Vera Bradley, Inc. Stock

Greetings. Welcome to Vera Bradley's Second Quarter Fiscal 2027 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

At this time, I'll turn the conference over to Dan Ross, General Counsel. Thank you, Dan. You may begin.

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

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

I will now turn the call over to Vera Bradley's Chairman and Executive Officer, Ian Bickley.

Good morning, everyone, and thank you for joining us for Vera Bradley's Second Quarter Fiscal 2027 Earnings Call. This was another strong quarter for us. We continue to build operational excellence across the business while making significant progress on our Project Sunshine transformation journey. This marked our second consecutive quarter of overall growth with total revenue up 1.1% versus the prior year, an important continuation of the trajectory we discussed last quarter. While the pace of growth was more modest than the nearly 8% we delivered last quarter, the underlying health of the business continued to strengthen across our direct channels, our margin structure and our balance sheet. That combination of continued top line progress alongside real improvement in the fundamentals of the business is exactly what we set out to build when we launched this transformation. And I want to walk you through why we remain confident in the path forward.

Like the first quarter, our second quarter performance was not solely a top line story. Gross margin expanded more than 40 basis points year-over-year, improvement that excludes refunds recognized in the quarter, which Marty will cover in more detail. That margin expansion was driven by several factors: continued success in our product assortment work, an intensified marketing strategy anchored on cohesive social-first brand storytelling and enhanced planning and inventory management and disciplined pricing and promotion governance. Together, these enabled us to further work down non-go-forward Project Restoration inventory while still improving our overall gross margin rate.

We continue to manage our balance sheet and liquidity with discipline. Inventory ended the quarter down 28% compared to the second quarter last year, and we generated $23 million of operating cash flow in the period, up $28 million from the last year. We ended the second quarter in strong [Technical Difficulty]

Ladies and gentlemen, please stand by. We are experiencing technical difficulties and will resume momentarily. Thank you.

Ladies and gentlemen, please remain on the line and our conference will resume momentarily. Thank you.

Thank you, Ian. Please continue.

Yes. Apologies, everyone. We had some technical difficulties. Let me continue. We continue to manage our balance sheet and liquidity with discipline. Inventory ended the quarter down 28% compared to the second quarter last year, and we generated $23 million of operating cash flow in the period, up $23 million from last year. We ended the second quarter in a strong financial position with $34 million of cash, double our prior year cash position and no debt.

Based on our year-to-date performance, we continue to expect our year-over-year non-GAAP operating loss improvement to be at least 50%, consistent with the guidance we shared last quarter. There's still significant work ahead of us, but I remain encouraged by what our second quarter results show. The opportunity for us to grow market share and rebuild towards durable, profitable cash-generative growth remains substantial, and this quarter's progress gives us real conviction as we continue executing against our 5 transformation pillars.

Before I walk through the details of the quarter, I want to thank our entire Vera Bradley team. What we're accomplishing across each of our strategic initiatives reflects their hard work, focus and belief in this transformation and in bringing Vera Bradley's joyful optimism back to life while we build a more disciplined, higher-performing organization and operating model underneath it.

Our Direct segment delivered revenue growth of 8% versus the prior year, our fifth consecutive quarter of sequential improvement in this channel and an acceleration from roughly 4% growth achieved in the first quarter. Comparable sales across our Direct channel, combining stores and digital were up 9.2% for the quarter, our second consecutive quarter of positive comparable sales with growth in both our full price and outlet businesses. Our Direct segment represents more than 90% of our business and is the channel we control most directly. It also continues to be the best indicator of how our customers are responding to the product, marketing and strategic distribution choices we are making.

In our Indirect channel segment, due to intentional shifts in timing related to our marketplace strategy and reduction in liquidation sales, revenue contracted 39% compared to the prior year. The underlying performance in the Indirect channel remains strong with mid-single-digit overall selling growth to our strategic wholesale accounts, including leading specialty and key department store partners. We continue to see this part of our wholesale business as the clearest evidence that our product and brand work is translating beyond our own direct channels.

As the Back to School shopping season took hold in the back half of the quarter, our results accelerated, and we entered the third quarter with good momentum in both our full price and outlet channels. Back to School is a critical selling occasion for Vera Bradley and our strong preparation, planning and execution paid off with overall Back to School business up versus last year. We continue to strategically manage our pricing and promotional cadence this quarter, staying disciplined on the number of promotional events and expanding gross margin even as we drove continued sell-through of non-go-forward Project Restoration inventory. We've made good progress and are now past the halfway point on working through our legacy inventory.

Now let me provide an update on our continued progress against the 5 strategic transformation pillars of Project Sunshine, with a particular focus on where we saw the most meaningful movement this quarter and where we focus as we head into the second half of the year.

Pillar 1, sharpening our brand focus. As we have discussed on prior calls, sharpening our brand focus is fundamentally about bringing our unique brand positioning back to life through compelling product, authentic storytelling and strategic distribution choices. Our Back to School and holiday collections marked the first quarter with 100% of the assortment reflecting our collective work, an important milestone as we continue reengaging lapsed customers and attracting new customers across channels.

Our focused product strategies continue to resonate. Cotton continued its return to historic levels of importance and our more intentional IP collaborations contributed meaningfully to the quarter. Hello Kitty was a standout in brand, fared well against back-to-school with a strong assortment and relevant marketing campaign, the best example of the right collaboration, the right product and the right occasion coming together in a compelling and brand-enhancing manner.

The reintroduction of Winnie the Pooh in brand also continued to perform well. In outlet, our Star Wars Droid collaboration performed well through June and early July, following earlier quarter success with Disney Princesses. We also continue to see success with Stitch and Honeydukes IP product.

The successful return of Vera Originals also continued to reengage our long-time fans. We also saw continued validation of our shift towards introducing reimagined iconic styles and heritage prints. This gives us continued confidence that our product strategy grounded in the same brand attributes that define Vera Bradley, feminine, creative, cheerful, whimsical, joyful, fun, colorful, approachable, high quality and smart value is the right one and that it is durable across seasons and occasions rather than dependent on any single collaboration or moment.

Under our new wholesale leadership, our key accounts continue to realize the benefit of improved assortment productivity and full price sell-through, and we remain encouraged by the growing recognition of our brand momentum among leading retail partners, including existing and prospective wholesale accounts. Given our confidence in the future wholesale growth pipeline and our desire to rebuild this channel thoughtfully and with the right partners, we recently made the decision to reestablish our in-house sales team to accelerate growth while discontinuing our previous arrangement with a third-party sales representative agency.

On the marketing side, we continued our storytelling momentum from the spring, extending our joyful optimism creative into our Back to School campaign, which shifted from a school-focused campaign to a lifestyle-driven highlighting the versatility of our products across everyday moments. We featured enhanced Back to School backpack comparison guides and messaging to clearly differentiate product sizes and use cases, helping customers find the right solution for their needs.

We also continue to build on the success of our collaborations. This quarter, we partnered with Anthropologie, Target and Little Words Project, all of which drove outsized reach and new audiences to our social platforms. We remain focused on driving engagement through social and digital channels while continuing to manage marketing spend prudently, and we expect to continue rebuilding our upper and middle funnel marketing investment over time behind this storytelling foundation as our results support it.

Taken together, the progress we're making in sharpening our brand focus across product, marketing and channels validates that we're on the right path, and we remain committed to this strategic direction as a cornerstone of our transformation. In fact, as a result of these collective efforts, we have recently seen a return to positive growth in Google search activity for the term Vera Bradley this year, the first time in more than a decade.

Pillar 2, resetting our go-to-market approach. Turning to our second pillar, resetting our go-to-market approach. The stronger operational discipline we have built continued to support our results this quarter with our gross margin performance and product sell-through remaining the clearest evidence that our reimagined planning, buying and pricing processes are taking hold. We continue to see this as the connective tissue that turns our creative product and marketing engine into consistent commercial results.

The consumer research and segmentation work we described last quarter, including our in-home ethnographic studies and work with Gen Z customers on co-creating assortments continue to inform our product and marketing decisions this quarter, including the Back to School and fall seasons. We're building on this foundation as we plan for the balance of the year with a more deliberate and targeted approach to the introduction of new styles and prints.

Pillar 3, rewriting our digital ecosystem. Turning to our third pillar. Under our new Head of Digital Commerce, we continue to invest in the connectivity between our digital -- owned digital platforms, our marketplace partnerships and emerging channels like social commerce. We increasingly see digital and social as a driver, not only of our own digital and social commerce business, but of a broader halo and discovery effect that supports our wholesale accounts and drives traffic into our stores.

We are continuing to invest against that view, including additional talent and expertise, incremental media investment and technology to support our customer data platform migration, personalization expansion, card enhancements and additional testing platforms. This work remains an important contributor to our ability to meet customers where they are and to support both our direct and wholesale businesses.

Pillar 4, Outlet 2.0. Moving to our fourth pillar, the strategic transformation in how we approach our outlet channel. We continue to see the benefits of the elevated visual merchandising standards and curated SKU-reduced assortment we introduced under Outlet 2.0 last year. Notably, our Outlet 2.0 test stores registered improved sales, conversion and gross margin metrics versus our control group of stores. Given the initial results of Outlet 2.0 and the strength of our current outlet footprint, we intend to be more intentional about capitalizing on the trends we are seeing.

We are in the early stages of evolving Outlet 2.0 into a new strategy we are calling One Vera. One Vera is about acknowledging that every channel needs to work together as one brand, creating a seamless, more relevant and elevated Vera Bradley experience and meeting customers wherever they want to shop. Simply put, it is about creating a singular expression of the brand across channels and recognizing that customers want to find the brand icons wherever they shop.

Finally, our fifth pillar, reimagining how we work, has been largely achieved. Whilst we will continue to add select critical capabilities, we have fundamentally redesigned our organization to be future-ready. We have put in place a best-in-class team with the experience and track record to move quickly and win in the marketplace. Our primary focus now is building a culture of performance, agility and accountability with strong cross-functional collaboration and data-driven decision-making to drive the business forward, translating our creative and product work into commercial results.

In summary, we are encouraged by our second quarter results and the continued progress we are making across all 5 pillars of our transformation framework. And I want to again thank our team for how they've come together to deliver a second consecutive quarter of growth. The sequential improvement we have achieved over multiple quarters validates that our strategic direction is gaining traction and represents the right path forward to revitalize the Vera Bradley brand, expand market share and return the business to long-term sustainable growth, profitability and cash flow generation.

As we move into the third quarter, we expect the underlying trends we've described today, strengthening direct business, disciplined promotional management and continued gross margin improvement to remain intact. While there's significant work ahead, we're encouraged by our momentum and the alignment and commitment across the team. As we move through the back half of the year, we'll continue operating with discipline and agility, staying intentional about building the foundation for long-term value creation for all Vera Bradley stakeholders.

With that, I will turn the call over to Marty for a detailed financial review, and then we'll be happy to take your questions.

Thanks, Ian. Good morning, everyone, and thank you for joining us. For the sake of clarity, all of the numbers I am discussing today are non-GAAP and exclude the charges outlined in today's press release. A complete detail of items excluded from the non-GAAP numbers as well as the reconciliation of GAAP to non-GAAP can be found in that release.

We are pleased with our second quarter results, which reflect continued improvement in both our top and bottom line performance. For the second quarter of fiscal 2027, our consolidated revenues totaled $71.6 million compared to $70.9 million in the prior year second quarter. Net income from continuing operations for the second quarter increased $3.8 million to $3.3 million or $0.11 per diluted share compared to a negative $0.5 million last year or negative $0.02 per diluted share a year ago.

In terms of segment performance, Vera Bradley Direct segment revenues increased 8% to $65.4 million from $60.5 million in the prior year second quarter. Comparable sales increased 9.2% with all channels comping positive. This marks our fifth consecutive quarter of improvement. Total revenues were also impacted by having 14 fewer stores open in Q2 of this year versus last year, reducing total growth by approximately 100 basis points.

Vera Bradley Indirect segment revenues were $6.3 million compared to $10.3 million in the prior year second quarter. As Ian mentioned, the decline was related to strategic shifts and timing related to our marketplace strategy as well as a reduction in liquidation sales. We were pleased to see continued improvement in our specialty and department store sales where we see meaningful long-term runway for growth.

Second quarter gross profit totaled $42.8 million or 59.8% of net revenues compared to $35.4 million or 49.9% of net revenues in the prior year. During the quarter, we received $8 million in tariff refunds net of interest, which favorably impacted gross profit by $7.7 million and inventory by $0.3 million. Tariff refunds drove approximately 980 basis points of gross profit rate increase year-to-year. The underlying Q2 gross margin performance, excluding tariff refunds, improved more than 40 basis points versus last year, driven by product margin improvement and freight efficiencies, partially offset by margin pressure as we strategically cleared through non-go-forward Project Restoration product.

SG&A expense totaled $38.7 million or 54% of net revenues compared to $36.3 million or 51.2% of net revenues for the prior year second quarter. The increase in SG&A expense was primarily due to increased variable compensation expenses compared to the prior year period, combined with comparing to last year's Q2 stock forfeitures associated with senior leadership changes.

Second quarter operating income from continuing operations totaled $4.3 million or 5.9% of net revenues compared to an operating loss of negative $0.6 million or negative 0.8% of net revenues in the prior year.

Now turning to the balance sheet. Cash and cash equivalents at the end of the quarter totaled $34.2 million compared to $15.2 million at the end of last year's second quarter. Cash flow for the quarter increased $21.7 million versus an increase of $3.9 million last year due primarily to the tariff refunds, inventory management and accounts receivable improvement during the quarter. We had no borrowings on our ABL facility at quarter end.

Second quarter inventory decreased 28.4% year-over-year to $69.3 million compared to $96.7 million at the end of second quarter of fiscal 2026. The decrease was driven by improved assortment planning, buy management and sales performance as well as the $5.3 million Project Restoration inventory reserve.

For fiscal 2027, we are reiterating our prior guidance, including sales in the range of $255 million to $270 million and a year-over-year operating profit improvement of at least 50%. We are pleased with continuing momentum in our Direct business segment, while we are making strategic shifts in our marketplace strategy while reducing liquidation sales. We continue to expect full year gross margin improvement, and we remain focused on diligent cost management across all business functions.

In closing, we are encouraged by the progress we have made executing our strategic plan and confident the changes we are making set the company up for sustained growth and improved profitability.

Now I will open the call to questions. Operator?

[Operator Instructions] And our first question is from the line of Eric Beder with SCC Research.

Congratulations on another solid quarter. So let's talk about some of the pieces here. On the inventories first off, how should we be thinking about how you plan on -- what are you thinking about inventories as you anniversary some of the sell-through and some of the reserves and other pieces? How should we think about inventories kind of at the end of this year?

I think that inventory will continue to decline through the end of the year. And then as we get into next year, with the continued growth, I expect that there'll be some small increase as we head into next year. But overall, I expect us to be focused on continued turn improvement. So I think right, near term, it has been all about cash conversion. But I think the goal at the end of the day is to improve our overall turns into the 2 to 3 range. And so that's where the focus will be.

Okay. Indirect. So I know the Indirect is usually historically is a lagging indicator. Many times, it just takes a while for the people to see what's going on in the stores and to move forward there. So when you look at it, where are you seeing the encouragement? And where is the potential moving from third party to Direct in terms of selling the product?

Yes. Good question, Eric. So look, I think the bottom line is that we are very confident in our product marketing and strategic distribution choices that we're making. We feel they are working. And frankly, we're already seeing this in our, sort of, strategic wholesale accounts. I consider that to be, sort of, our specialty accounts and department stores, where we're already seeing this mid-single-digit sell-in growth. And I think the fact that we've now had 5 consecutive quarters of sequential improvement in our Direct business, right, which is also continuing to build momentum shows us that the fundamentals are right. And we've been prioritizing the Direct business. It's 90% of our sales, and it's the best indicator of how customers are responding.

Now really, the focus is going into how do we sort of reset our Indirect business and set it up for long-term sort of sustainable growth, just like we're achieving in our Direct business. And look, I think we've got a game plan. We've got the right strategies. Number one, under new -- we brought in new wholesale leadership. Under that leadership, we've acted very quickly to rebuild our in-house sales team. Their first priority is going to be on focusing on building back our strategic accounts, the specialty in the department stores, which, as you well know, is at a fraction of where it was during the peak.

Also, we're focused on a more sort of sustainable management of some of our key accounts where we have these cut-to-order programs. We're reducing liquidation. And also, we are looking at our marketplace portfolio where -- and marketplace, as you know, is a channel, a digital channel where we increasingly see customers shopping and really optimizing that portfolio in terms of how we manage it. And the reality is some of those may be managed as wholesale accounts, some of those may be managed as direct accounts. And we want to find the best way to work with each of those platforms so that we can service our customers.

Great. When you look at it, you spent time bringing back some of the features that the kind of the OG Vera customer loves in terms of utility, bringing back some of the prior product. And the Back to School season was, kind of, I think, in some ways, a test to see how relevant and how you can expand even more with that younger customer base. I'm curious when you look at the Back to School learnings, kind of, what you saw that basically where you have it going forward that you want to do [indiscernible].

Sorry, I couldn't hear the last part of your question, Eric.

The last part was about the back-to-campus (sic) [ Back to School ] season and, kind of, what are the learnings you're going to take from that going forward?

Yes. Look, I think overall, the key learnings are, first and foremost, Back to School is a moment and an occasion that Vera Bradley really can own. And so by leaning into the right kind of product development for that Back to School season, we have the opportunity to continue to grow market share. I think for the most part, we were very pleased with the preparation that we had done, the planning as well as the execution.

If there was maybe one thing I could call out that we recognized was sort of a missed opportunity. We realized actually there were several of the backpack or there were several prints in which we had the backpacks, but then not the matchback lunch bags. And the customers really love to have that matchback. That was for us a missed opportunity potentially to drive more growth in sales on the lunch bags, just as one example. But look, we think this is -- Back to School is something we're going to continue to lean into.

Okay. Yes. And I will say that you had great inventory this year versus prior periods. Last question. What is the you're in 100% of what you want to be? How should we be thinking about what you're looking to do for the holiday season in terms of product and flows? I know last year, there was a lot of clearance, a lot of getting rid of older inventory. This year, I would assume you can be a little bit more, kind of, aggressive in showcasing the Vera that you want it to be.

Yes. Look, I think the bottom line is, right, as of this last quarter, we are now 100% in control of the assortment and the buys. And I think we are taking the same very thoughtful and planful approach to holiday as we did to Back to School. And I think we -- our team is feeling very confident about the assortment, about some of the prints, about especially the accessories and small bags, which, as you know, has been a big development opportunity for us, which we think for sort of occasions at that time of year and gifting is great. So we're feeling very much sort of in control now of driving great outcomes.

Ladies and gentlemen, this will conclude our question-and-answer session, and we'll also conclude today's conference. We thank you for your participation, and have a wonderful day.

Thank you. conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please this conference is being recorded. I will now turn the conference over to Mark to Eli, Chief Administrative Officer. Thank you. You may begin.

Good morning and welcome, everyone. We'd like to thank you for joining us for today's call. Some of the statements made during our prepared remarks in response to your questions may constitute forward-looking statements made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect. Please refer to today's press release in the company's most recent filed form 10-K filed with the SEC for a discussion of known risks and uncertainties. Investors should not assume that the statements made during the call will remain operative at a later time. We undertake no obligation to update any information discussed on today's call. I would now like to turn the call over to Vera Bradley's Chairman and Chief Executive Officer, Ian Bickley. Ian?.

Good morning, everyone, and thank you for joining us for Vera Bradley's first quarter fiscal 2027 earnings call. I am pleased to report that our first quarter results demonstrate continued momentum in our Project Sunshine transformation journey to reclaim Vera Bradley's joyful optimism while building operational excellence across the business. We made meaningful progress across multiple fronts that give us confidence in the path forward. Most notably, following a clear trajectory of sequential improvement, our first quarter achieved a return to positive year-on-year growth of nearly 8%, marking our first quarter of overall revenue growth since Q4 FY22. This achievement marks an important inflection point in our turnaround, reflecting the cumulative impact of our strategic initiatives and the hard work and commitment of our entire team. Our first quarter performance was not solely a top-line story. On a non-GAAP basis, we generated year-over-year gross margin expansion of 430 basis points to 51.8 percent and continued to manage expenses prudently, with total costs down $5.6 million compared to the prior year, or a favorable decline of nearly 15%.

This fueled a year-over-year improvement in our operating loss of $10 million, or 76%. We achieved these results while reducing our year-over-year inventory by 26% and improving our operating cash flow for the period by $12.7 million, or a 70% increase. improvement over last year. Based on the solid start to the new fiscal year, we are now expecting our year-over-year non-GAAP operating loss improvement to be at least 50 percent. Although we have much work to do, I'm very pleased with our first quarter performance. we still have a tremendous opportunity to increase market share and return the business to long-term sustainable growth, profitability, and cashflow generation. The The improvements we achieved this quarter provide a strong foundation as we continue executing the five strategic pillars of our transformation. Before providing more details on our first quarter performance, I want to personally thank the entire Vera Bradley team for their focus, adaptability, and passion during this pivotal transformation. The progress we are making across our strategic initiatives is a direct result of their acceptance. exceptional commitment and dedication to reclaiming Vera Bradley's joyful optimism while building operational excellence across every function.

Overall sales for the first quarter were up 7.8% versus Q1 of the prior year, with growth across nearly all channels of distribution. We achieved strong sequential improvement in our direct segment, with revenue growth of 4.1% compared to the prior year, representing our fourth consecutive quarter of sequential improvement. This performance is building confidence in our teams and reinforces that the direction we are taking is resonating with our consumers. indirect segment revenue grew approximately 26.6% year-over-year, driven by improved performance in our specialty and department store accounts, as well as shipments related to strategic wholesale partnerships, including Target. We are seeing stabilization in our existing specialty retail accounts and stronger sell-through in department stores, notably Dillard's, which is very encouraging. It's important to note our indirect segment benefited from several key account collaborations. Excluding this benefit, our indirect channel growth would have been approximately flat year over year, which still represents meaningful stabilization in this channel. We are seeing significantly higher levels of interest and engagement with both existing and new wholesale accounts, which is further validation that our product and marketing efforts are yielding excitement and interest beyond our direct channels. giving us confidence in the future wholesale growth pipeline.

During the quarter, we continued to strategically manage our pricing and promotional cadence to drive sell-through of aged inventory while expanding gross margins year over year. pleased with the discipline our team demonstrated in balancing inventory clearance with margin enhancement and we continue to make progress working through the remaining discontinued product from project restoration. Now, let me provide an update on our continued progress across the five strategic pillars of Project Sunshine. Pillar one, sharpening our brand focus. As I've shared on previous calls, we had lost sight of what made Vera Bradley distinctive and beloved by our customers. we had become less differentiated in the marketplace and too dependent on promotional activity. Carpeting Our Brand Focus is fundamentally about bringing our unique brand positioning back to life through compelling product, authentic storytelling, and strategic distribution choices. Taking on a leadership role one year ago, our primary emphasis has been on driving the relevancy of our product offering. Building on the 20% influence we had on the assortment in Q4, we successfully impacted nearly 80% of the spring collection, and I'm pleased with the positive response and strong engagement from customers.

In addition to the positive sales trend, this was the first Q1 with year-over-year customer growth in our direct channels since calendar 2021. Back to school season and moving forward, 100% of our assortment will be influenced by the work we have done collectively over the past year. Very exciting considering we are in the early stages of recouping customers across all our channels. Customers clearly responded to our focused product strategies, which drove the results. We leaned into cotton as a material, which is now returning to historic levels of importance. We reintroduced beloved heritage styles and prints in addition to fresh, innovative designs. we focused on more impactful IP collections with more qualitative design and execution. We successfully won back many of our loyal customers and fans, while at the same time engaging with a new generation of customers.

Across the business, our cotton material performance nearly doubled versus prior year. In brand, our Winnie the Pooh collection was a huge success, strongly selling through in less than two weeks. At the same time, six of our top 10 non-IP products were new styles, with the small beaded Roxbury bag at $150 and the original 100 bag over-indexing with Gen Z customers. Our iconic duffel in both IP and heritage prints, like Cambridge Blue, was a winner across generations. In Outlet, colorful fun beach and spring prints, as well as the Stitch and Honeydukes IP product resonated across cohorts, while the return of Vera Originals reengaged many of our longtime fans. Thank you. The product changes we've implemented remain firmly rooted in the brand attributes that define our DNA. Vera Bradley is feminine, creative, cheerful, whimsical, joyful, fun, colorful, approachable, high quality, and smart value.

To amplify the substantial product progress we've made, we're now intensifying our marketing efforts to drive engagement through an enhanced, cohesive, social-first marketing approach, focused brand storytelling with product as hero, and a unified brand framework consistent across all channels. all designed to connect with both our loyal customer base and new audiences. From a creative perspective, under new marketing leadership and leveraging our core brand attributes, we developed and launched a new spring campaign that embodies our return to joyful optimism and authentic Vera Bradley character, including our cut-through Cherry on Top campaign in brand and Strawberry Girl Summer in outlet. This refreshed creative went live across our website, in stores, email marketing channels, and social media platforms, where we saw improved productivity and higher customer engagement on lower marketing spend. Our Bespoke 100 Bag campaign was also a first, demonstrating our ability to elevate Vera Bradley in social and cultural conversation. on social media, over 30,000 people queued up online for the release of 52 Bespoke 100 bags, ranging in price from $95 to $145, which were sold out in less than three minutes. This activation generated significant buzz, built our social footprint, and created a halo impact for our iconic 100 bag, which we subsequently featured in our Meet the Icons campaign in social and online. Beyond product and marketing, we're also concentrating on our distribution channels to sharpen brand focus and extend our reach. Let me highlight the importance of our wholesale strategy and partnerships within our overall distribution.

While the wholesale landscape has evolved significantly, we firmly believe that we are the only company in the world that can do this. We believe that thoughtfully rebuilding this channel with the right partners is essential to regaining brand relevance and expanding market share. Under new wholesale leadership, our retail partners are realizing meaningful year-over-year margin expansion, underscoring improved assortment productivity and healthier, full-price sell-throughs. Strong performance is being driven by elevated print execution and the reintroduction of iconic legacy styles, reinforcing brand equity and accelerating wholesale growth. In addition to stronger sell-through performance and increased open-to-buys with key department store and specialty accounts, we've also been encouraged by the growing recognition of our brand momentum from leading retail partners. On June 1st, we launched a focused back-to-school Vera Bradley capsule collection in 89. Nordstrom Doors and on nordstrom.com for the first time.

Of significant note this quarter were the success of our strategic collaborations with Bath and Body Works and Target. collaborations represent the kind of high-impact partnerships that drive buzz and expose the brand to new audiences. The collaborations ignited strong user-generated content and and customer engagement. Approximately 80% of consumers who engage with us through these collaborations were new to Vera Bradley's social channels, demonstrating the power of these strategic partnerships in generating brand heat, growing our social footprint, and attracting new customers. The success of these partnerships has also generated additional inbound interest in future collaborations which we are now exploring. The progress we're making in sharpening our brand focus across product, marketing, and channels validates that we're on the right path and we remain committed to this strategic direction as a cornerstone of our transformation. Turning to our second pillar, resetting our go-to-market approach. As we've shared previously, we've been fundamentally transforming how we work to deliver what our customers truly need and value, focusing on six critical areas.

Concentrated investments in hero products and bigger ideas. Strategic channel assortment alignment. Social first integrated marketing supporting key moments like back to school. enhanced planning and inventory management to drive improved turns, disciplined pricing and promotion governance to enhance margins, and strengthened analytics and business intelligence capabilities to enable better data-informed decision-making. Our objective has been to rebuild the operational engine that converts our creativity into measurable commercial success. fostering a more integrated and agile way of working. In Q1, we saw continued evidence that this reimagined approach is positively influencing our business performance. The team has advanced its cross-functional collaboration, examining and refining how we operate from product development through buying, marketing, and channel execution, ensuring our products reach customers through their preferred shopping venues and experiences. At the top of the funnel, we've now deeply embedded consumer insights into our operating rhythm through comprehensive customer research and segmentation work, including in-home ethnographic studies, AI digital twins, AI digital twins to product test across customer segments during the product development phase and Gen Z focus groups for co-creating our assortments These insights are actively shaping product development decisions from silhouette selection to print development, helping us address customer needs and preferences more precisely. Operationally, we've demonstrated greater agility in Q1, leveraging real-time data to optimize promotions, marketing initiatives, and digital communications to meet evolving customer needs.

These data-driven approaches contributed to the strong 430 basis point gross margin expansion we experienced. in Q1 while also enabling continued inventory management discipline. For Q1, we executed a streamlined promotional plan that was more focused and less complex to implement, which we believe contributed to our margin performance. Our marketing and data analytics teams have been working on building a single, connected customer journey, enabled by a unified customer data platform, email service provider, and SMS ecosystem. Powered by predictive AI analytics, this connectivity is aimed at driving a significantly higher level of personalized customer engagement across channels. We're also making strides in how we approach our go-to-market timeline. Our design and development teams are now engaging with factory partners much earlier in the process, which is enabling us to streamline our overall go-to-market calendar. One benefit is that we were able to have our first ever sample line for pre-market, allowing for account order validation prior to Vera Bradley's investing in buys for our wholesale accounts.

Additionally, we've aligned our wholesale buying cycles with standard market practices by transitioning to four seasons from two, bringing us in sync with how the accessories industry operates and making it easier for wholesale partners to work with us. Overall, we're encouraged by the operational progress we've made and the increasing effectiveness of our integrated approach. The foundation we're building through resetting our go-to-market approach with a centralized calendar, aligned milestones, and clear owners for decision-making is strengthening our ability to translate creative vision into a more efficient and sustainable economy. into commercial results while working with greater speed, efficiency, and collaboration across the organization. Turning to our third pillar, rewiring our digital ecosystem. Our digital commerce business across owned sites and third-party marketplaces represents a significant and highly profitable component of Vera Bradley's overall business. However, historically, our various digital platforms have not delivered a cohesive, seamless customer journey. We've been working to fundamentally transform this, building on the organizational changes we made in Q4, where we consolidated the P&Ls of all digital platforms, including DTC e-commerce and third-party marketplace operations.

I'm pleased to announce that our new head of digital commerce joined the team on May 4th. Peter brings exceptional credentials and relevant experience, having built significant digital businesses and operations for multiple brands, including Adidas, Talbots, and Crocs. His expertise in scaling digital commerce businesses on existing platforms like Amazon and Target, as well as emerging platforms like TikTok Shop, will be instrumental as we execute our integrated digital strategy and drive future growth and profitability. Under this new leadership, we're taking a comprehensive approach to optimizing our digital ecosystem. We continue to enhance our e-commerce platform with improved site navigation and an elevated overall customer experience. Our data-driven approach to pricing and promotions has enabled us to operate with reduced promotional intensity while sustaining strong customer engagement and improved margins. We've also deployed enhanced digital capabilities designed to drive deeper customer engagement and streamline the path to purchase.

The progress we're making in rewiring our digital ecosystem from organizational integration to platform enhancements to strategic marketplace positioning is strengthening our ability to meet customers where they are, delivering compelling digital experiences through our digital ecosystem. profitable growth through our digital channels. We were proud this year to have been named the Target Plus 2025 Partner of the Year on their marketplace. Moving to our fourth pillar, Outlet 2.0. As a reminder, our 2.0 initiative represents a strategic transformation in how we approach our outlet channel. This initiative is designed to create an elevated customer experience while preserving our smart value proposition and extending our reach to customers in markets where we don't currently operate brand stores. The enhancements we've implemented include a more curated and focused assortment with an initial 35% SKU reduction, while strategically incorporating new brand products from our heritage collections and select IP collaborations. We've introduced elevated visual merchandising standards and elements throughout the stores that drive greater category clarity and enable easier customer navigation, including mannequins, light boxes, and brand fixtures that showcase our signature use of color, pattern, and lifestyle. storytelling.

Our enhanced selling experience incorporates updated training programs and improved in-store tools that enable our teams to deliver better selling support and personalization for our customers. This transformation is moving us towards a more engaged, curated experience that reinforces brand equity while simultaneously driving conversion and profitability. Under a newly appointed visual experience leader, we're building on the pilot program we launched during the holiday season while maintaining a disciplined test and learn approach. We continue to see encouraging results that not only validate this direction, but inspire us to be bolder in our approach. Beyond the positive qualitative feedback that we're receiving from both customers and store employees, we're observing measurable improvements across key retail performance indicators. This sustained momentum demonstrates that the Outlet 2.0 experience is resonating with consumers and creating a more meaningful brand engagement. which we believe we can build upon. Looking ahead, we're planning to open four new outlet stores while evaluating enhancements to this strategy as we approach holiday.

Our approach remains measured and data-driven, ensuring we capture learnings from each conversion to optimize the model before broader implementation. Importantly, through Q1, our outlet channel has now achieved four consecutive months of positive comparable sales growth. Finally, turning to our fifth pillar, reimagining how we work. Streamlining our organization while strategically building and investing in new capabilities. We are rebuilding Vera Bradley for long-term sustainable growth and profitability. We are fundamentally redesigning our organization to be future ready, cultivating new capabilities, and making deliberate investments in talent that will drive our transformation forward. In summary, we are encouraged by our first quarter results and the continued progress we are making across all five pillars of Project Sun.

The sequential improvement we have achieved over multiple quarters validates that our strategic direction is gaining traction and represents the right path forward to revitalize the Vera Bradley brand, expand market share, and return the business to long-term sustainable growth, profitability, and cash flow generation. We're building a best-in-class team with relevant experience and proven track records that will enable us to move with speed and win in the marketplace. reimagining how we work, fostering a culture of performance, agility, accountability, and strong cross-functional collaboration, while leveraging data-driven insights to make intelligent decisions that drive our business forward. are stabilizing growth and efficiency opportunities. While we still have significant work ahead, we are encouraged by the momentum we are building and the alignment and commitment of our entire team. With that, I will turn the call over to Marty for a detailed financial review, and then we'll be happy to take your questions.

Thanks, Ian. Good morning, everyone, and thank you for joining us. For the sake of clarity, all of the numbers I am discussing today are non-GAAP and exclude the charges outlined in today's press release. The complete detail of items excluded from the non-GAAP numbers, as well as a reconciliation of GAAP to non-GAAP, can be found in that release. We are pleased to report continued sequential improvement in both our direct and indirect segments as our strategic initiatives demonstrate results. We delivered meaningful margin improvements in both gross margin and SG&A leverage driven by lower promotional levels and disciplined expense management. FOR THE FIRST QUARTER OF FISCAL 2027, OUR CONSOLIDATED REVENUES TOTAL 55.7 MILLION COMPARED TO 51.7 MILLION IN THE PRIOR YEAR FIRST QUARTER. NET LOSS FROM CONTINUING OPERATIONS FOR THE FIRST QUARTER IMPROVED 75%, TOTALING NEGATIVE 2.5 MILLION OR NEGATIVE 0.9 CENTS PER DILUTED SHARE compared to $10.1 million last year, or negative $0.36 per diluted share.

In terms of segment performance, Vera Bradley direct segment revenues increased 4.1% to 44.9 million from 43.1 million in the prior year first quarter. Comparable sales increased 13.4%, which represents the fourth quarter of sequential comparable sales improvement. Positive growth was driven by improved e-commerce conversion and higher average ticket across all channels, as well as increased traffic in our outlet and full wine stores. Total revenues year over year were also impacted by 14 store closures since the prior year first quarter. Beer Bradley indirect segment revenues increased 26.6% to 10.8 million from 8.6 million in the prior year first quarter. The increase was driven by improvements in specialty and department stores while cut to made order sales able to continue growth across key accounts. First quarter gross profit totaled $28.8 million or 51.8% of net revenues compared to $24.6 million or 47.5% of net revenues in the prior year.

The 430 basis point increase in year-over-year margin rate resulted from favorable sales mix and lower freight and duty costs. SG&A expense totaled $32.7 million, or 58.8% of net revenues, compared to $38.3 million, or 74.2% of net revenues for the prior year first quarter, a reduction of $5.6 million and 1,540 bps improvement as a percent of net revenues. Decrease in expense was primarily due to cost optimization initiatives begun in fiscal 25, which are enabling lower personnel costs, optimized marketing spend, which allows us to reduce and reface spending throughout the year, and reduce lease costs through store closures and renegotiations. First quarter operating loss from continued operations totaled negative 3.3 million or negative 5.8% of net revenues compared to negative 13.6 million or negative 26.3% of net revenues in the prior year. Overall, we are pleased with the sequential progress we're making across both segments, which reinforces that we are on the right path. NOW TURNING TO THE BALANCE SHEET. CASH AND CASH EQUIVALENTS AT THE END OF THE QUARTER TOTAL 12.5 MILLION COMPARED TO 11.3 MILLION AT THE END OF LAST YEAR'S FIRST QUARTER.

CASH FLOW FOR THE FIRST QUARTER WHILE NEGATIVE IMPROVED 68% TO NEGATIVE $6 MILLION VERSUS NEGATIVE 19.1 MILLION IN THE PRIOR YEAR FIRST QUARTER. We had no borrowings on our ABL facility at quarter end. First quarter inventory decreased 26% year over year to $73 million compared to $99.2 million at the end of first quarter of fiscal 26, representing the company's leanest first quarter inventory position since fiscal 2011. DECREASE IS DRIVEN BY IMPROVED ASSORTMENT PLANNING, BIO MANAGEMENT, AND SALES PERFORMANCE, AS WELL AS THE 5.3 MILLION PROJECT RESTORATION INVENTORY RESERVE. For fiscal 2027, we continue to plan for sales to be in the range of $255 million to $270 million as we remain focused on stabilizing the direct business and rebuilding our wholesale business under FDIC. new leadership, while at the same time placing less emphasis on liquidation channels. Although we are encouraged by our sales growth in the first quarter of fiscal 27, we see consumer headwinds from higher inflation and more specifically fuel prices creating some friction we will be working to overcome. We are raising our operating performance improvement to be at least 50% from 40% due to expected full-year gross margin improvement and continued diligence around cost management.

We expect quarter-to-quarter improvement to be uneven. In closing, the Vera Bradley team has delivered an excellent start to our fiscal year, demonstrating agility, creativity, and strong execution. we still have work ahead of us, we are confident in our strategic direction and our ability to drive sustainable profit growth over time. Now I will open the call to your questions. Operator? Thank you. If you would like to.

If you have a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker calls, It may be necessary to pick up your handset before pressing the star keys. Our first question is from Eric Better with SCC Research. Good morning. Congratulations on the quarter.

Thank you. Thank you, Eric. So let's talk about the.

about Back to School, it's a big piece for you guys. It expands Historically, it expands the consumer base by a lot. What should we be seeing and what should your Vera Bradley customers be seeing here as this rolls out, and kind of what are the key touch points that we're going to focus on and we should be focusing on at the best?.

to support. Yes, thanks, Eric. Great question. Yes. And thank you for your comments on the quarter, which we obviously are very pleased with. You know, as you pointed out, I mean, back to school for us and the second quarter is really a critical quarter for Vera Bradley. I think we all firmly believe that it's a moment and an occasion that this brand can really authentically own. And together with our teams, we've put a lot of emphasis into the preparation for back to school. Just to give you a few examples, on the product front, I believe we have much stronger relationships backpack innovation, in addition to actually being much better positioned in our core backpack inventory. Last year, you know, despite the strong results we had, we actually had a tremendous number of out-of-stocks in our core, you know, core colors in the backpacks.

Secondly, we are starting our sort of back to school, you know, back to school promotion three weeks earlier than we did last year. We think, you know, the back-to-school momentum is building much sooner in the cycle, and we prepared ourselves for that this year. We also have developed, you know, a very strong assortment around personalization as well as an expanded community. small bag assortment that we believe will particularly resonate with our Gen Z customers. We also are promoting what we are calling teacher totes. and that's primarily in our outlet channel. But beyond that, we're also going to have significant new distribution, with the rollout in Nordstrom to 89 locations. which is basically a whole back-to-school capsule. It's going to, I think, give us, you know, significant additional reach with new consumers that may not be able to purchase Vera Bradley today. I mean, those are just a few of the examples, but I think overall we are feeling well prepared. cautiously optimistic.

Obviously we have to be realistic about you know the overall environment for consumers out there right now which is definitely you know we're facing some headwinds however we think back to school is an occasion that people are going to need to purchase for. And I think Vera Bradley can position itself as a go-to resource.

Great. Speaking about the outlet, the Outlet 2.0, you mentioned You mentioned opening, I just want to confirm this, you opened four, are you opening four new outlet stores or converting four more outlets to outlet 2.0 stores?.

No, we are opening four new outlet stores.

What is the potential to expand the outlet 2.0 beyond kind of the seven to nine that you're testing right now. And kind of what do you see as the longer term in terms of their ability to generate better or better returns than the outlet stores? Yes.

Yes, I think, great question. First of all, I think if we think about the outlet channel, the biggest opportunity for us is to improve the productivity of our existing stores, not to go out and open a bunch of new outlet stores. That's something which we are doing very opportunistically and where we see opportunities from a distribution perspective. The real opportunity is really on driving same-store sales growth in our outlet locations, which are, from a productivity standpoint, significantly off where they were before. during the peak. With regards to outlet 2.0, you know, we're continuing to really refine the model. We definitely have seen improved retail KPIs in our outlet 2.0 stores, but we are still making adjustments and want to have a much higher degree of certainty before really doing a more substantial rollout. So I think we're continuing to really take a test to learn approach with different things. But I think if we can really hit outlet 2.0, we'll be a significant contributor to how we close the gap on productivity in our outlet locations. in addition to, I think also, you know, enhancing the overall, you know brand image and experience with with customers you know across the fleet because as you know one of the one of the rationales for outlet 2.0 is that we have outlet stores in a lot of places where we don't have coverage either by wholesale or by brand locations.

Marty, how should we be thinking about the inventories going forward? Um, and how were tariffs, uh, flowing into all of this? Um,.

Thank you. With regard to inventories going forward, we still see opportunities to improve TURN, and we continue to focus on working through the project restoration inventory that we have on hand, so we'll see further reductions with that. know, investing back in styles for the core business going forward. as we see, you know, lift off on consumption with those. So I think we'll continue to be in this $60 to $75 million range is where we're going to land from an inventory standpoint. With regard to tariffs, we have applied for refunds just like everybody else based on what was paid. Year over year, we're seeing the absolute rate with the Supreme Court decision drop from 19%. to a planning rate of 15 and and currently they're communicating at 10 to 12.5 percent um under the Section 301 tariffs that will probably take effect. So we should see less pressure from tariffs on margins kind of going forward based on what we know today.

Great. Thank you and good luck with back to school and the rest of the year.

Thank you. Thank you. There are no further questions at this time, so this will conclude. today's conference. You may disconnect at this time and thank you for your participation.

[Call has ended.]

Greetings, and welcome to the Vera Bradley Fourth Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mark Dely, Chief Administrative Officer for Vera Bradley. Thank you. You may begin.

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

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

I'll now turn the call over to Vera Bradley's Chairman and Chief Executive Officer Ian Bickley. Ian?

Good morning, everyone, and thank you for joining us for Vera Bradley's Fourth Quarter and Full Year 2026 Earnings Call.

Before I begin discussing our quarterly results and continued transformation progress, I want to share some important leadership news that reflects the Board's confidence in our strategic direction and the momentum we are building. I am pleased to announce that the Board of Directors has named me as Vera Bradley's permanent Chief Executive Officer in addition to my current role as Chairman of the Board, transitioning from my role as Executive Chairman. Additionally, our Chief Financial Officer, Marty Layding, will be expanding the scope of his responsibilities as Chief Operating and Financial Officer. I want to express my sincere gratitude to our Board of Directors for their support, confidence and this tremendous opportunity to lead Vera Bradley into its next chapter of growth.

This leadership transition reinforces the Board's belief in our existing strategies under Project Sunshine and validates that we are on the right path forward. I remain confident that with the right focus, effort and execution we have a tremendous opportunity to increase market share and return the business to growth by reengaging our loyal customer base while also expanding our reach and relevance to new customer segments.

In addition to my appointment to the permanent CEO seat and Martin's added role as COO. Over the past few months, we have added new leadership talent across all key customer-facing functions including merchandising, marketing, digital commerce, wholesale and stores. This was achieved through a combination of new external leadership appointments as well as internal promotions of top talent, demonstrating our commitment to the path of continued progress in reinvigorating and reimagining the iconic Vera Bradley brand.

I'm also pleased to report that the fourth quarter marks our first quarter of profitability in over a year. We are stabilizing our business gaining better visibility to the underlying growth and efficiency opportunities and beginning to make meaningful progress on our transformation journey. Looking to FY '27, we are planning our sales to be between $255 million and $270 million.

The Board's decision to formalize our leadership structure at this pivotal moment underscores the collective confidence in our transformation plans and ability to deliver long-term sustainable results. Over the past quarter, we have remained focused on delivering Project Sunshine which anchors on reclaiming Vera Bradley's joyful optimism and acts as our North Star, bringing creative energy to how we work within functions and across the Vera Bradley team. It is leading us to new ideas for products, marketing and channels, transforming how we work with each other and encouraging us to think differently about our operations.

At the same time, we have been addressing past missteps with urgency and implementing comprehensive changes across the business and organization, demonstrating the focus and agility of our team. To remind you, the 5 strategic pillars under Project Sunshine are: first, sharpening our brand focus through product relevance and storytelling. Second, resetting our go-to-market approach with data-led insights. Third, rewiring our digital ecosystem across all touch points. Fourth, implementing Outlet 2.0 for a more brand-enhancing retail experience. And fifth, reimagining how we work with new capabilities and organizational alignment.

Before updating you on our progress across these 5 pillars, I would like to provide a few fourth quarter highlights that clearly demonstrate continued sequential improvement and measurable progress towards our goal of achieving long-term sustainable growth and profitability. For the fourth quarter, we achieved strong sequential improvement in our Direct channel registering a revenue decline of 2.6% compared to the prior year, 270 basis points of progress from Q3 and nearly 1,400 basis points from Q2.

The Q4 Direct channel top line results represent our third consecutive quarter of sequential improvement. And I'm pleased to report that our fiscal '27 Q1 Direct channel revenue is tracking positive marking a significant milestone in the stabilization of our business. While we have work to do, this performance is building confidence in our teams and reinforces that the direction we are taking is beginning to resonate with our consumers.

Overall sales for the fourth quarter were down 1.7% versus Q4 of the prior year. benefiting from positive year-over-year indirect channel revenue growth of just under 5%. Our indirect channel growth was driven by a large wholesale order from an upcoming spring collaboration which we're very excited about and will be able to announce shortly.

During the quarter, we also successfully and intentionally leveraged holiday traffic to clear through the discontinued product from last year's Project Restoration while rebuilding our assortment of hero products, including the original 100 Bag, iconic heritage prints and select IP including Snoopy and Lilo and Stitch.

We continue to see strong consumer acceptance to the strategic reinvestment in our cotton-based assortment and in our brand channels, we experienced a second consecutive quarter of strong double-digit positive comp growth, further validating that we're moving the overall product assortment in the right direction. In our outlet channel, a more impactful and better executed end of season sale in January drove clearance and successful sell-through of discontinued and aged products.

At the same time, customers responded positively to the return of classics and handbags, including the triple zip, glenna and Vera franchise as well as the giftability of our cozy collection. We are also encouraged by the positive response we are seeing to the first deliveries of new spring/summer product that flowed into our stores at the end of January. For the quarter, comparable sales declined by less than 1% and when we account for the negative impact of winter storm burn during the last week of January, our comparable sales were essentially flat.

As I mentioned, this marks our first quarter of achieving profitability in over a year with net income of $2.5 million and an EPS of $0.09, a positive year-over-year swing of $0.28. Our bottom line disciplined cost management, while our overall results demonstrate that we are stabilizing the business gaining better visibility and beginning to make meaningful progress on our transformation journey.

Marty will provide greater detail, but through an improvement in product acceptance, continued inventory management efforts and disciplined pricing and promotional strategies while delivering smart value to our customers, we generated year-over-year gross margin expansion of approximately 100 basis points.

We also managed our SG&A spend prudently with total costs down more than $10 million to the prior year or a favorable decline of 22%. From a cash flow perspective, we generated $17 million in operating cash flow in Q4. This strong cash flow generation allowed us to pay off our ABL facility, further strengthening our balance sheet and providing additional financial flexibility as we continue executing Project Sunshine.

While we recognize there's still significant work ahead, these early wins give us confidence that our focused approach to product innovation brand storytelling and operational excellence is moving Vera Bradley in the right direction. The sequential improvement we've achieved across multiple quarters, combined with our return to profitability this quarter, validates that Project Sunshine is gaining traction and positioning us for long-term sustainable growth, profitability and cash flow generation.

I want to personally thank our entire team for their disciplined execution, agility and commitment to operational excellence during the all-important holiday season, which allowed us to achieve these results.

Now for an update on our Project Sunshine strategic initiatives. First up, sharpening our brand focus. As I've discussed on prior calls, we lost track of what made Vera Bradley special and unique and what customers love about us. We became indistinguishable from other brands and over reliant on promotions, sharpening our brand focus has been all about bringing our unique and distinctive brand positioning to life through our products, marketing and storytelling and where consumers can find our products.

Since I joined in my executive chair role, roughly 8 months ago, our #1 focus has been on improving the product. This is an effort that doesn't happen overnight but our Q4 results are testament to the early success we're experiencing. We are seeing strong initial indicators of our product strategies effectiveness and our continued momentum in Q4 was fueled in part by the return of discontinued styles that our customers had been asking for. This 20% of the assortment that we were able to influence this quarter delivered encouraging results, validating our merchandising approach.

The great news is that through a combination of reintroduced styles and high demand coupled with newly designed products, the team has successfully influenced approximately 80% of the spring assortment and is generating positive customer response and early sales momentum. The assortment changes we have made remain anchored in the brand attributes, which are core to our DNA. Vera Bradley is feminine, creative, cheerful, whimsical, joyful, fun, colorful, approachable, high-quality and smart value.

To support the significant progress we have made on the product assortment during the past 8 months, we are now putting increased focus on storytelling through an enhanced social-first marketing strategy to engage both our existing customers and new audiences. From a creative standpoint, under new marketing leadership and leveraging our core brand attributes, we have shot a new spring campaign that reflects our return to joyful optimism and authentic Vera Bradley roots.

This refresh creative is being deployed across our website and e-mail marketing with a major social media push that just began last week. Our marketing strategy has been focused on 3 key priorities: channel optimization, refined messaging and enhanced media efficiency. Despite reducing overall marketing spend year-over-year, we achieved strong performance across multiple metrics, return on ad spend improved meaningfully, e-mail open rates increased, and we successfully scaled our paid social programs while maintaining consistent returns.

In addition to product and marketing, we have also been focused on our channels of distribution in order to sharpen our brand focus and amplify our messaging. Let me first spend a moment on our wholesale strategy and partnerships. As I've stated before, while the overall landscape of wholesale partners has evolved, we believe that rebuilding the wholesale channel with the right partners will be a key component of our success in regaining brand relevance and market share.

Under new wholesale leadership that has recently joined, we are building a tiered strategy with focus on key retailers, strategic collaborations and specialty accounts. In the meantime, we are thrilled about a large wholesale order that shipped late in Q4 for a very exciting upcoming collaboration, which we will be able to announce soon. We are also seeing recognition of the brand momentum by some leading retail accounts. For Back to School, we will launch a focused Vera Bradley capsule collection in 89 Nordstrom doors and on nordstrom.com.

Let me also spend a moment discussing our IP partnerships, which remain an important driver of brand heat and commercial success. And as we engage both new customers and repeat purchasers looking to collect items. Our strategy is to focus on fewer, more impactful and qualitatively executed IP launches going forward. The success of this strategy was evidenced by our Peanuts, Lilo and Stitch and recent Winnie the Pooh collaborations, which achieved excellent social media engagement and strong product sell-through, some of the best results we have ever had.

Second, resetting our go-to-market approach. As previously shared, we have been fundamentally updating our go-to-market approach to deliver what our customers truly need and value working across 6 critical areas. More focused investments into bigger product ideas and hero styles, alignment of our channel assortment strategy, integrated social-first marketing to support our big ideas in moments like Back to School, better planning and inventory management capabilities to improve terms, stronger pricing and promotion governance to protect margins and enhanced analytics and business intelligence capabilities to inform data-driven decisions.

Our goal has been to rebuild the engine that turns our creativity into commercial results and to work in a more integrated and agile manner. In Q4, we saw several examples of this newly new approach positively impacting our business performance. The team began the process of coming together cross-functionally and scrutinizing how we work from product development to buying, to marketing and executing strategies in our channels, ensuring the right products to reach our customers through their preferred shopping channels.

We have now integrated consumer insights into this process with the implementation of various customer ethnographies, segmentation focus groups and quantitative analyses that are informing product development to address our customers' needs and wants more effectively going forward. Operationally, we were much more agile, reacting to our data to adjust promotions, marketing and digital communications to meet real-time customer needs, improving gross margin year-to-year and enabling reductions in overall inventory.

For Q1, we have developed a streamlined promotional plan that is more focused and less complex to execute that we believe will lead to further gross margin improvements. We also began to impact the business upstream with a new creative team quickly conceiving and executing this spring's campaign with an on-location shoot at dramatically lower cost than historic levels. and producing recognizable and relatable campaign imagery to which our customers have positively responded. We are excited about these early achievements and optimistic about the impact that our integrated approach will continue to have on the business in the year ahead.

Moving to our third pillar, rewiring our digital ecosystem. As previous -- as mentioned previously, our digital commerce business across owned sites and third-party marketplaces is already a very important business for Vera Bradley, both in terms of the business size and overall profitability. However, our various digital platforms, there has not been a cohesive customer journey for Vera Bradley customers. During Q4, we took the important step of consolidating the P&L of all our digital platforms, including DTC e-commerce and third-party marketplace operations, and we are currently recruiting a new Head of Digital Commerce to lead this integrated function.

At the same time, while taking these important strategic steps, we made significant enhancements to our e-commerce platform with improved site navigation and a better overall customer experience. Our data-driven approach to pricing and promotions has enabled us to operate with lower promotional intensity while maintaining strong customer engagement. Additionally, we deployed enhanced digital capabilities that are driving customer engagement, early results also show strong adoption of our streamlined checkout process, which is contributing to improved conversion rates.

Fourth, Outlet 2.0. As a reminder, our Outlet 2.0 initiative represents a fundamental shift in how we approach our outlet channel. Outlet 2.0 is designed to elevate customer experience while maintaining our smart value proposition and reaching customers where we currently do not have brand stores. The enhancements included a curated more focused assortment with an initial 35% SKU reduction, strategically adding new brand products from our heritage and select IP collections. We have introduced elevated visual merchandising elements, including mannequins, light boxes and brand fixtures that hero our signature color, pattern and lifestyle stories.

Our enhanced selling experience incorporates updated training, improved in-store tools for selling and personalization. This transformation moves us from a discount-focused model to a smart value curated experience that reinforces brand equity while driving conversion and profitability. Building on the pilot that we launched during the holiday season, we have been taking a disciplined test and learn approach.

So far, in addition to the positive qualitative feedback from our customers and employees, we have seen measurable improvements in retail KPIs, including overall sales, conversion rate, average spend and gross profit per visitor versus a control group of stores. This tells us that the Outlet 2.0 experience is engaging consumers in a more meaningful way with the brand. We are continuing to monitor and track these results while also refining the Outlet 2.0 pilot with a view to rolling out additional stores in the near future.

And last but not least, reimagining how we work, streamlining our organization while building and investing in new capabilities. rebuilding Vera Bradley for long-term sustainable growth and profitability has required us to make tough decisions to reduce personnel costs. At the same time, reimagining how we work is not only about cutting costs. but also about redesigning our organization to be future fit, building new capabilities and making significant investments in our talent.

To date, this has been most pronounced across our customer-facing product, marketing and commercial functions, which are vital to reinvigorating the relevance of our brand and driving brand heat. In addition to the appointment of a new Chief Brand Officer in October, we have now also appointed new leaders across merchandising, marketing, stores wholesale and a soon to be appointed new head of Digital Commerce. We have strategically strengthened our team through a combination of internal promotions and strategic external hires with particular focus on roles that directly impact the customer experience across all touch points.

To sum up, we remain confident that the 5 strategic pillars we are pursuing under Project Sunshine are the right initiatives to revitalize the Vera Bradley brand, expand market share and return the business to long-term sustainable growth, profitability and cash flow. To execute these plans, we have been building a best-in-class team with relevant experience that will allow us to move quickly to win in the marketplace. We are reimagining how we work, building a culture of performance, agility, accountability and strong cross-functional collaboration, leveraging data-driven insights to make smart decisions.

We are still in the very early stages of our transformation, but remain encouraged by the results we achieved in Q4, the stabilization of our business, the greater visibility we have to the underlying opportunities and the strong belief in alignment, our entire team and Board of Directors has behind our transformation plans.

As the newly appointed CEO, Vera Bradley, I am extremely excited about the opportunity to lead us into the future and write the next chapter of this iconic and storied brand.

With that, I will turn the call over to Marty for a detailed financial review, and then we'll be happy to take your questions.

Thanks, Ian. Good morning, everyone, and thank you for joining us. I have a few brief comments to make about our performance for the quarter. Before I begin, I want to thank the Board for their unwavering support and confidence in entrusting me with expanded operational responsibilities. Our focus remains on transforming our operational processes to deliver enhanced business performance and greater efficiency across the organization.

For the sake of clarity, all of the numbers I am discussing today are non-GAAP and exclude the charges outlined in today's press release, the complete detail of items are excluded from the non-GAAP numbers as well as a reconciliation of GAAP to non-GAAP can be found in that release. For the fourth quarter of fiscal 2026, our consolidated revenues totaled $84.9 million compared to $86.4 million in the prior year fourth quarter.

Net income from continuing operations for the fourth quarter totaled $2.5 million or $0.09 per diluted share compared to a net loss from continuing operations of negative $5.4 million last year or negative $0.19 per diluted share. In terms of segment performance, Vera Bradley Direct segment revenues for the current year fourth quarter totaled $74.5 million a 2.6% decrease from $76.5 million in the prior year fourth quarter. Comparable sales declined 0.7%, which represents a sequential comparable sales improvement in each quarter of the current fiscal year, our original 100 handbag heritage prints, along with leveraging holiday promotional activity resulted in positive brand comps and overall positive growth versus last year.

Total revenues year-over-year were also impacted by 2 store openings -- new store openings, 13 store closures since the prior year fourth quarter and negatively impacted by approximately $0.4 million due to the temporary store closures associated with winter storm burn in week 52. Vera Bradley Indirect segment revenues for the fourth quarter totaled $10.4 million, a 4.9% increase from $9.9 million in the prior year fourth quarter.

The increase was driven by a large wholesale spring collaboration to be announced in the future date. Fourth quarter gross margin totaled $40.5 million or 47.8% of net revenues compared to $40.4 million or 46.8% of net revenues in the prior year. The increase in year-over-year margin rate resulted from lower promotional activity in outlet channels, A favorable adjustment to the Q3 inventory reserve and freight cost savings, partially offset by sell-through of Project Restoration inventory as part of clearance and incremental duty costs.

SG&A expense totaled $37.3 million or 43.9% of net revenues compared to $47.9 million or 55.4% of net revenues for the prior year fourth quarter. The $10.6 million decrease in expenses was primarily due to continued cost reduction initiatives, reduction in phasing of marketing expenses during the year and reduced lease costs. Fourth quarter operating income from continuing operations totaled $3.6 million or 4.2% of net revenue compared to an operating loss from continuing operations negative $7.3 million or negative 8.5% of net revenues in the prior year.

We continue to be pleased with our operational performance, demonstrating increased levels of agility as we react to changes in the marketplace, enabling us to take advantage of opportunities, thus improving our sell-through of age inventory through more focused strategies and tactics. Now turning to the balance sheet. Cash and cash equivalents at the end of the quarter totaled $18.5 million.

Cash flow for the year while negative $11.9 million has significantly improved from FY '25 to negative $46.9 million. We had no borrowings on our ABL facility at year-end. Fourth quarter inventory decreased year-over-year by nearly 17% to $76 million compared to $91.4 million at the end of fourth quarter last year. Tariffs increased year-end inventory value by approximately $4.2 million. Excluding tariff impact, inventory dollars would have decreased over approximately 22% versus last year.

Our inventory turns were 1.6%, improved from 1.5% from fiscal year '25. We recognize that this is a key measure we need to improve on while also reducing our overall level of inventory in FY '27. In FY '27, we will begin experimenting with new strategies to improve our responsiveness to our consumers when sell-through is ahead of expectations while looking for opportunities to continue ourselves down a Project Restoration inventory thus improving our net working capital position and inventory productivity overall.

As Ian mentioned, we are providing some guidance for fiscal year 2027. For fiscal year '27, we plan for sales to be in the range of $255 million to $270 million as we continue to focus on stabilizing the direct business and rebuilding our wholesale business under new leadership while at the same time, placing less emphasis on liquidation channels. It is important to note that we will not be holding our annual outlook sale in the first quarter as we focus on the inventory for our stores and look to elevate the overall customer and brand experience for this event, which we hope to bring back and better in the future.

Further, due to our continued operational focus in fiscal 2027, we expect to see year-over-year rate improvement in both gross profit and SG&A, enabling operating loss improvement of 40% or better compared to an adjusted operating loss of $21.7 million in fiscal 2026.

In closing, I want to reiterate that we are encouraged by the progress we have made throughout fiscal 2026, we have significantly improved our operational efficiency, reduced our cost structure and strengthened our balance sheet. While we still have work ahead of us, we are confident in our strategic direction and our ability to drive sustainable, profitable growth over time.

Now I'll open the call to your questions. Operator?

[Operator Instructions] Our first question comes from the line of Eric Beder with SCC Research.

Congratulations on the appointments and the strong Q4 results. When we look at it, I know you continue to make progress, when should we feel that the product flows and kind of the product mix is where you want it to be? I know you've worked through kind of prior -- some of the prior management's pieces. How should we be judging what we're seeing as we go to the stores and beyond through this year?

I'll begin. Thanks, Eric, first of all, and appreciate the comments. Obviously, this is a really exciting opportunity. And delighted to have a chance to step into this role.

I think pretty consistent with what we have said before. We -- our impact on product has gradually improved over time, right, in terms of what we could impact. As I mentioned in the call, about 80% of what is in there for spring/summer, we've been able to impact. I think to fall/winter, we basically have a blank sheet of paper and everything that is there, we will have been able to impact. And additionally, we are continuing to learn from the product that has flowed in already in terms of the decisions that we've made.

With that said, as you are well aware, we are still managing through and balancing some overhang of inventory from Project Restoration, a lot of the discontinued and aged products. So I think this is going to continue to be a path that we're going to have to navigate through over the next 6 to 12 months. And I think overall, I really do think that we need to look at fiscal '27 still as a year of both stabilization of the business, but also a year where we are continuing to build the strong foundation that we believe are going to lead the business to growth in FY '28 and beyond.

Great. And when you think about the future, some of the shifts going on in terms of stores, other pieces. Where should we be thinking about the depth and where the focuses are going to be on this force versus the digital versus the other pieces? And how the store flows can kind of look going forward?

Yes. No, I think it's a great question. Obviously, let's not downplay the digital business because it is a very important part of our business today. It is an important source of profitability. And it is an important way in which we can reach consumers, especially new consumers when our retail and outlet fleet may not be optimized in the way that we would like it to be.

But with respect to the brick-and-mortar, I think first of all, we're going to continue to leverage the fleet that we have and optimize the productivity of that business. That's a big reason for Outlet 2.0 because the majority of our fleet today is outlet stores, which is sort of a -- which is a legacy that we have inherited. But these stores are, as you know, very productive. They get incredibly high foot traffic and the majority of them are located in centers where there are also luxury brands and other premium accessible luxury brands.

And so there's a very high-quality footfall and eyeballs that we get. So our -- it is important for us to be the best that we can be in those outlet centers because that's where we're getting the majority of the retail footfall visibility today. In terms of the brand stores, this for us is an opportunity. And as we get more confident about the performance of the product. And as you know, we're now really going to step into a much higher here with the marketing now that we're feeling good about the product pipeline, this is going to be something we're going to be looking at very carefully in terms of where we could selectively open new brand stores in pockets which would make sense for us and where we don't have coverage.

And I would say the last piece of this is going to be the wholesale channel, which for us is going to be a very important channel that we need to focus on and rebuild because one of the things we hear from many of our consumers when we do research is they don't know where to find us. And in many of these sort of more affluent areas, we don't have brand stores. And so I think we also have an opportunity with our wholesale accounts to develop the business there. So focusing on key retailers specialty accounts, in particular, this is a way to -- for us to broaden awareness and reach and fill in some of the gaps that we don't have with our own fleet. And so I think all boats will rise.

Great. We -- so your 7 Outlet 2.0, do you think you'll open any more of them in 2026? Or should we be thinking about it as another year of, kind of, increasing the experimentation with the group?

I can't say that definitively. I think you meant will we open anything in FY '27, right, this fiscal year?

Yes. I'm sorry, '26.

Yes, yes. No worries. But look, I think if I had to place a bet, I would say we are inclined to do a few more Outlet 2.0 stores this fiscal year. I think there are just some opportunities to refine what we do in Outlet 2.0 and also to think about where are going to be the best places for us to do it.

Again, congratulations and look forward to '26.

And this -- we have reached the end of the question-and-answer session. And this also concludes today's conference call. You may disconnect your lines at this time, and we do thank you for your participation. Have a great day.

Greetings. Welcome to Vera Bradley's Third Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. At this time, I'll turn the conference over to Mark Dely, Chief Administrative Officer. Mark, you may now begin.

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

Please refer to today's press release and the company's most recent Form 10-K filed with the SEC for a discussion of known risks and uncertainties. Investors should not assume that the statements made during the call will remain operative at a later time. We undertake no obligation to update any information discussed on today's call. I will now turn it over to Vera Bradley's Executive Chairman, Ian Bickley, Ian?

Good morning, everyone, and thank you for joining us for Vera Bradley's Third Quarter Fiscal 2026 Earnings Call. It has now been 5 months since I took on the Executive Chairman role, and I want to update you on our continued progress in reinvigorating and reimagining this iconic brand. I remain confident that with the right focus, effort and execution, we have a tremendous opportunity to increase market share and return the business to growth by reengaging our loyal customer base while also expanding our reach and relevance to new customer segments. Over the past quarter, we have remained focused on refining and implementing the 5 strategic pillars and actions that are fundamental to our transformation. As shared previously, we have been addressing past missteps with urgency and implementing comprehensive changes across the business and organization.

On today's call, I will first provide an update on our continued progress across these 5 strategic transformation initiatives. I will then briefly discuss our third quarter results. I will then ask Marty to provide a more detailed financial review of our third quarter performance, and we will wrap up with time to answer any questions you might have. Before I begin, I want to take a moment to recognize and personally thank the entire Vera Bradley team for their exceptional commitment and resilience during this pivotal transformation. Through their adaptability, creativity and relentless focus on excellence, I am confident that as we continue this journey together, our collective expertise and passion will deliver the results our customers, shareholders and communities expect from Vera Bradley, and we are off to a promising start.

Importantly, we have now branded the work of our Strategy and Transformation Committee and our 5 strategic pillars as Project Sunshine, anchoring on reclaiming Vera Bradley's joyful optimism while fueling operational excellence. Project Sunshine has been successfully cascaded to our entire organization, and we are galvanized as a team around these mission-critical objectives at every level. First, we are sharpening our brand focus, leveraging our joyful and authentic brand DNA through innovative product relevance and storytelling to reconnect with our loyal customers while engaging new audiences, ensuring consistent messaging across all consumer touch points.

Second, we are resetting our go-to-market approach by transforming our product, planning, promotional and inventory decisions through data-led insights to create more productive assortments supported by integrated marketing. Third, we are rewiring our digital ecosystem to optimize performance across all digital touch points from social media and vb.com to our outlet online presence and emerging social commerce platforms, ensuring clear brand identity and channel roles supported by cohesive storytelling for customer acquisition and retention. Fourth, implementing Outlet 2.0 under the umbrella of a broader reinvention of our physical retail to develop a more brand-enhancing and productive outlet experience given the importance of this channel to our business. This aligns with our efforts to create cohesive customer experiences across all digital and brick-and-mortar channels.

And finally, we are reimagining how we work by building critical new capabilities and aligning our organizational structure, operating model and culture for sustainable future growth. Before diving into our progress on each of these 5 transformation initiatives, I would like to briefly discuss our results. For the third quarter, we registered revenues of $62.3 million, 11.7% below prior year. This compared to a 24.6% decline during the second quarter. Revenues in our direct business segment were $49.7 million, 5.3% below prior year compared to a decline of 16.2% in the second quarter. Importantly, we achieved sequential improvement in our key metrics in nearly all direct segment channels, highlighted by positive comparable channel sales in our brand channels that have been product-led and have continued for 5 months, extending from back-to-school through the Black Friday weekend.

Additionally, we are making progress on improving profitability and cash management through more disciplined pricing and promotional strategies. In summary, while we recognize there's still significant work ahead, these early wins in our Direct segment give us confidence that our focused approach to product innovation, brand storytelling and operational excellence is moving Vera Bradley in the right direction. We remain committed to building upon this foundation as we continue executing our transformation strategy. Now let me dive a little deeper into each of these 5 transformation initiatives, the progress we have made and the impact it is already having on our business.

Strategic initiative number one, sharpening our brand focus. As we continue our Project Sunshine transformation, we are fundamentally reshaping how Vera Bradley operates. We lost track of what made Vera Bradley special and unique and what customers loved about us. We became indistinguishable from other brands and over reliant on promotions with an aging customer base. We are now moving to recapture our joyful authentic DNA that our customers love while attracting new generations through innovative products and compelling storytelling. As we continue to sharpen our brand focus, we've developed new brand guidelines that are both modern and authentic to who we are. We are being intentional about what Vera Bradley represents.

We are feminine, creative, cheerful, whimsical, joyful, fun, colorful, approachable, high quality and smart value. Equally important is what we are not. We are not trying to be luxury, high fashion or sophisticated in ways that make us seem exclusive, intimidating or too expensive to our customers. This clarity in our brand identity is helping us reinforce the unique and differentiated positioning that made us successful to begin with and sharpen how we show up and communicate with consumers. We need to stay true to the joyful, functional and accessible brand that our customers fell in love with while ensuring we remain relevant and compelling to new generations. This brand clarity has already been informing our product development, marketing campaigns and customer experience across all touch points. And we believe this authentic approach will help us reconnect with our core customers while attracting new ones who are seeking the joy and optimism that only Vera Bradley can deliver. This is the market white space that only Vera Bradley can own.

As we continue to execute our Project Sunshine strategy, we remain focused on what our customers truly value about Vera Bradley. Our research confirms that customers are drawn to 3 core pillars that define our brand promise. First is joyful functionality, the thoughtful organization, lightweight materials and practical designs that make daily life and travel easier for our customers. Second is our distinctive patterns and color palette, those signature prints and border iconography that allow our customers to express their individuality and optimism in ways that no other brand can deliver. And third is smart value, providing high perceived quality at an attainable price point. This is not just about promotional pricing, but about making our customers feel smart about the investment they are making. As we continue our transformation journey through Project Sunshine, I want to emphasize how our approach differs fundamentally from our previous Project Restoration initiative.

We are building from our DNA, not rebranding, leaning into Vera Bradley's distinctive heritage in cotton, color, prints, joy and craft rather than trying to emulate other brands. This time, we are focusing on both new and existing customers, engaging them through lifestyle and needs rather than trying to grow only with new customers and moving loyal shoppers to outlet channels. Our strategy is focused on a realistic, disciplined and sustainable build rather than an overnight turnaround. Most importantly, we are carefully integrating data and insights into every decision from product development and pricing to storytelling, using results and customer understanding to drive our decisions. We are also fundamentally changing how we work with clearer roles, cross-functional alignment and shared incentives designed for peak performance.

This disciplined customer-centric approach gives us confidence that we are building the foundation for sustainable, profitable growth while staying true to what makes Vera Bradley special. Beginning with product, which has been our primary focus to date, I'm pleased to report that we continue to see momentum in several areas that give us confidence that Project Sunshine is moving in the right direction. Building on the success of our back-to-school business, highlighted by product wins across iconic backpacks and lunch bags, Q3 results were positively impacted by the return of additional iconic styles and proven heritage-inspired prints and border iconography, including the Vera Tote and Glenna Satchel, the Original 100 Bag and our patchwork Rachel Ditsy and Mistletoe Lattice prints.

Our refocused investment in cotton was also a key driver of performance during Q3. Our shift to a social-first marketing approach is also delivering measurable results, driving new customer acquisition on vb.com while significantly expanding our social media reach. We're thrilled that our initial orders of the Original 100 Bag sold through across the majority of SKUs. At the same time, our social campaign, including the New York City Rockettes, drove new consumers to purchase on vb.com. The 100 Bag is also attracting a younger customer, achieving more than twice the penetration of Gen Z customers than we currently have across the business on other products. Our collaboration with Anthropologie also garnered significant social media impressions, and the customer response to the product demonstrates our ability to reach new customer segments and has fueled additional collaboration plans for spring/summer and fall/winter of '26.

For spring/summer '26, we have made a larger commitment on the Original 100 Bag with more depth and exciting new prints and colors in addition to relaunching the iconic Hathaway Tote that can be reversed inside out, bringing joy to our customer with value-added design and delightful function. It comes in 3 sizes, including a crossbody. These products will be supported by strong integrated marketing. So far, the feedback from our teams and key wholesale accounts has been very encouraging. Next up, resetting our go-to-market approach. As part of our comprehensive Project Sunshine transformation, we are fundamentally updating our go-to-market approach to deliver what our customers truly need and value. We are taking action across 6 critical areas.

First, we're rationalizing our SKU count and making bigger commitments focused on hero styles that resonate with our consumers. Second, we're clarifying our go-to-market process and channel assortment strategy to ensure the right products reach the right customers through the right channels. Third, we're implementing integrated social-first marketing to support our hero styles, building on the success we've seen with campaigns like our back-to-school initiative with a joyful and nostalgic tone. Fourth, we're revamping our inventory management and planning capabilities to improve turns and reduce excess stock. Fifth, we're driving pricing and promotion governance to protect margins while delivering smart value to our customers.

And finally, we're building robust analytics and business intelligence capabilities to inform data-driven decisions. This represents a complete rebuilding of the engine that turns our creativity into commercial results, and we are already seeing early positive indicators from these efforts in our sequential quarterly improvements and enhanced operational discipline. Next, rewiring our digital ecosystem. We are aligning our digital ecosystem to drive growth and meet our customers where they shop. While digital is already a significant part of Vera Bradley's revenue and profitability, it should operate as an interconnected flywheel with each channel fueling momentum for the next while also helping to create a seamless customer experience. A well-connected ecosystem builds exponential value and each campaign interaction and conversion adds to the flywheel. The goal is to create a connected experience powered by shared data, unified storytelling and coordinated execution.

We see this as mission-critical for our transformation and are investing the necessary capabilities and resources to bring this to life. Now Outlet 2.0. As part of our comprehensive Project Sunshine transformation, we are making considerable progress on our Outlet 2.0 initiative, which represents a fundamental shift in how we approach our outlet channel strategy. Building on the pilot program we launched during the holiday season, Outlet 2.0 is designed to elevate customer experience while maintaining our smart value proposition. The enhancements include a curated, more focused assortment with an initial 35% SKU reduction, strategically adding new brand product from our heritage and Select IP collections. We have introduced elevated visual merchandising elements, including mannequins, lightboxes and brand fixtures that hero our signature color, pattern and lifestyle stories.

Additionally, we have refreshed our marketing elements with lifestyle imagery and product storytelling infused with the color and femininity that defines Vera Bradley. Our enhanced selling experience incorporates updated training, improved in-store tools and personalized selling spaces designed to add on sales. We are taking a disciplined test-and-learn approach with ongoing results tracking from our Q4 learnings, informing our future rollout strategy. This transformation makes us -- moves us from a discount-focused model to a smart value curated experience that reinforces brand equity while driving conversion and profitability. Reimagining how we work. As part of our fifth strategic initiative under Project Sunshine, we are fundamentally reimagining how we work to build the agile, responsive organization needed to capitalize on Vera Bradley's iconic brand positioning.

We're shifting from what I call a relay race mentality where work is passed between functional silos to operating like a crew team, where every function moves in rhythm toward the same goal. This transformation involves reimagining our organizational design and operating model, evaluating key processes to unlock efficiencies and simplify work and ensuring we have the right skills, capabilities and roles in place to support our key growth initiatives and new processes. We're not just talking about efficiency improvements. We're building the foundational capabilities that will enable us to move faster, make better decisions and execute with the precision that our customers and shareholders expect. This organizational evolution is critical to our success. And through Project Sunshine, we're actively engaging our entire organization along this journey to ensure we have the collective expertise and passion needed to deliver sustainable results.

We are pleased with the progress we are making with Project Sunshine and expect the cumulative impact of these initiatives to continue to positively impact the momentum of our business going forward. To sum up, we're refocusing the brand on our heritage of joy, color and authentic connection through innovative products and compelling storytelling that resonates with both our loyal customers and new generations of consumers. We've deepened our customer understanding through enhanced research, segmentation and our new customer intimacy program, which is already informing our product development and marketing strategies. Our commitment to reducing discounts while protecting margin continues to show progress as we've improved inventory turns, streamlined their SKU count and enhanced our planning and forecasting capabilities, all while shifting to a smart value positioning anchored in quality rather than constant promotions.

We are removing organizational silos by redesigning our processes and leveraging data to drive actionable insights for decision-making across all functions. Additionally, we're driving a more sustainable business model by leveraging technology to improve efficiency, reduce manual tasks and increase our agility to address the changing market landscape. Throughout this transformation, our unwavering focus remains on profitability, cash generation and building a sustainable cost structure that supports our long-term growth objectives. These foundational improvements are already contributing to sequential improvements we've seen across our channels, and we remain confident these 5 strategic pillars represent a holistic transformation that builds on our distinctive brand heritage while positioning Vera Bradley for long-term success in an evolving retail landscape.

And finally, I would like to update you on our CEO search. We continue to be focused on finding the right future leader for Vera Bradley. It's a critical decision for the business that we want to get right. While we do not have any updates currently, we are moving forward rapidly with Project Sunshine and shoring up key leadership positions across the business, including the recent appointment of our Chief Brand Officer. With that, I will turn the call over to Marty for a detailed financial review, and then we'll be happy to take your questions.

Thanks, Ian. Good morning, everyone, and thank you for joining us. I have a few brief comments to make about our performance for the quarter. For the sake of clarity, all the numbers I'm discussing today are non-GAAP and exclude the charges outlined in today's press release. A complete detail of items excluded from the non-GAAP numbers as well as a reconciliation of GAAP to non-GAAP can be found in that release. For the third quarter of fiscal 2026, our consolidated revenues totaled $62.3 million compared to $70.5 million in the prior year third quarter. Net loss from continuing operations for the third quarter totaled negative $8.3 million or negative $0.30 per diluted share compared to negative $3.7 million last year or negative $0.13 per diluted share.

Results from continuing operations for the quarter were significantly affected by a $5.9 million inventory write-down related to the brand's strategic product shift toward cotton and heritage prints, along with a $4 million write-off of television media credits, which were acquired to support the company's project restoration efforts and won't be fully utilized with the focus on digital and performance marketing. The previously mentioned charges had a negative $0.35 impact on diluted earnings per share for the quarter. In terms of segment performance, Vera Bradley Direct segment revenues for the current third quarter totaled $49.7 million, a 5.3% decrease from $52.5 million in the prior year third quarter. Comparable sales similarly declined 5.8%, which represents our third quarter of sequential comparable sales improvement.

Initial efforts to improve products, along with a return to back-to-school resulted in positive brand comps and overall positive growth versus last year. Total revenues year-over-year were also impacted by 5 new store openings and 14 store closures since the prior year third quarter. Vera Bradley Indirect segment revenues for the third quarter totaled $12.6 million, a 30.2% decrease from $18 million in the prior year third quarter. The decrease was primarily -- was related primarily to a decline in specialty and key account orders, which were partially offset by increased liquidation sales. The quarter's performance also marks a sequential improvement relative to the preceding quarter. Third quarter gross margin totaled $26 million or 41.7% of net revenues compared to $38.4 million or 54.5% of net revenues in the prior year.

The decrease in year-over-year margin rate resulted from the previously mentioned inventory write-down as well as additional duty expenses, partially offset by pricing improvements. Excluding the inventory write-down, gross margin for the current quarter was 51.2%, which represents our third consecutive quarter of gross margin improvement. SG&A expenses totaled $37.4 million or 60.0% of net revenues compared to $43.6 million or 61.8% of net revenues for the prior year third quarter. The $6.2 million decrease in expenses was primarily due to lower compensation expenses and other cost reduction initiatives, which were partially offset by the previously mentioned media credit write-off. Third quarter operating loss from continuing operations totaled negative $11.1 million or negative 17.8% of net revenues compared to negative $5 million or negative 7.1% of net revenues in the prior year.

Operating loss, excluding the previously mentioned inventory reserve and media credits write-off totaled negative $1.2 million or negative 1.9% of net revenues. Continuing our efforts from last quarter, we are focusing on store performance, inventory levels and website performance in order to improve product availability and navigation of the online outlet website. We are pleased with the trajectory of the improvement made to date, evidenced by sustained sequential comp improvements across 3 of our 4 direct channels and continued cost efficiency focus. The team continues to review our processes and actions to identify opportunities for new approaches to how we work.

Now turning to the balance sheet. Cash and cash equivalents at the end of the quarter totaled $10.7 million. We had borrowings of $10 million on our $75 million ABL facility at quarter end. Our third quarter inventory decreased year-over-year by 24.3% to $82.9 million compared to $109.6 million at the end of third quarter last year. Furthermore, our inventory balance has declined 9.3% from the end of fiscal 2025 and remains lower even after accounting for the inventory reserve recorded this quarter. We recognize that inventory performance is a key opportunity for our business and are focused on developing strategies to improve our turns over the next 12 months.

We made good progress on aligning our receipts with sales expectations this quarter, along with continued focus on assortment optimization to reduce SKU counts while developing strategies to reduce lead times, enabling faster response where we see consumer excitement for our products. In closing, we remain committed to disciplined expense control and inventory management during this turnaround period. We are confident that these actions, combined with the execution of our strategic initiatives will lead to improved performance and enhanced shareholder value over the long term. This concludes our presentation, and we can now open it up to questions.

[Operator Instructions] Our first question is from the line of Eric Beder with SCC Research.

So a lot of changes this quarter, more rolling into Q4. When we roll into 2026, what should we be thinking about as the kind of the key signpost that Project Sunshine is starting to have an even greater impact than it had in Q3 and into Q4?

Yes. Thanks, Eric. Look, I think from day 1, I've really believed that product is really the key. And as you know, this was the first thing that we really began to focus on. We were able, obviously, to have a more limited impact on product for Back to School and Holiday, although some successes. And really, the first sort of window where we've been able to have a significant impact on product will be spring/summer of 2026, really starting with product that will flow between January and July.

What gives us a lot of confidence is that our sort of strategy around refocusing on the reinvention of iconic styles with critical delightful function, returning heritage-inspired prints and the border iconography, reinvesting back into cotton, which is now north of 50%, and it was below 40% and sort of much more qualitative and impactful IP products as well as really focusing on sort of occasions that we can own like Back to School, Spring Break, Mother's Day, Travel. All of that, what we see and what we're doing is working. And so we're entering really into the spring/summer season with confidence knowing that we've been able to make bigger commitments into the things that we really believe are going to work. And I believe that success with product will be the most important thing that can turn the business. And frankly, is the sort of positive experience that we're having in our brand channels right now, I believe, is primarily product-led.

Okay. When you look at Outlet 2.0, in some ways, it's -- we visited 2 of them. And it's a great concept. It also, in some ways, provides for some consumers who have lost kind of their full-price store a way for them to still see and touch kind of full-price items. I'm curious what's kind of been the response to consumers to seeing kind of full-price items in the Outlet 2.0 stores. And when you look at it, does that become a bridge given that a lot of -- there's been a lot of closures in the full-price stores?

Yes. No, great -- listen, great question. I'll first talk about Outlet 2.0, and then I think I'll talk more broadly about sort of distribution and how customers can access the full-price product and brand experience. Look, on Outlet 2.0, it's early days. We launched 7 pilot stores this holiday season. I would say that the qualitative feedback that we're getting from our teams as well as customers has been very positive, positive about sort of the overall store environment, positive that it's more brand enhancing, positive about the customer journey in the stores with much clearer destinations and heroing of lifestyles and different products, stronger visual merchandising, also supported by in-store imagery.

And what we have seen, again, at a very, very high level and recognizing it's early, is even with sort of the very strong focused assortment, editing of the assortment of SKUs, we've seen sort of performance in line with stores that have 35% more SKUs. We're also seeing a positive impact on the profitability of each customer that comes in the store. So we're leveraging the traffic that we do have because it's going to take longer to get traffic to come back with stronger conversion. And we're also seeing that the more time that these Outlet 2.0 stores have to work through sort of the new system, the better they're performing. And frankly, we're already seeing certain things in Outlet 2.0 that we feel we can take to other stores without having to do the full sort of Outlet 2.0 update where we can get some wins.

We also are planning to do more follow-ups visiting -- we're going to be visiting a couple of the stores with the team next week. We're also planning to do some customer intercepts. So it's very much a test-and-learn approach. To your question specifically about full-price product, we're seeing very encouraging reaction to customers on the limited assortment of heritage product and select IP that we put into these stores. We think there's potentially -- more potential there. But again, that's, I think, improving to the -- sorry, impacting sort of the impact we're having on the profitability of each customer.

More broadly on sort of how customers can really access our brand proposition, clearly, vb.com today is probably our most important vehicle, and we're continuing to really upgrade the customer experience there to really represent the best of what Vera Bradley can be. And we also are looking very carefully at our overall full-price brand fleet, but we have to get more confident, I think, in the business before we start making big commitments there. So we're -- in the meantime, we're leveraging our outlet channel. And also, we are putting another big focus on to our wholesale accounts, especially our specialty accounts.

I mean, those -- as I said in the first call last quarter, it's specialty retail and wholesale that actually are the ones that helped to build Vera Bradley into a nationwide brand. And we still feel very strongly that with those strong relationships we have there, which we're focused on building that they can continue to play a very, very important role in our transformation.

Yes. I agree. I also think they're somewhat of a lagging indicator, but we'll see. Final question, I actually had 2 questions here. One on inventory. It was a really impressive job reducing inventory. How should we be thinking about the opportunities, I guess, to capture working capital and get more productive going forward with the inventory? And how long a journey do you think it can be to go a little find that younger customer? That's historically, it seems it takes a few years to start moving that kind of average age down.

Yes. Great question. I'll let Marty handle the first part on the inventory, and then maybe I can talk about sort of the -- your question about the younger customer.

Thanks for the question, Eric. On inventory, we definitely see the opportunity for improvement there and to improve our -- from a productivity standpoint. And today, our turns are less than 2, but we have seen -- we're starting to see the improvement in turns this quarter, and we think that we're on track through our planning processes and other activities we're taking on to kind of move that into the greater than 2 to 3 range over the course of the next 12 to 18 months.

Great. And look, Eric, I think on the younger customer, you're right. It will take some time. And look, I think, first and foremost, we have a significant opportunity in front of us, right, to reengage with our loyal customer, who is still the biggest and most important part of our business. We have an opportunity to reengage them with the brand, bring back lapsed purchasers. I think also get them used to buying better products that really invoke what I like to think of as the OG, Vera Bradley with not only the iconic styles and function and prints, but also bringing back some of that craft. If you look at the 100 Bag where we have that sort of iconic quilted-through lining. The reversible tote, which we're introducing for spring is really phenomenal. It's basically a 2-in-1 bag.

And so we have that opportunity. But I think where we're now focused besides product with the recent appointment of Melinda as our Chief Brand Officer, is now also starting to shift some of that focus into the marketing and the digital commerce which are both areas where I believe we have significant opportunity to reinforce the great work we're doing on product with great storytelling that can -- and targeted storytelling that can really spark the emotion of younger customers. And we saw in a limited way with the 100 Bag, right, which we weren't able to have as much product as we wanted to have. We didn't have quite all the right focused marketing. But even that, we saw twice the penetration of Gen Z customers on that bag that we have across other products in the range. And that for me is super encouraging. And I think the speed at which we can travel is all about what we see and how agile we can be at leaning into things and making them bigger.

[Operator Instructions] Thank you. At this time, ladies and gentlemen, this does conclude our question-and-answer session, and we'll also conclude today's conference. We thank you for your participation. You may now disconnect your lines, and have a wonderful day.