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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 3, 2019
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
 
___________________________ 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13105155&doc=14
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
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 33,988,547 shares of its common stock outstanding as of September 4, 2019.
 



Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.


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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. 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, including our Vision 20/20 initiatives;
possible declines in our comparable sales;
possible inability to maintain and enhance our brand;
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 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;
possible new or increased tariffs on our products that could lead to increased product costs and lower profit margins;
possible failure of Pura Vida acquisition benefits to materialize as expected, including the possibility that the business may not perform as anticipated; and
possible inability to successfully implement integration strategies related to the Pura Vida business.
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 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 February 2, 2019, as well as in this Quarterly Report on Form 10-Q.
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.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 
 
 
August 3,
2019
 
February 2,
2019
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
46,842

 
$
113,493

Short-term investments
 
8,987

 
19,381

Accounts receivable, net
 
28,183

 
15,604

Inventories
 
130,718

 
91,581

Income taxes receivable
 
994

 
809

Prepaid expenses and other current assets
 
10,483

 
11,600

Total current assets
 
226,207

 
252,468

Operating right-of-use assets
 
122,240

 

Property, plant, and equipment, net
 
77,477

 
77,951

Intangible assets, net
 
61,536

 

Goodwill
 
41,310

 

Long-term investments
 
14,652

 
23,735

Deferred income taxes
 
7,304

 
6,724

Other assets
 
2,593

 
1,270

Total assets
 
$
553,319

 
$
362,148

Liabilities, Redeemable Noncontrolling Interest, and Shareholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
30,094

 
$
14,595

Accrued employment costs
 
11,247

 
13,316

Short-term operating lease liabilities
 
21,610

 

Earn-out liability
 
20,854

 

Other accrued liabilities
 
20,512

 
13,482

Income taxes payable
 
696

 
2,163

Total current liabilities
 
105,013

 
43,556

Long-term operating lease liabilities
 
122,213

 

Other long-term liabilities
 
92

 
23,889

Total liabilities
 
227,318

 
67,445

Commitments and contingencies
 

 

Redeemable noncontrolling interest
 
31,650

 

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

 

Common stock, without par value; 200,000 shares authorized, 41,507 and 41,283 shares issued and 34,090 and 34,347 shares outstanding, respectively
 

 

Additional paid-in-capital
 
96,958

 
95,572

Retained earnings
 
295,247

 
291,994

Accumulated other comprehensive income (loss)
 
121

 
(24
)
Treasury stock
 
(97,975
)
 
(92,839
)
Total shareholders’ equity of Vera Bradley, Inc.
 
294,351

 
294,703

Total liabilities, redeemable noncontrolling interest, and shareholders’ equity
 
$
553,319

 
$
362,148

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

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Vera Bradley, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Net revenues
 
$
119,785

 
$
113,625

 
$
210,788

 
$
200,216

Cost of sales
 
52,452

 
47,885

 
92,987

 
85,860

Gross profit
 
67,333

 
65,740

 
117,801

 
114,356

Selling, general, and administrative expenses
 
60,745

 
53,770

 
115,042

 
104,475

Other income
 
760

 
46

 
944

 
223

Operating income
 
7,348

 
12,016

 
3,703

 
10,104

Interest income, net
 
(375
)
 
(259
)
 
(822
)
 
(502
)
Income before income taxes
 
7,723

 
12,275

 
4,525

 
10,606

Income tax expense
 
2,005

 
2,993

 
1,212

 
2,694

Net income
 
5,718

 
9,282

 
3,313

 
7,912

Less: Net loss attributable to redeemable noncontrolling interest
 
(136
)
 

 
(136
)
 

Net income attributable to Vera Bradley, Inc.
 
$
5,854

 
$
9,282

 
$
3,449

 
$
7,912

 
 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
 
34,178

 
35,540

 
34,203

 
35,536

Diluted weighted-average shares outstanding
 
34,380

 
35,735

 
34,476

 
35,733

 
 
 
 
 
 
 
 
 
Basic net income per share attributable to Vera Bradley, Inc.
 
$
0.17

 
$
0.26

 
$
0.10

 
$
0.22

Diluted net income per share attributable to Vera Bradley, Inc.
 
$
0.17

 
$
0.26

 
$
0.10

 
$
0.22

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

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Vera Bradley, Inc.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Net income
 
$
5,718

 
$
9,282

 
$
3,313

 
$
7,912

Unrealized (loss) gain on available-for-sale debt investments
 
(8
)
 
57

 
124

 
12

Cumulative translation adjustment
 
20

 
(3
)
 
21

 
(7
)
Comprehensive income, net of tax
 
5,730

 
9,336

 
3,458

 
7,917

Less: Comprehensive loss attributable to redeemable noncontrolling interest
 
(136
)
 

 
(136
)
 

Comprehensive income attributable to Vera Bradley, Inc.
 
$
5,866

 
$
9,336

 
$
3,594

 
$
7,917

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

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Vera Bradley, Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(in thousands, except share data)
(unaudited)
 
 
Number of Shares
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
Treasury
Stock
 
Total Permanent
Equity
Balance at February 2, 2019
 
34,347,420

 
6,935,623

 
$
95,572

 
$
291,994

 
$
(24
)
 
$
(92,839
)
 
$
294,703

Net loss
 

 

 

 
(2,405
)
 

 

 
(2,405
)
Translation adjustments
 

 

 

 

 
1

 

 
1

Unrealized gain on available-for-sale debt investments
 

 

 

 

 
132

 

 
132

Restricted shares vested, net of repurchase for taxes
 
183,346

 

 
(791
)
 

 

 

 
(791
)
Stock-based compensation
 

 

 
1,238

 

 

 

 
1,238

Treasury stock purchased
 
(284,088
)
 
284,088

 

 

 

 
(2,908
)
 
(2,908
)
Cumulative adjustment for ASC 842 adoption
 

 

 

 
(196
)
 

 

 
(196
)
Balance at May 4, 2019
 
34,246,678

 
7,219,711

 
$
96,019

 
$
289,393

 
$
109

 
$
(95,747
)
 
$
289,774

Net income attributable to Vera Bradley, Inc.
 

 

 

 
5,854

 

 

 
5,854

Translation adjustments
 

 

 

 

 
20

 

 
20

Unrealized loss on available-for-sale debt investments
 

 

 

 

 
(8
)
 

 
(8
)
Restricted shares vested, net of repurchase for taxes
 
40,297

 

 
(316
)
 

 

 

 
(316
)
Stock-based compensation
 

 

 
1,255

 

 

 

 
1,255

Treasury stock purchased
 
(196,507
)
 
196,507

 

 

 

 
(2,228
)
 
(2,228
)
Balance at August 3, 2019
 
34,090,468

 
7,416,218

 
$
96,958

 
$
295,247

 
$
121

 
$
(97,975
)
 
$
294,351















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Vera Bradley, Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(in thousands, except share data)
(continued)
(unaudited)
 
 
Number of Shares
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
Treasury
Stock
 
Total Permanent
Equity
Balance at February 3, 2018
 
35,459,025

 
5,642,485

 
$
91,192

 
$
270,783

 
$
(114
)
 
$
(76,578
)
 
$
285,283

Net loss
 

 

 

 
(1,370
)
 

 

 
(1,370
)
Translation adjustments
 

 

 

 

 
(4
)
 

 
(4
)
Unrealized loss on available-for-sale debt investments
 

 

 

 

 
(45
)
 

 
(45
)
Restricted shares vested, net of repurchase for taxes
 
177,192

 

 
(522
)
 

 

 

 
(522
)
Stock-based compensation
 

 

 
899

 

 

 

 
899

Treasury stock purchased
 

 

 

 

 

 

 

Cumulative adjustment for ASC 606 adoption
 

 

 

 
454

 

 

 
454

Balance at May 5, 2018
 
35,636,217

 
5,642,485

 
$
91,569

 
$
269,867

 
$
(163
)
 
$
(76,578
)
 
$
284,695

Net income
 

 

 

 
9,282

 

 

 
9,282

Translation adjustments
 

 

 

 

 
(3
)
 

 
(3
)
Unrealized gain on available-for-sale debt investments
 

 

 

 

 
57

 

 
57

Restricted shares vested, net of repurchase for taxes
 
897

 

 
(5
)
 

 

 

 
(5
)
Stock-based compensation
 

 

 
1,714

 

 

 

 
1,714

Treasury stock purchased
 
(252,201
)
 
252,201

 

 

 

 
(3,591
)
 
(3,591
)
Balance at August 4, 2018
 
35,384,913

 
5,894,686

 
$
93,278

 
$
279,149

 
$
(109
)
 
$
(80,169
)
 
$
292,149







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

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Vera Bradley, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
 
Twenty-Six Weeks Ended
 
 
August 3,
2019
 
August 4,
2018
Cash flows from operating activities
 
 
 
 
Net income
 
$
3,313

 
$
7,912

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation of property, plant, and equipment
 
8,663

 
8,344

Amortization of operating right-of-use assets
 
10,813

 

Amortization of intangible assets
 
415

 

Provision for doubtful accounts
 
61

 
132

Stock-based compensation
 
2,493

 
2,613

Deferred income taxes
 
(512
)
 
359

Cash gain on investments
 
(178
)
 
32

Other non-cash charges, net
 
131

 
285

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(4,807
)
 
(9,519
)
Inventories
 
(11,494
)
 
1,307

Prepaid expenses and other assets
 
(1,269
)
 
446

Accounts payable
 
9,393

 
1,453

Income taxes
 
(1,652
)
 
1,948

Operating lease liabilities, net
 
(12,917
)
 

Accrued and other liabilities
 
(1,362
)
 
1,298

Net cash provided by operating activities
 
1,091

 
16,610

Cash flows from investing activities
 
 
 
 
Purchases of property, plant, and equipment
 
(8,089
)
 
(5,857
)
Purchases of investments
 
(10,111
)
 
(39,073
)
Proceeds from maturities and sales of investments
 
29,798

 
44,700

Cash paid for business acquisition, net of cash acquired
 
(73,010
)
 

Net cash used in investing activities
 
(61,412
)
 
(230
)
Cash flows from financing activities
 
 
 
 
Tax withholdings for equity compensation
 
(1,107
)
 
(527
)
Repurchase of common stock
 
(5,244
)
 
(3,522
)
Net cash used in financing activities
 
(6,351
)
 
(4,049
)
Effect of exchange rate changes on cash and cash equivalents
 
21

 
(7
)
Net (decrease) increase in cash and cash equivalents
 
(66,651
)
 
12,324

Cash and cash equivalents, beginning of period
 
113,493

 
68,751

Cash and cash equivalents, end of period
 
$
46,842

 
$
81,075

Supplemental disclosure of cash flow information
 
 
 
 
Cash paid for income taxes, net
 
$
3,328

 
$
360

Supplemental disclosure of non-cash activity
 
 
 
 
Non-cash operating, investing, and financing activities
 
 
 
 
Repurchase of common stock
 
 
 
 
Expenditures incurred but not yet paid as of August 3, 2019 and August 4, 2018
 
$
89

 
$
69

Expenditures incurred but not yet paid as of February 2, 2019 and February 3, 2018
 
$
197

 
$

Purchases of property, plant, and equipment
 
 
 
 
Expenditures incurred but not yet paid as of August 3, 2019 and August 4, 2018
 
$
453

 
$
133

Expenditures incurred but not yet paid as of February 2, 2019 and February 3, 2018
 
$
1,065

 
$
1,183

Contingent consideration related to business acquisition
 
$
20,854

 
$

Refer to Note 3 herein for supplemental cash flow information regarding the Company’s leases.
The accompanying notes are an integral part of these financial statements.

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


1.
Description of the Company and Basis of Presentation
The term “Company” refers to Vera Bradley, Inc. and its wholly and majority owned subsidiaries, except where the context requires otherwise or where otherwise indicated.
Vera Bradley is a leading designer of women’s handbags, luggage and travel items, fashion and home accessories, and unique gifts. Founded in 1982 by friends Barbara Bradley Baekgaard and Patricia R. Miller, the brand’s innovative designs, iconic patterns, and brilliant colors continue to inspire and connect women. Vera Bradley offers a unique, multi-channel sales model, as well as a focus on service and a high level of customer engagement.
In July 2019, Vera Bradley, Inc. acquired a 75% interest in Creative Genius, Inc., which also operates under the name Pura Vida Bracelets (“Pura Vida”). Pura Vida, based in La Jolla, California, is a rapidly growing, digitally native, and highly engaging lifestyle brand that deeply resonates with its loyal consumer following. The Pura Vida brand has a differentiated and expanding offering of bracelets, jewelry, and other lifestyle accessories.
Beginning in the second quarter of fiscal 2020, the Company has included an additional segment for Pura Vida due to its acquisition. As a result, the Company now has three reportable segments: Vera Bradley Direct (“VB Direct”), Vera Bradley Indirect (“VB Indirect”), and Pura Vida.
The VB Direct business consists of sales of Vera Bradley products through Vera Bradley full-line and factory outlet stores in the United States; verabradley.com; the Vera Bradley online outlet site; and the Vera Bradley annual outlet sale in Fort Wayne, Indiana. As of August 3, 2019, the Company operated 94 full-line stores and 62 factory outlet stores.
The VB Indirect business consists of sales of Vera Bradley products to approximately 2,200 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, third-party inventory liquidators, and royalties recognized through licensing agreements related to the Vera Bradley brand.
The Pura Vida segment represents revenues generated through the Pura Vida websites, www.puravidabracelets.com and www.puravidabracelets.eu, and through the distribution of Pura Vida-branded products to wholesale retailers, substantially all of which are located in the United States.
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 condensed or omitted as permitted by such rules and regulations. These interim condensed 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 February 2, 2019, 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 3, 2019, are not necessarily indicative of the results to be expected for the full fiscal year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and its majority owned subsidiary, Pura Vida beginning on July 17, 2019. 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 3, 2019 and August 4, 2018, refer to the thirteen-week periods ended on those dates.
    

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

Operating Leases
Accounting Standard Codification (“ASC”) Topic 842, Leases, was adopted on a modified retrospective basis on February 3, 2019. Accordingly, prior year financial information contained herein was not recast and is reported under the prior accounting standard. This comparability primarily impacts the Company's Condensed Consolidated Balance Sheets. Refer to Note 3 herein for additional information regarding the Company's leases.
The Company recognizes lease liabilities at the lease commencement date based upon the present value of the remaining lease payments. Operating right-of-use assets are based on the lease liability adjusted for prepaid rent, deferred rent, and tenant allowances received from certain of the Company’s landlords, primarily for its retail store locations.
Operating lease liabilities are amortized based upon the effective interest method. Operating right-of-use assets are amortized based upon the straight line lease expense less interest on the lease liability. Operating lease expense is recognized on a straight-line basis over the lease term. Variable rent expense is recognized in the period incurred.
Business Combination
The Company acquired a majority interest in Pura Vida on July 16, 2019. In connection with a business combination, the Company records the identifiable assets acquired, liabilities assumed, contingent consideration liabilities, if any, and any noncontrolling interest in the acquiree at their acquisition-date fair values. Goodwill is measured indirectly as the excess of the sum of (1) the consideration transferred (including contingent consideration, if any) and (2) the fair value of any noncontrolling interest in the acquiree over the net assets acquired and liabilities assumed. Refer to Note 12 herein for additional information.
These fair value assessments require management judgment and include the use of significant estimates and assumptions including future cash flows, discount and other market rates, and asset lives, among other items.
Goodwill and Other Intangible Assets
Upon an acquisition, the Company records the fair value of the identifiable intangible assets. As of August 3, 2019, these items consisted of the Pura Vida brand, customer relationships, and non-competition agreements. Assets that are determined to have an indefinite life, including goodwill and the Pura Vida Brand, are not amortized but are assessed for impairment at least annually or whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. Definite-lived intangible assets, including customer relationships and non-competition agreements, are amortized over their estimated useful lives and are also subject to impairment testing, similar to the Company’s long-lived assets.
Redeemable Noncontrolling Interest
On July 16, 2019, as contemplated by the Interest Purchase Agreement, the Company and certain of its subsidiaries and the owners of the remaining twenty-five percent (25%) ownership interest in Pura Vida (the “Sellers”) which was not acquired by the Company (the “Remaining Pura Vida Interest”) entered into a Put/Call Agreement (the “Put/Call Agreement”). Pursuant to the Put/Call Agreement, and subject to the terms and conditions thereof, the Sellers have the right to sell all of the Remaining Pura Vida Interest to the Company, and the Company has the right to purchase all of the Remaining Pura Vida Interests from Sellers, in each case generally at any time following the fifth anniversary of the closing date of the Transaction until the tenth anniversary thereof. The purchase price for any Remaining Pura Vida Interest put to, or called by, the Company will be determined based on the arithmetic average of a multiple of adjusted EBITDA of Pura Vida and a multiple of adjusted EBITDA of the Company, as defined in the Put/Call Agreement, over the twelve-month period ending on the last day of the month immediately preceding the month in which an exercise notice is delivered by a relevant party. In the event of a change in control of the Company, the parties may exercise a portion of their put and call rights prior to the fifth anniversary of the closing date (as defined in the Put/Call Agreement).
As a result of this redemption feature, the Company recorded the noncontrolling interest as redeemable and classified it in temporary equity within its Condensed Consolidated Balance Sheets initially at its acquisition-date fair value. The noncontrolling interest is adjusted each reporting period for income (or loss) attributable to the noncontrolling interest. A measurement period adjustment, if any, is then made to the noncontrolling interest to adjust the carrying value to the

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

redemption value each reporting period, subject to certain limits. These adjustments are recognized through retained earnings and are not reflected in net income or net income attributable to Vera Bradley, Inc. When calculating earnings per share attributable to Vera Bradley, Inc., the Company adjusts net income attributable to Vera Bradley, Inc. for the measurement period adjustment to the extent the redemption value exceeds the fair value of the noncontrolling interest on a cumulative basis. Refer to Note 13 herein for additional information regarding the redeemable noncontrolling interest.
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases, which increases transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and disclosing key information about leasing arrangements. This guidance is effective for interim and annual periods beginning on or after December 15, 2018. In July 2018, the FASB issued ASU 2018-11 for targeted improvements, including the option of allowing entities to initially apply the new leases standard at the adoption date (February 3, 2019 for the Company) and recognize a cumulative-effect adjustment to the opening balance of retained earnings. The Company adopted the standard using this adoption method on February 3, 2019 (the beginning of fiscal 2020) and recorded a $0.2 million beginning retained earnings adjustment. In addition, the Company evaluated the usage of applicable transition relief practical expedients at the adoption date as follows:
Practical Expedient Package
The Company elected the practical expedient package and did not re-assess whether a contract was or contained a lease; did not re-assess lease classification as an operating or financing lease for expired or existing leases; and did not re-assess whether a lease contained initial direct costs for expired or existing leases.
Hindsight
The Company did not elect the hindsight practical expedient, which allows for hindsight when assessing the lease term and impairment of right-of-use assets.
The Company has operating leases at all of its retail stores; therefore, the adoption of this standard resulted in a material increase of assets and liabilities on the Company’s Condensed Consolidated Balance Sheets. The opening balance of its operating lease liabilities was approximately $149 million and its operating right-of-use assets were approximately $126 million at transition on February 3, 2019. The adoption of this standard had no impact on the Company's Condensed Consolidated Statements of Operations and its Condensed Consolidated Statements of Cash Flows.
Refer to Note 3 herein for additional information regarding ASC Topic 842, including details of practical expedients related to policy elections.
In August 2018, the FASB issued ASU 2018-15, Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing or expensing implementation costs in hosting arrangements (regardless of whether they convey a license to the hosted software) with capitalizing or expensing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual periods beginning on or after December 15, 2019 (fiscal 2021). Early adoption is permitted, and the amendments can be adopted either retrospectively or prospectively. The Company adopted this standard at the beginning of its fiscal 2020 (February 3, 2019) on a prospective basis. The adoption of this standard had an immaterial impact on the Company's Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements. The amendments in this update remove, modify, and add certain disclosure requirements to ASC 820, Fair Value Measurement. This guidance is effective for interim and annual periods beginning on or after December 15, 2019 (fiscal 2021). Early adoption is permitted, and certain amendments are to be adopted prospectively for only the most recent annual or interim period presented in the initial year of adoption or retrospectively. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.

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

In January 2017 the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years (fiscal 2021). Early adoption is permitted. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.
2.
Revenue from Contracts with Customers

Disaggregation of Revenue
The following presents the Company's net revenues disaggregated by product category for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018 (in thousands):    
 
 
Thirteen Weeks Ended
 
 
August 3, 2019
 
 
VB Direct Segment
 
VB Indirect Segment
 
Pura Vida Segment
 
Total
Product categories
 
 
 
 
 
 
 
 
Bags
 
$
39,682

 
$
10,993

 
$

 
$
50,675

Travel
 
23,285

 
3,580

 

 
26,865

Accessories
 
20,987

 
3,965

 
5,220

 
30,172

Home
 
7,829

 
240

 

 
8,069

Other
 
2,597

(1) 
1,239

(2) 
168

(3) 
4,004

Total net revenues
 
$
94,380

(4) 
$
20,017

(5) 
$
5,388

(4) 
$
119,785

 
 
 
 
 
 
 
 
 
(1) Primarily includes net revenues from apparel/footwear, stationery, freight, and gift card breakage.
(2) Primarily includes net revenues from licensing agreements, freight, apparel/footwear, and merchandising.
(3) Related to freight.
(4) Net revenues were related to product sales recognized at a point in time.
(5) $19.1 million of net revenues related to product sales recognized at a point in time and $0.9 million of net revenues related to sales-based royalties recognized over time.
 
 
Thirteen Weeks Ended
 
 
August 4, 2018
 
 
VB Direct Segment
 
VB Indirect Segment
 
Pura Vida Segment
 
Total
Product categories
 
 
 
 
 
 
 
 
Bags
 
$
39,194

 
$
12,315

 
$

 
$
51,509

Travel
 
23,123

 
4,360

 

 
27,483

Accessories
 
20,261

 
4,415

 

 
24,676

Home
 
6,144

 
378

 

 
6,522

Other
 
2,299

(1) 
1,136

(2) 

 
3,435

Total net revenues
 
$
91,021

(3) 
$
22,604

(4) 
$

 
$
113,625

 
 
 
 
 
 
 
 
 
(1) Primarily includes net revenues from apparel/footwear, stationery, freight, and gift card breakage.
(2) Primarily includes net revenues from licensing agreements, freight, apparel/footwear, and merchandising.
(3) Net revenues were related to product sales recognized at a point in time.
(4) $21.8 million of net revenues related to product sales recognized at a point in time and $0.8 million of net revenues related to sales-based royalties recognized over time.

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

 
 
Twenty-Six Weeks Ended
 
 
August 3, 2019
 
 
VB Direct Segment
 
VB Indirect Segment
 
Pura Vida Segment
 
Total
Product categories
 
 
 
 
 
 
 
 
Bags
 
$
67,349

 
$
20,984

 
$

 
$
88,333

Travel
 
43,211

 
7,302

 

 
50,513

Accessories
 
37,047

 
8,167

 
5,220

 
50,434

Home
 
13,514

 
824

 

 
14,338

Other
 
4,395

(1) 
2,607

(2) 
168

(3) 
7,170

Total net revenues
 
$
165,516

(4) 
$
39,884

(5) 
$
5,388

(4) 
$
210,788

 
 
 
 
 
 
 
 
 
(1) Primarily includes net revenues from apparel/footwear, stationery, freight, and gift card breakage.
(2) Primarily includes net revenues from licensing agreements, freight, apparel/footwear, and merchandising.
(3) Related to freight.
(4) Net revenues were related to product sales recognized at a point in time.
(5) $38.0 million of net revenues related to product sales recognized at a point in time and $1.9 million of net revenues related to sales-based royalties recognized over time.
 
 
Twenty-Six Weeks Ended
 
 
August 4, 2018
 
 
VB Direct Segment
 
VB Indirect Segment
 
Pura Vida Segment
 
Total
Product categories
 
 
 
 
 
 
 
 
Bags
 
$
64,794

 
$
22,543

 
$

 
$
87,337

Travel
 
41,182

 
9,050

 

 
50,232

Accessories
 
35,940

 
8,583

 

 
44,523

Home
 
10,314

 
836

 

 
11,150

Other
 
4,323

(1) 
2,651

(2) 

 
6,974

Total net revenues
 
$
156,553

(3) 
$
43,663

(4) 
$

 
$
200,216

 
 
 
 
 
 
 
 
 
(1) Primarily includes net revenues from apparel/footwear, stationery, freight, and gift card breakage.
(2) Primarily includes net revenues from licensing agreements, freight, apparel/footwear, and merchandising.
(3) Net revenues were related to product sales recognized at a point in time.
(4) $41.9 million of net revenues related to product sales recognized at a point in time and $1.8 million of net revenues related to sales-based royalties recognized over time.
Contract Balances
Contract liabilities as of August 3, 2019 and February 2, 2019, were $2.6 million and $1.6 million, respectively. The balance as of August 3, 2019 consisted of unearned revenue related to unredeemed gift cards, unearned revenue associated with the monthly bracelet and jewelry clubs of the Pura Vida segment, and an immaterial amount of unearned revenue for pre-payments of royalties in certain of the Company’s licensing arrangements. The balance as of February 2, 2019 consisted of unearned revenue related to unredeemed gift cards and an immaterial amount of unearned revenue for pre-payments of royalties in certain of the Company’s licensing arrangements. These contract liabilities are recognized within other accrued liabilities on the Company’s Condensed Consolidated Balance Sheets. The Company did not have contract assets as of August 3, 2019 and February 2, 2019.
The balance for accounts receivable from contracts with customers, net of allowances, as of August 3, 2019 and February 2, 2019, was $23.6 million and $14.1 million, respectively, which is recognized within accounts receivable,

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

net, on the Company’s Condensed Consolidated Balance Sheets. The provision for doubtful accounts was $0.4 million and $0.3 million as of August 3, 2019 and February 2, 2019, respectively.
    
Performance Obligations
The performance obligations for the VB Direct, VB Indirect, and Pura Vida segments include the promise to transfer distinct goods (or a bundle of distinct goods). The VB Indirect segment also includes the right to access intellectual property (“IP”) related to the Vera Bradley brand.
Remaining Performance Obligations
The Company does not have remaining performance obligations in excess of one year or contracts that it does not have the right to invoice as of August 3, 2019.

3.
Leases
Nature of Leases
The Company has operating leases at all of its retail stores, as well as for its New York office, the California Pura Vida office, Asia sourcing office and showrooms. The Company also has operating leases for certain equipment and storage spaces. The Company does not have residual value guarantees, restrictions, or covenants imposed by leases.

Determination of Lease Terms
Retail store leases have remaining terms of up to 10 years as of August 3, 2019. These leases generally have early termination rights when certain sales thresholds are not met for a specified measurement period. The Company's other leases have remaining terms of up to seven years as of August 3, 2019. If the lease contains a renewal period at the Company's option, the renewal period is included in the lease term if determined the option is reasonably certain to be exercised at lease commencement. The Company's lease options generally do not include termination rights other than those mentioned. The Company did not have financing leases as of August 3, 2019.

Variable Rental Payments
All of the Company's retail store leases contain variable rental payments when the retail store's sales exceed a specified breakpoint. In addition, certain of the Company's leases contain real estate taxes, common area maintenance, and similar items that are billed as pass-through charges from its landlords. These rental payments are not included in the measurement of the lease liability, but are recognized as variable lease cost in the period incurred.
Certain of the Company's leases also contain lease components with increases based upon an index or rate. These lease components are included on the Company's balance sheet at the rate as of lease commencement. Future changes in the index or rate will generally be included as variable lease cost.

Significant Judgments and Assumptions

Determination of Whether a Contract Contains a Lease
The Company determines whether a contract is or contains a lease at the inception of the contract. The contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company generally must also have the right to obtain substantially all of the economic benefits from use of the property, plant, and equipment and have the right to direct its use.

Discount Rate
The weighted-average discount rate as of August 3, 2019, was 5.0%. The discount rate is not readily determinable in the lease; therefore, the Company estimated the incremental borrowing rate, at the commencement date of each lease, which is the rate of interest it would have to borrow on a collateralized basis over a similar term with similar payments.



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

Leases Not Yet Commenced
As of August 3, 2019, the Company had certain retail store leases which were executed but it did not have control of the underlying assets; therefore, the lease liabilities and right-of-use assets are not recorded on its Condensed Consolidated Balance Sheets. These leases contain undiscounted lease payments, which will be included in the determination of the lease liability, totaling approximately $4.4 million and have approximate terms of 10 years commencing in fiscal 2020 and fiscal 2021.

Practical Expedients (Policy Elections)
The Company has elected the following practical expedients as policy elections upon the adoption of ASC Topic 842.
Short-Term Leases
The Company elected to exclude leases with a term of 12 months or less from recognition on the balance sheet for all leases.
Not Separating Lease and Nonlease Components
The Company elected to combine lease and nonlease components and recognize as a single lease component for all leases.
Refer to Note 1 herein for information regarding transition practical expedients elected.

Amounts Recognized in the Condensed Consolidated Financial Statements
The following lease expense is recorded within cost of sales for the Asia sourcing office and certain equipment leases and within selling, general, and administrative expenses for all other leases, including retail store leases, in the Company's Condensed Consolidated Statement of Operations for the thirteen and twenty-six weeks ended August 3, 2019 (in thousands):
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
August 3, 2019
 
August 3, 2019
Operating lease cost
$
7,010

 
$
14,367

Variable lease cost
2,528

 
4,765

Short-term lease cost
143

 
333

Total lease cost
$
9,681

 
$
19,465


The weighted-average remaining lease term as of August 3, 2019 was 6.0 years.

Supplemental operating cash flow information was as follows (in thousands):
 
Twenty-Six Weeks Ended
 
August 3, 2019
Cash paid for amounts included in the measurement of operating lease liabilities
$
16,175

Right-of-use assets increase as a result of new and modified operating lease liabilities, net
$
7,144



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

Maturity Analysis of Operating Lease Liabilities
Maturities of the Company's operating lease liabilities (undiscounted) reconciled to its lease liability as of August 3, 2019 were as follows (in thousands):
 
Operating Leases
Fiscal 2020 (remaining six months)
$
12,105

Fiscal 2021
31,712

Fiscal 2022
29,244

Fiscal 2023
25,274

Fiscal 2024
21,947

Thereafter
48,581

Total remaining obligations
168,863

Less: Interest
25,040

Present value of lease liabilities
$
143,823


Under the prior accounting standard (ASC Topic 840), the maturities of minimum lease payments as disclosed in the Company's Annual Report on Form 10-K as of the fiscal year ended February 2, 2019 were as follows:
 
Operating Leases
Fiscal 2020
$
32,658

Fiscal 2021
32,017

Fiscal 2022
29,707

Fiscal 2023
25,933

Fiscal 2024
22,250

Thereafter
45,099

Total remaining minimum lease payments
$
187,664



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

4.
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 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
5,718

 
$
9,282

 
$
3,313

 
$
7,912

Less: Net loss attributable to redeemable noncontrolling interest
 
(136
)
 

 
(136
)
 

Net income attributable to Vera Bradley, Inc.
 
$
5,854

 
$
9,282

 
$
3,449

 
$
7,912

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
Weighted-average number of common shares (basic)
 
34,178

 
35,540

 
34,203

 
35,536

Dilutive effect of stock-based awards
 
202

 
195

 
273

 
197

Weighted-average number of common shares (diluted)
 
34,380

 
35,735

 
34,476

 
35,733

 
 
 
 
 
 
 
 
 
Net income per share attributable to Vera Bradley, Inc.:
 
 
 
 
 
 
Basic
 
$
0.17

 
$
0.26

 
$
0.10

 
$
0.22

Diluted
 
$
0.17

 
$
0.26

 
$
0.10

 
$
0.22

For the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018, 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.
 
5.
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 Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, other current assets, and accounts payable as of August 3, 2019 and February 2, 2019, approximated their fair values.




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

The following table details the fair value measurements of the Company's investments and contingent consideration as of August 3, 2019 and February 2, 2019 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
August 3, 2019
 
February 2, 2019
 
August 3, 2019
 
February 2, 2019
 
August 3, 2019
 
February 2, 2019
Cash equivalents(1)
$
1,129

 
$
2,169

 
$
995

 
$
6,493

 
$

 
$

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
    U.S. corporate debt securities

 

 
3,357

 
5,769

 

 

    Municipal securities

 

 
3,125

 
4,190

 

 

    Non-U.S. corporate debt securities

 

 
1,510

 
5,808

 

 

    U.S. treasury securities

 
3,116

 

 

 

 

    Commercial paper

 

 
995

 
498

 

 

Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
    U.S. corporate debt securities

 

 
3,965

 
9,499

 

 

    U.S. asset-backed securities

 

 
5,330

 
7,169

 

 

    Non-U.S. corporate debt securities

 

 
2,779

 
4,675

 

 

    Non-U.S. asset-backed securities

 

 
806

 
1,127

 

 

    Municipal securities

 

 
1,271

 
1,265

 

 

    Other foreign securities

 

 
501

 

 

 

Contingent consideration related to earn-out provision(2)

 

 

 

 
20,854

 

 
 
 
 
 
 
 
 
 
 
 
 
(1) Cash equivalents include commercial paper and a money market fund that have a maturity of three months or less at the date of purchase. Due to their short maturity, the Company believes the carrying value approximates fair value.
(2) Refer to Note 12 herein for additional information.
The Company assesses potential impairments to its long-lived assets, which includes property, plant, and equipment and lease right-of-use assets, on a quarterly basis or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Store-level assets and right-of-use assets are grouped at the individual store-level for the purpose of the impairment assessment. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The fair value of the store assets is determined using the discounted future cash flow method of anticipated cash flows through the store’s lease-end date using fair value measurement inputs classified as Level 3. The fair value of right-of-use assets is estimated using market comparative information for similar properties. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. The Company recorded no impairment for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018.
Assets recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property, plant, and equipment, including leasehold improvements, and operating lease assets, as well as assets related to the Pura Vida acquisition including goodwill and intangible assets. These assets are measured at fair value if determined to be impaired. Refer to Note 12 herein for additional information on the methods used in the initial preliminary valuation of intangible assets.

6.
Debt
On September 7, 2018, VBD, a wholly-owned subsidiary of the Company, entered into an asset-based revolving Credit Agreement (the “Credit Agreement”) among VBD, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto. The Credit Agreement provides for certain credit facilities to VBD in an

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Table of Contents


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

aggregate principal amount not to initially exceed the lesser of $75.0 million or the amount of borrowing availability determined in accordance with a borrowing base of certain assets. Any proceeds of the credit facilities will be used to finance 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”). The Credit Agreement also contains an option for VBD to arrange with lenders to increase the aggregate principal amount by up to $25.0 million.
Amounts outstanding under the Credit Agreement bear interest at a per annum rate equal to either (i) for CBFR borrowings (including swingline loans), the CB Floating Rate, where the CB Floating Rate is the prime rate which shall never be less than the adjusted one month LIBOR rate on such day, plus the Applicable Rate, where the Applicable Rate is a percentage spread ranging from -1.00% to -1.50% or (ii) for each eurodollar borrowing, the Adjusted LIBO Rate, where the Adjusted LIBO Rate is the LIBO rate for such interest period multiplied by the statutory reserve rate, for the interest period in effect for such borrowing, plus the Applicable Rate, where the Applicable Rate is a percentage ranging from 1.00% to 1.30%. The applicable CB Floating Rate, Adjusted LIBO Rate, or LIBO Rate shall be determined by the administrative agent. The Credit Agreement also requires VBD to pay a commitment fee for the unused portion of the revolving facility of up to 0.20% per annum.
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 substantially all of the respective assets of VBD, the Company, and the Named Subsidiaries and are further secured by the equity interests in VBD and the Named Subsidiaries.
The Credit Agreement contains various affirmative and negative covenants, including restrictions on the Company's ability to incur debt or liens; engage in mergers or consolidations; make certain investments, acquisitions, loans, and advances; sell assets; enter into certain swap agreements; pay dividends or make distributions or make other restricted payments; engage in certain transactions with affiliates; and amend, modify, or waive any of its rights related to subordinated indebtedness and certain charter and other organizational, governing, and material agreements. The Company may avoid certain of such restrictions by meeting payment conditions defined in the Credit Agreement.
The Credit Agreement also requires the Loan Parties to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 during periods when borrowing availability is less than the greater of (A) $7.5 million, and (B) 10% of the lesser of (i) the aggregate revolving commitment, and (ii) the borrowing base. The fixed charge coverage ratio, availability, aggregate revolving commitment, and the borrowing base are further defined in the Credit Agreement.
The Credit Agreement contains customary events of default, including, among other things: (i) the failure to pay any principal, interest, or other fees under the Credit Agreement; (ii) the making of any materially incorrect representation or warranty; (iii) the failure to observe or perform any covenant, condition, or agreement in the Credit Agreement or related agreements; (iv) a cross default with respect to other material indebtedness; (v) bankruptcy and insolvency events; (vi) unsatisfied material final judgments; (vii) Employee Retirement Income Security Act of 1974 (“ERISA”) events that could reasonably be expected to have a material adverse effect; and (viii) a change in control (as defined in the Credit Agreement).
Any commitments made under the Credit Agreement mature on September 7, 2023.
As of August 3, 2019 and February 2, 2019, the Company had no borrowings outstanding and availability of $75.0 million under the Credit Agreement.

7.
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 3, 2019, was 26.0%, compared to 24.4% for the thirteen weeks ended August 4, 2018. The year-over-year effective tax rate increase was primarily due to the relative impact of permanent and discrete items in the current-year period compared to the prior-year period, primarily as a result of executive compensation.
The effective tax rate for the twenty-six weeks ended August 3, 2019, was 26.8%, compared to 25.4% for the twenty-six weeks ended August 4, 2018. The year-over-year effective tax rate increase was primarily due to the relative impact

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

of permanent and discrete items in the current-year period compared to the prior-year period, primarily as a result of tax shortfalls from stock-based compensation and executive compensation.

8.
Stock-Based Compensation
The Company recognizes stock-based compensation expense, for its awards of 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 3, 2019, the Company did not grant time-based or performance-based restricted stock units. During the thirteen weeks ended August 4, 2018, the Company granted 66,069 time-based and performance-based restricted stock units with an aggregate fair value of $0.9 million to certain employees under the 2010 Equity and Incentive Plan.
During the twenty-six weeks ended August 3, 2019, the Company granted 407,264 time-based and performance-based restricted stock units with an aggregate fair value of $5.3 million to certain employees and non-employee directors under the 2010 Equity and Incentive Plan compared to a total of 475,214 time-based and performance-based restricted stock units with an aggregate fair value of $5.2 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 the 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. Restricted stock units issued to non-employee directors vest after a one-year period from the grant date. The Company recognizes 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 and the Company’s achievement of annual earnings per share targets, or other Company performance targets, during the three-year performance period. The Company recognizes 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 3, 2019 (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 February 2, 2019
 
473

 
$
11.75

 
442

 
$
11.38

Granted
 
236

 
13.10

 
171

 
13.10

Vested
 
(265
)
 
12.23

 
(50
)
 
19.62

Forfeited
 
(2
)
 
13.44

 
(2
)
 
9.90

Nonvested units outstanding at August 3, 2019
 
442

 
$
12.18

 
561

 
$
11.18

As of August 3, 2019, there was $7.2 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 1.8 years, subject to meeting performance conditions.
 

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

9.
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 claims, employee benefits, environmental issues, and other matters. Management believes that at this time it is not probable that any of these claims will have a material adverse effect on the Company’s financial condition, results of operations, or cash flows. However, the outcomes of legal proceedings and claims brought against the Company are subject to uncertainty, and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows of a particular reporting period.

10.
Common Stock
On November 29, 2018, the Company's board of directors approved a share repurchase plan (the “2018 Share Repurchase Program”) authorizing up to $50.0 million of repurchases of shares of the Company's common stock. The 2018 Share Repurchase Program is scheduled to expire on December 14, 2020.
The Company purchased 196,507 shares at an average price of $11.34 per share, excluding commissions, for an aggregate amount of $2.2 million during the thirteen weeks ended August 3, 2019, under the 2018 Share Repurchase Program.
The Company purchased 480,595 shares at an average price of $10.69 per share, excluding commissions, for an aggregate amount of $5.1 million during the twenty-six weeks ended of August 3, 2019, there was $42.0 million remaining available to repurchase shares of the Company's common stock under the 2018 Share Repurchase Program.
As of August 3, 2019, the Company held as treasury shares 7,416,218 shares of its common stock at an average price of $13.21 per share, excluding commissions, for an aggregate carrying amount of $98.0 million. The Company’s treasury shares may be issued under the 2010 Equity and Incentive Plan or for other corporate purposes.

11.
Investments
Cash Equivalents
Investments classified as cash equivalents relate to highly-liquid investments with a maturity of three months or less at the date of purchase. As of August 3, 2019 and February 2, 2019, these investments in the Company's portfolio consisted of commercial paper and a money market fund.
Short-Term Investments
As of August 3, 2019 and February 2, 2019, short-term investments consisted of U.S. and non-U.S. corporate debt securities, municipal securities, and commercial paper with a maturity within one year of the balance sheet date. The balance as of February 2, 2019, also included U.S. treasury securities. These debt securities are classified as available-for-sale; therefore, unrealized gains and losses are recorded within other comprehensive income. Interest income earned is recorded within interest income, net, in the Company's Condensed Consolidated Statements of Operations.
The Company held $9.0 million and $19.4 million in short-term investments as of August 3, 2019 and February 2, 2019, respectively. The following table summarizes the Company's short-term investments (in thousands):
 
August 3, 2019
 
February 2, 2019
U.S. corporate debt securities
$
3,357

 
$
5,769

Municipal securities
3,125

 
4,190

Non-U.S. corporate debt securities
1,510

 
5,808

Commercial paper
995

 
498

U.S. treasury securities

 
3,116

Total short-term investments
$
8,987

 
$
19,381


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

Long-Term Investments
As of August 3, 2019 and February 2, 2019, long-term investments consisted of U.S. and non-U.S. corporate debt securities, U.S. and non-U.S. asset-backed securities, and municipal securities with a maturity greater than one year from the balance sheet date. The balance as of August 3, 2019 also included other foreign securities. These debt securities are classified as available-for-sale; therefore, unrealized gains and losses are recorded within other comprehensive income. Interest income earned is recorded within interest income, net, in the Company's Condensed Consolidated Statements of Operations.
The Company held $14.7 million and $23.7 million in long-term investments as of August 3, 2019 and February 2, 2019, respectively. The following table summarizes the Company's long-term investments (in thousands):
 
August 3, 2019
 
February 2, 2019
U.S. corporate debt securities
$
3,965

 
$
9,499

U.S. asset-backed securities
5,330

 
7,169

Non-U.S. corporate debt securities
2,779

 
4,675

Non-U.S. asset-backed securities
806

 
1,127

Municipal securities
1,271

 
1,265

Other foreign securities
501

 

Total long-term investments
$
14,652

 
$
23,735

There were no material gross unrealized gains or losses on available-for-sale debt securities as of August 3, 2019 and February 2, 2019.

12.
Acquisition of Pura Vida
On July 16, 2019, the Company completed its acquisition of a seventy-five percent (75%) ownership interest in Creative Genius, Inc. or “Pura Vida” (the “Transaction”) in exchange for cash consideration of approximately $75 million, subject to certain adjustments, including working capital. Pura Vida, based in La Jolla, California, is a rapidly growing, digitally native, and highly engaging lifestyle brand that deeply resonates with its loyal consumer following. The Pura Vida brand has a differentiated and expanding offering of bracelets, jewelry, and other lifestyle accessories. The Company believes that the acquisition will strengthen the Company by providing increased product diversification and future growth opportunities partially as a result of resource and knowledge-sharing.
In accordance with the Interest Purchase Agreement, the Company also agreed to a contingent payment of up to $22.5 million payable during the first quarter of calendar year 2020 based on calendar year 2019 adjusted EBITDA of Pura Vida, as defined in the Interest Purchase Agreement. This contingent payment is recorded as an earn-out liability on the Company's Condensed Consolidated Balance Sheets at its acquisition-date fair value of $20.9 million. The maximum payout of this contingent payment is $22.5 million. The Company’s existing available cash, cash equivalents, and investments funded the purchase price due at the closing of the Transaction. Pre-tax Transaction costs totaled $1.9 million and $2.7 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively. These costs are recorded within selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations and within corporate unallocated expenses.
On July 16, 2019, as contemplated by the Interest Purchase Agreement, the Company and certain of its subsidiaries and the owners of the remaining twenty-five percent (25%) ownership interest in Pura Vida which was not acquired by the Company entered into a Put/Call Agreement.
The following preliminary schedule summarizes the consideration paid for Pura Vida, the fair value of the assets acquired and liabilities assumed, the fair value of the noncontrolling interest, and the fair value of the contingent consideration related to the earn-out provision. The accounting for the acquisition is preliminary as the Company has not yet finalized the working capital purchase price adjustment or the valuation of the aforementioned items.

23

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

in thousands
Fair Value at Acquisition Date
Cash and cash equivalents
$
1,495

Accounts receivable, net(5)
8,673

Inventories(1)
27,643

Prepaid expenses and other current assets
1,537

Operating right of use asset
1,250

Property, plant, and equipment, net
751

Goodwill(2)
41,310

Intangible asset, brand(3)
36,668

Other intangible assets(4)
25,283

Total assets acquired
144,610

 
 
Accounts payable
6,818

Accrued employment costs
2,351

Other accrued liabilities(5)
6,637

Operating lease liability
1,659

Total liabilities assumed
17,465

 
 
Less:
 
Contingent consideration related to earn-out provision(6)
(20,854
)
Redeemable noncontrolling interest
(31,786
)
Cash acquired
(1,495
)
 
 
Total closing consideration amount, net of cash acquired
$
73,010

 
 
(1) Includes an $8.3 million step-up adjustment which will be recognized in cost of sales within four months of the acquisition. Inventories were valued using the cost approach. The significant assumptions used for the valuation include inventory balances, projected gross and operating margins, and cost and time to dispose (sell) inventory on hand.
(2) Refer to Notes 1 and 14 herein for additional information regarding goodwill.
(3) The brand intangible asset was valued using the relief-from-royalty method. The significant assumptions used for the valuation include the royalty rate, estimated projected revenues, long-term growth rate, and the discount rate. Refer to Note 14 herein for additional information regarding intangible assets.
(4) Other intangible assets include customer relationships and non-competition agreements. Customer relationships were valued using the multi-period excess earnings method. Significant assumptions used for the valuation include projected cash flows, the discount rate, and customer attrition rate. The non-competition agreements were valued using the with-or-without method. Significant assumptions used for the valuation include projected cash flows, probability of competition, impact of competition on business, and the discount rate. Refer to Note 14 herein for additional information regarding intangible assets.
(5) Includes $4.1 million related to an indemnified liability.
(6) Contingent consideration related to the earn-out provision was valued using a Monte Carlo simulation in order to forecast the value of the potential future payment. Significant assumptions used for the valuation include the discount rate, projected cash flows, and calculated volatility.
The operations of Pura Vida are recorded in the Company's Condensed Consolidated Statements of Operations for the thirteen and twenty-six weeks ending August 3, 2019, beginning on July 17, 2019, which represents the first full day following the acquisition. As such, the Company's financial statements are not comparable with the prior-year period presented. Refer to Note 16 herein for segment-level financial information associated with Pura Vida. The following

24

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

pro forma financial information is intended to provide a sense for what the Company's operating results may have been if the Pura Vida acquisition had occurred at the beginning of fiscal 2019. The pro forma financial information is not indicative of the results that would have been reflected had the transaction actually occurred as of that date, nor is it necessarily indicative of the Company’s future results. The financial information includes expense related to supplemental officer wages and fully indemnified state sales tax matters for time periods before the acquisition date. The Company does not expect these items to have a continuing impact on its consolidated financial statements. The following adjustments have been made:
Short-term purchase accounting items, such as the inventory step-up adjustment, have been excluded due to their non-recurring nature;
Definite-lived intangible amortization that exceeds one year has been reflected as if it occurred at the beginning of fiscal 2019;
Transaction costs have been excluded; and
Tax expense has been estimated at a statutory rate of 25.0%.
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
in thousands, except per share data
 
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Pro forma net revenues
 
$
141,099

 
$
130,765

 
$
249,091

 
$
226,728

Pro forma net income
 
7,557

 
8,692

 
4,677

 
6,324

Pro forma net income attributable to Vera Bradley, Inc.
 
7,574

 
8,850

 
5,035

 
6,826

 
 
 
 
 
 
 
 
 
Pro forma basic net income per share attributable to Vera Bradley, Inc.
 
$
0.22

 
$
0.25

 
$
0.15

 
$
0.19

Pro forma diluted net income per share attributable to Vera Bradley, Inc.
 
$
0.22

 
$
0.25

 
$
0.15

 
$
0.19


13.
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest represents the remaining twenty-five percent (25%) interest in Pura Vida not acquired by the Company. Refer to Note 1 herein for additional information.
Changes in redeemable noncontrolling interest for the thirteen and twenty-six weeks ended August 3, 2019, were as follows (in thousands):    
Balance at February 2, 2019 and May 4, 2019
 

Fair value of noncontrolling interest at acquisition
 
31,786

Net loss attributable to redeemable noncontrolling interest
 
(136
)
Balance at August 3, 2019
 
$
31,650



25

Table of Contents


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

14.
Intangible Assets and Goodwill
The following table details the carrying value of the Company's intangible assets other than goodwill related to the acquisition of a majority interest in Pura Vida. The comparable prior-year period did not include intangible assets or goodwill. The valuation of the intangible assets and goodwill is preliminary and adjustments may be reflected during the measurement period.    
 
August 3, 2019
in thousands
Gross Basis
 
Accumulated Amortization(1)
 
Carrying Amount
Definite-lived intangible assets
 
 
 
 
 
Customer Relationships
$
24,495

 
$
408

 
$
24,087

Non-competition Agreements
788

 
7

 
781

Total definite-lived intangible assets
25,283

 
415

 
24,868

 
 
 
 
 
 
Indefinite-lived intangible asset
 
 
 
 
 
Pura Vida Brand
36,668

 

 
36,668

 
 
 
 
 
 
Total intangible assets, excluding goodwill
$
61,951

 
$
415

 
$
61,536

 
 
 
 
 
 
(1) Amortization expense is recorded within the Pura Vida segment.
The provisional weighted-average amortization period for the definite-lived intangible assets in total is 3.6 years. The provisional weighted-average amortization period is 3.6 years and 5.0 years for customer relationships and non-competition agreements, respectively. The provisional amortization expense for intangible assets is as follows (in thousands):    
 
 
Amortization Expense
Fiscal 2020 (remaining 6 months)
 
$
4,977

Fiscal 2021
 
9,070

Fiscal 2022
 
3,129

Fiscal 2023
 
3,129

Fiscal 2024
 
3,129

Thereafter
 
1,434

Total
 
$
24,868

The total amount of the provisional goodwill as of August 3, 2019, was $41.3 million recorded within the Pura Vida segment upon acquisition. Goodwill is expected to be deductible for tax purposes, limited to the Company's 75% majority ownership interest. Refer to Notes 1 and 12 herein for addition information regarding goodwill. Changes in goodwill for the thirteen and twenty-six weeks ended August 3, 2019, were as follows (in thousands):
Balance at February 2, 2019 and May 4, 2019
 

Goodwill at acquisition
 
41,310

Balance at August 3, 2019
 
$
41,310


    


26

Table of Contents


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

15.
Inventories
The components of inventories were as follows:
 
 
August 3,
2019
 
February 2,
2019
Raw materials(1)
 
$
2,815

 
$

Finished goods
 
127,903

 
91,581

Total inventories
 
$
130,718

 
$
91,581

(1) Relates solely to Pura Vida operations.

16.
Segment Reporting
Beginning in the second quarter of fiscal 2020, the Company has included an additional segment for Pura Vida due to its acquisition. As a result, the Company now has three operating segments, which are also its reportable segments: Vera Bradley Direct (“VB Direct”), Vera Bradley Indirect (“VB Indirect”), and Pura Vida. 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 VB Direct segment includes Vera Bradley full-line and factory outlet stores; the Vera Bradley website, verabradley.com; the Vera Bradley online outlet site; and the Vera Bradley annual outlet sale. Revenues generated from this segment are driven through the sale of Vera Bradley-branded products from Vera Bradley to end consumers.
The VB Indirect segment represents revenues generated through the distribution of Vera Bradley-branded products to specialty retailers representing approximately 2,200 locations, substantially all of which are located in the United States; key accounts, which include department stores, national accounts, third-party e-commerce sites, and third-party inventory liquidators; and royalties recognized through licensing agreements related to the Vera Bradley brand.
The Pura Vida segment represents revenues generated through the Pura Vida websites, www.puravidabracelets.com and www.puravidabracelets.eu, and through the distribution of Pura Vida-branded products to wholesale retailers, substantially all of which are located in the United States.
Corporate costs represent the Company’s administrative expenses, which include, but are not limited to: human resources, legal, finance, information technology, design, product development, merchandising, corporate-level marketing and advertising, and various other corporate-level-activity-related expenses not directly attributable to a reportable segment. All intercompany-related activities are eliminated in consolidation and are excluded from the segment reporting.

27

Table of Contents


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

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 3, 2019 and August 4, 2018, respectively, consisted of the following (in thousands):
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Segment net revenues:
 
 
 
 
 
 
 
 
VB Direct
 
$
94,380

 
$
91,021

 
$
165,516

 
$
156,553

VB Indirect
 
20,017

 
22,604

 
39,884

 
43,663

Pura Vida
 
5,388

 

 
5,388

 

Total
 
$
119,785

 
$
113,625

 
$
210,788

 
$
200,216

Segment operating income (loss):
 
 
 
 
 
 
 
 
VB Direct
 
$
22,137

 
$
22,318

 
$
30,497

 
$
29,608

VB Indirect
 
7,162

 
8,827

 
14,869

 
17,111

Pura Vida
 
(542
)
 

 
(542
)
 

Total
 
$
28,757

 
$
31,145

 
$
44,824

 
$
46,719

Reconciliation: