details on the shares repurchased under the program during the thirteen weeks ended August 1, 2015 are as follows:
Period
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Program
May 3, 2015 - May 30, 2015
145,500

 
$
13.82

 
145,500

 
$
17,853,799

May 31, 2015 - July 4, 2015
460,000

 
11.51

 
460,000

 
12,560,534

July 5, 2015 - August 1, 2015
544,031

 
11.09

 
544,031

 
6,527,471

 
1,149,531

 
$
11.60

 
1,149,531

 
 



27

Table of Contents

ITEM 6.    EXHIBITS
a. Exhibits
 
Exhibit
No.
 
Description
 
 
 
 
10.1
 
Second Amended and Restated Credit Agreement dated as of July 15, 2015 among Vera Bradley Designs, Inc., JPMorgan Chase Bank, National Association, and the lenders party thereto
 
 
 
 
31.1
 
CEO Section 302 Certification
 
 
 
 
31.2
 
CFO Section 302 Certification
 
 
 
 
32.1
 
Section 906 Certifications*
 
 
 
 
101
 
The following materials from the Vera Bradley, Inc.’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Income for the Thirteen and Twenty-Six Weeks ended August 1, 2015 and August 2, 2014; (ii) Consolidated Statements of Comprehensive Income for the Thirteen and Twenty-Six Weeks ended August 1, 2015 and August 2, 2014; (iii) Consolidated Balance Sheets as of August 1, 2015 and January 31, 2015; (iv) Consolidated Statements of Cash Flows for the Twenty-Six Weeks ended August 1, 2015 and August 2, 2014, and (v) Notes to Consolidated Financial Statements. **
 
 
 
 
*
Furnished, not filed.
 
 
 
 
**
Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files included as Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these Sections.


28

Table of Contents

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
Vera Bradley, Inc.
(Registrant)
 
 
 
Date: September 9, 2015
 
/s/ Kevin J. Sierks
 
 
Kevin J. Sierks
 
 
Executive Vice President – Chief Financial Officer

29

Table of Contents

EXHIBIT INDEX
 
Exhibit
No.
 
Description
 
 
 
 
10.1
 
Second Amended and Restated Credit Agreement dated as of July 15, 2015 among Vera Bradley Designs, Inc., JPMorgan Chase Bank, National Association, and the lenders party thereto
 
 
 
 
31.1
 
CEO Section 302 Certification
 
 
 
 
31.2
 
CFO Section 302 Certification
 
 
 
 
32.1
 
Section 906 Certifications*
 
 
 
 
101
 
The following materials from the Vera Bradley, Inc.’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Income for the Thirteen and Twenty-Six Weeks ended August 1, 2015 and August 2, 2014; (ii) Consolidated Statements of Comprehensive Income for the Thirteen and Twenty-Six Weeks ended August 1, 2015 and August 2, 2014; (iii) Consolidated Balance Sheets as of August 1, 2015 and January 31, 2015; (iv) Consolidated Statements of Cash Flows for the Twenty-Six Weeks ended August 1, 2015 and August 2, 2014, and (v) Notes to Consolidated Financial Statements. **
 
 
 
 
*
Furnished, not filed.
 
 
 
 
**
Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files included as Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these Sections.




30

Exhibit 10.1

EXECUTION VERSION


$125,000,000
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
dated as of
July 15, 2015
among
VERA BRADLEY DESIGNS, INC.,
as Borrower
The Lenders Party Hereto,
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION,
as Administrative Agent
WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Syndication Agent
and
KEYBANK NATIONAL ASSOCIATION,
as Documentation Agent
__________________________
J.P. MORGAN SECURITIES LLC,
as Sole Bookrunner and Sole Lead Arranger


1


TABLE OF CONTENTS

ARTICLE I Definitions
1

SECTION 1.01.
Defined Terms
1
SECTION 1.02.
Classification of Loans and Borrowings
21
SECTION 1.03.
Terms Generally
21
SECTION 1.04.
Accounting Terms; GAAP
21
ARTICLE II The Credits
21

SECTION 2.01.
Commitments
21
SECTION 2.02.
Loans and Borrowings
22
SECTION 2.03.
Requests for Revolving Borrowings
22
SECTION 2.04.
[Intentionally Omitted]
23
SECTION 2.05.
Swingline Loans
23
SECTION 2.06.
Letters of Credit
24
SECTION 2.07.
Funding of Borrowings
28
SECTION 2.08.
Interest Elections
29
SECTION 2.09.
Termination, Reduction and Increase of Commitments
30
SECTION 2.10.
Repayment of Loans; Evidence of Debt
31
SECTION 2.11.
Prepayment of Loans
32
SECTION 2.12.
Fees
33
SECTION 2.13.
Interest
34
SECTION 2.14.
Alternate Rate of Interest
34
SECTION 2.15.
Increased Costs
35
SECTION 2.16.
Break Funding Payments
36
SECTION 2.17.
Taxes
37
SECTION 2.18.
Payments Generally; Pro Rata Treatment; Sharing of Set-offs
40
SECTION 2.19.
Mitigation Obligations; Replacement of Lenders
42
SECTION 2.20.
Defaulting Lenders
43
ARTICLE III Representations and Warranties

45



i


TABLE OF CONTENTS
(continued)

SECTION 3.01.
Organization; Powers
45
SECTION 3.02.
Authorization; Enforceability
45
SECTION 3.03.
Governmental Approvals; No Conflicts
45
SECTION 3.04.
Financial Condition; No Material Adverse Change
45
SECTION 3.05.
Properties
46
SECTION 3.06.
Litigation and Environmental Matters
46
SECTION 3.07.
Compliance with Laws and Agreements
46
SECTION 3.08.
Investment Company Status
47
SECTION 3.09.
Taxes
47
SECTION 3.10.
ERISA
47
SECTION 3.11.
Disclosure
47
SECTION 3.12.
Subsidiaries
47
SECTION 3.13.
Security Documents
47
SECTION 3.14.
Regulation U
48
SECTION 3.15.
Labor Relations
48
SECTION 3.16.
Anti-Corruption Laws and Sanctions
48
ARTICLE IV Conditions
 
48

SECTION 4.01.
Effectiveness and Initial Advance
48
SECTION 4.02.
Each Credit Event
51
ARTICLE V Affirmative Covenants
 
51

SECTION 5.01.
Financial Statements; Ratings Change and Other Information
51
SECTION 5.02.
Notices of Material Events
53
SECTION 5.03.
Existence; Conduct of Business
53
SECTION 5.04.
Payment of Obligations
53
SECTION 5.05.
Maintenance of Properties; Insurance
53
SECTION 5.06.
Books and Records; Inspection Rights
54
SECTION 5.07.
Compliance with Laws
54
SECTION 5.08.
Use of Proceeds
54
SECTION 5.09.
Further Assurances; etc
54
SECTION 5.10.
Additional Subsidiary Guarantors and Collateral
55
ARTICLE VI Negative Covenants
 
56



ii


TABLE OF CONTENTS
(continued)

SECTION 6.01.
Indebtedness
56
SECTION 6.02.
Liens
57
SECTION 6.03.
Fundamental Changes; Asset Sales
58
SECTION 6.04.
Investments, Loans, Advances, Guarantees and Acquisitions
59
SECTION 6.05.
Swap Agreements
60
SECTION 6.06.
Restricted Payments
60
SECTION 6.07.
Transactions with Affiliates
61
SECTION 6.08.
Restrictive Agreements
61
SECTION 6.09.
Minimum EBITDAR
61
SECTION 6.10.
Maximum Leverage Ratio
61
SECTION 6.11.
Subordinated Indebtedness; Other Indebtedness and Payments
61
SECTION 6.12.
Use of Proceeds
62
SECTION 6.13.
Capital Expenditures
62
ARTICLE VII Events of Default
 
62

ARTICLE VIII The Administrative Agent
 
65

ARTICLE IX Miscellaneous
 
67

SECTION 9.01.
Notices
67
SECTION 9.02.
Waivers; Amendments
68
SECTION 9.03.
Expenses; Indemnity; Damage Waiver
69
SECTION 9.04.
Successors and Assigns
70
SECTION 9.05.
Survival
74
SECTION 9.06.
Counterparts; Integration; Effectiveness
74
SECTION 9.07.
Severability
75
SECTION 9.08.
Right of Setoff
75
SECTION 9.09.
Governing Law; Jurisdiction; Consent to Service of Process
75
SECTION 9.10.
WAIVER OF JURY TRIAL
76
SECTION 9.11.
Headings
76
SECTION 9.12.
Confidentiality
76
SECTION 9.13.
Interest Rate Limitation
77
SECTION 9.14.
USA PATRIOT Act
77
SECTION 9.15.
Application of Proceeds
78
SECTION 9.16.
Amendment and Restatement
78







iii


TABLE OF CONTENTS
(continued)

SCHEDULES :
Schedule I    –    Exiting Lenders
Schedule 1.01(a)    –    Pricing Schedule
Schedule 1.01(b)    –    Existing Letters of Credit
Schedule 2.01    –    Commitments
Schedule 3.12    –    Subsidiaries
Schedule 6.01    –    Existing Indebtedness
Schedule 6.02    –    Existing Liens
Schedule 6.08    –    Existing Restrictions
EXHIBITS :
Exhibit A
–    Form of Assignment and Assumption
Exhibit B
–    Form of Borrowing Request
Exhibit C
–    Form of Increase Request
Exhibit D
–    Form of Compliance Certificate
Exhibit E-1
–    U.S. Tax Compliance Certificate (For Non-U.S. Lenders that are not Partnerships for U.S. Federal; Income Tax Purposes)
Exhibit E-2
–    U.S. Tax Compliance Certificate (For Non-U.S. Lenders that are Partnerships for U.S. Federal; Income Tax Purposes)
Exhibit E-3
–    U.S. Tax Compliance Certificate (For Non-U.S. Participants that are not Partnerships for U.S. Federal; Income Tax Purposes)
Exhibit E-4
–    U.S. Tax Compliance Certificate (For Non-U.S. Participants that are Partnerships for U.S. Federal; Income Tax Purposes)




iv




SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of July 15, 2015, among VERA BRADLEY DESIGNS, INC., the LENDERS party hereto and JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, as Administrative Agent.
R E C I T A L S :
A.    The Borrower, the Administrative Agent, the financial institutions designated as existing lenders on Schedule 2.01 (the “Continuing Lenders”) and the financial institutions listed on Schedule I hereto (the “Exiting Lenders”) are party to that certain Amended and Restated Credit Agreement, dated as of October 4, 2010 (as amended up to but not including the date hereof, the “Existing Credit Agreement”).
B.    The Borrower, the Administrative Agent and the Continuing Lenders wish to amend and restate the Existing Credit Agreement on the terms and conditions set forth below to, among other things, extend the Revolving Maturity Date, reallocate the Commitments and make the other changes to the Existing Credit Agreement evidenced hereby.
C.    The financial institutions identified on Schedule 2.01 which are not Continuing Lenders wish to become “Lenders” hereunder and accept and assume the obligations of “Lenders” hereunder with the Commitments specified on the Commitment Schedule.
NOW, THEREFORE, in consideration of the premises and of the mutual agreements made herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Existing Credit Agreement is amended and restated in its entirety as follows:
ARTICLE I

Definitions
SECTION 1.01.      Defined Terms . As used in this Agreement, the following terms have the meanings specified below:
ABR ”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.
Acquired Entity or Business ” means either (a) the assets constituting a business, division, facility, product line or line of business of any Person not already a Subsidiary or (b) 100% of the capital stock of any such Person, which Person shall, as a result of such acquisition or merger, become a Wholly-Owned Subsidiary of the Borrower (or shall be merged with and into the Borrower with the Borrower being the surviving Person or with a Subsidiary Guarantor with the Subsidiary Guarantor being the surviving Person or such other surviving Person becoming a Subsidiary Guarantor).
Act ” has the meaning assigned to such term in Section 9.14.

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Adjusted LIBO Rate ” means, with respect to any Eurodollar Borrowing for any Interest Period (or, as applicable, for the purpose of determining the Alternate Base Rate for any day by reference to a one month Interest Period), an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.
Administrative Agent ” means JPMorgan, in its capacity as administrative agent for the Lenders hereunder, and its successors and assigns in such capacity.
Administrative Questionnaire ” means an Administrative Questionnaire in a form supplied by the Administrative Agent.
Affiliate ” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
Agreement ” means this Second Amended and Restated Credit Agreement, as it may be amended, restated, modified or supplemented from time to time.
Alternate Base Rate ” means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day (b) the Federal Funds Effective Rate in effect on such day plus ½ of 1% and (c) the Adjusted LIBO Rate for deposits in dollars for a one month Interest Period on such day (or if such day is not a Business Day, the immediately preceding Business Day) plus 1%; provided that, for the avoidance of doubt, the Adjusted LIBO Rate for any day shall be based on the rate appearing on the Reuters Screen LIBOR01 Page (or on any successor or substitute page of such page) at approximately 11:00 a.m. London time on such day (or if such day is not a Business Day, the immediately preceding Business Day). Any change in the Alternate Base Rate due to a change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted LIBO Rate shall be effective from and including the effective date of such change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted LIBO Rate, respectively.
Anti-Corruption Laws ” means all laws, rules, and regulations of any jurisdiction applicable to the Borrower or its Subsidiaries from time to time concerning or relating to bribery or corruption (but not including any such law, rule or regulation in so far as it applies to matters unrelated to the Borrower, its Subsidiaries or their respective businesses) .
Applicable Percentage ” means, with respect to any Lender, the percentage of the total Commitments represented by such Lender’s Commitment; provided that in the case of Section 2.20 when a Defaulting Lender shall exist, “Applicable Percentage” shall mean the percentage of the total Commitments (disregarding any Defaulting Lender’s Commitment) represented by such Lender’s Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments and to any Lender’s status as a Defaulting Lender at the time of determination.
Applicable Rate ” means, for any day, with respect to any Eurodollar Loan or ABR Loan or with respect to the Letter of Credit fees or the facility fees payable hereunder, the applicable

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rate per annum set forth on Schedule 1.01(a) under the caption “Eurodollar Spread”, “ABR Spread”, “Letter of Credit Fee” or “Facility Fee”, as the case may be, based upon the Leverage Ratio.
Approved Fund ” has the meaning assigned to such term in Section 9.04.
Asset Disposition ” means any sale, transfer or other disposition of any asset of the Borrower or any Subsidiary in a single transaction or in a series of related transactions (other than (a) the sale of inventory in the ordinary course or the sale or other disposition of obsolete or worn out property in the ordinary course and (b) the sale of Permitted Investments in the ordinary course of business).
Assignment and Assumption ” means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent.
Availability Period ” means the period from and including the Effective Date to but excluding the earlier of the Revolving Maturity Date and the date of termination of the Commitments.
Bankruptcy Event ” means, with respect to any Person, such Person becomes the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, custodian, assignee for the benefit of creditors or similar Person charged with the reorganization or liquidation of its business appointed for it, or, in the good faith determination of the Administrative Agent, has taken any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any such proceeding or appointment, provided that a Bankruptcy Event shall not result solely by virtue of any ownership interest, or the acquisition of any ownership interest, in such Person by a Governmental Authority or instrumentality thereof, provided, further, that such ownership interest does not result in or provide such Person with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Person (or such Governmental Authority or instrumentality) to reject, repudiate, disavow or disaffirm any contracts or agreements made by such Person.
Board ” means the Board of Governors of the Federal Reserve System of the United States of America.
Borrower ” means Vera Bradley Designs, Inc., an Indiana corporation.
Borrowing ” means (a) Revolving Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect or (b) a Swingline Loan.
Borrowing Request ” means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.03.
Business Day ” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; provided

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that, when used in connection with a Eurodollar Loan, the term “ Business Day ” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.
Capital Expenditures ” means, without duplication, any expenditures for any purchase or other acquisition of any asset which would be classified as a fixed or capital asset on a consolidated balance sheet of the Borrower and its Subsidiaries prepared in accordance with GAAP excluding (a) the cost of assets acquired with Capital Lease Obligations, (b) expenditures of insurance proceeds to rebuild or replace any asset after a casualty loss and (c) leasehold improvement expenditures for which the Borrower or a Subsidiary is reimbursed promptly by the lessor.
Capital Lease Obligations ” of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.
Change in Control ” means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), other than Vera Bradley, Inc., Barbara Baekgaard, Patricia Miller, Jill Nichols, Michael Ray and Kim Colby and their respective heirs and descendants and any trust established for the benefit of such Persons, of Equity Interests representing more than 40% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of the Borrower; or (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated by the board of directors of the Borrower nor (ii) appointed or approved by directors so nominated; or (c) the acquisition of direct or indirect Control of the Borrower by any Person or group other than Vera Bradley, Inc.
Change in Law ” means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender’s or the Issuing Bank’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement; provided that, notwithstanding anything herein to the contrary,  (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall be deemed to be a “Change in Law,” regardless of the date enacted, adopted or issued.
Charges ” has the meaning assigned to such term in Section 9.13.
Class ”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans or Swingline Loans.

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Code ” means the Internal Revenue Code of 1986, as amended from time to time.
Collateral ” means all property with respect to which any security interests have been granted (or purported to be granted) pursuant to any Security Document, including, without limitation, all “Collateral” referred to in the Security Agreement and all cash delivered as collateral pursuant to Section 2.06(j).
Collateral Access Agreement ” means any landlord waiver, bailee letter or other agreement, in form and substance satisfactory to the Administrative Agent, between the Administrative Agent and any third party (including any bailee, consignee, customs broker, or other similar Person) in possession of any Collateral or any landlord of the Borrower for any real property where any Collateral is located, as such landlord waiver, bailee letter or other agreement may be amended, restated, or otherwise modified from time to time.
Collateral Agent ” means JPMorgan, in its capacity as collateral agent for the benefit of the Secured Creditors under the Security Documents, and its successors and assigns in such capacity.
Commitment ” means, with respect to each Lender, the commitment of such Lender to make Revolving Loans and to acquire participations in Letters of Credit and Swingline Loans hereunder, expressed as an amount representing the maximum aggregate amount of such Lender’s Revolving Credit Exposure hereunder, as such commitment may be (a) reduced or increased from time to time pursuant to Section 2.09 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender’s Commitment is set forth on Schedule 2.01, or in the Assignment and Assumption pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders’ Commitments is $125,000,000.
Connection Income Taxes ” means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.
Continuing Lenders ” has the meaning assigned to such term in the Recitals hereto.
Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.
Credit Documents ” means this Agreement and, after the execution and delivery thereof pursuant to the terms of this Agreement, each promissory note, if any, delivered pursuant to Section 2.10(e), the Parent Guaranty, the Subsidiary Guaranty, each Security Document and each other document or instrument contemplated hereby and executed by the Borrower, Holdings, and/or any Subsidiary Guarantor in favor of the Administrative Agent, the Collateral Agent or any Lender, any amendment, restatement or supplement of any of the foregoing and any other document from time to time designated in writing as a “Credit Document” hereunder by the Administrative Agent and the Borrower.

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Credit Parties ” means Holdings, the Borrower and each Subsidiary Guarantor.
Default ” means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.
Defaulting Lender ” means any Lender that (a) has failed, within two Business Days of the date required to be funded or paid, to (i) fund any portion of its Loans, (ii) fund any portion of its participations in Letters of Credit or Swingline Loans or (iii) pay over to any Credit Party any other amount required to be paid by it hereunder, unless, in the case of clause (i) above, such Lender notifies the Administrative Agent in writing that such failure is the result of such Lender’s good faith determination that a condition precedent to funding (spec