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Article by DailyStocks_admin    (04-12-12 12:48 AM)

Description

Vera Bradley. CEO Michael C. Ray bought 10000 shares on 3-30-2012 at $ 304.4

BUSINESS OVERVIEW

Our Company

Vera Bradley is a leading designer, producer, marketer, and retailer of stylish and highly functional accessories for women. Our products include a wide offering of handbags, accessories, and travel and leisure items. Over our 30-year history, Vera Bradley has become a true lifestyle brand that appeals to a broad range of consumers. Our brand vision is accessible luxury that inspires a casual, fun, and family-oriented lifestyle. We have positioned our brand to highlight the high quality, distinctive and vibrant styling, and functional design of our products. Frequent releases of new designs help keep the brand fresh and our customers continually engaged.

We generate net revenues by selling products through two reportable segments: Direct and Indirect. As of January 28, 2012, our Direct segment consisted of sales of Vera Bradley products through our 48 full-price stores, our eight outlet stores in the United States, seven pop-up stores in Japan, our websites, verabradley.com and verabradley.co.jp, and our annual outlet sale in Fort Wayne, Indiana. As of January 28, 2012, our Indirect segment consisted of sales of Vera Bradley products to approximately 3,300 specialty retailers, substantially all of which are located in the United States, as well as select national retailers and third party e-commerce sites. For financial information about our reportable segments, refer to Note 15 of the Notes to Consolidated Financial Statements set forth in Part II, “Item 8. Financial Statements and Supplementary Data,” of this report.

Effective January 1, 2008, we changed our fiscal year to end on the Saturday closest to January 31. Our most recent fiscal years ended on January 28, 2012 (“fiscal 2012”), January 29, 2011 (“fiscal 2011”), and January 30, 2010 (“fiscal 2010”), and the current fiscal year will end on February 2, 2013 (“fiscal 2013”).

Reorganization Transaction and Stock Split

Vera Bradley, Inc. was formed as an Indiana corporation on June 23, 2010, for the purpose of reorganizing the corporate structure of Vera Bradley Designs, Inc., which was incorporated in Indiana on November 15, 1982. On October 3, 2010, the shareholders of Vera Bradley Designs, Inc. contributed all of their shares of Class A Voting Common Stock and Class B Non-Voting Common Stock of Vera Bradley Designs, Inc. to Vera Bradley, Inc. in return for shares of Vera Bradley, Inc. Class A Voting Common Stock and Class B Non-Voting Common Stock on a one-for-one basis. In addition, effective October 3, 2010, Vera Bradley Designs, Inc. converted from an “S” Corporation to a “C” Corporation for income-tax purposes. Further, on October 18, 2010, Vera Bradley, Inc. recapitalized all of its Class A Voting Common Stock and Class B Non-Voting Common Stock into a single class of common stock and effectuated a 35.437-for-1 stock split of all outstanding shares of its common stock. These events collectively are referred to as the “Reorganization.” As a result of the Reorganization, Vera Bradley Designs, Inc. became a wholly owned subsidiary of Vera Bradley, Inc.

The only significant asset of Vera Bradley, Inc. is its investment in Vera Bradley Designs, Inc., and all of our operations are conducted through Vera Bradley Designs, Inc. Except where context requires or where otherwise indicated, the terms “Company,” “Vera Bradley,” “we,” “our,” and “us” refer to Vera Bradley Designs, Inc. and its subsidiaries before the Reorganization and to Vera Bradley, Inc. and its subsidiaries, including Vera Bradley Designs, Inc., after the Reorganization. All historical common stock and per share common stock information has been changed to reflect the stock split.

Evolution of Our Business

Beginning in 2005, we embarked on a series of strategic initiatives designed to take advantage of the growing interest in the Vera Bradley brand. These initiatives were designed to strengthen and enhance our business and operating model, expand our demographic and geographic market opportunity, and position us for future growth. The core components of these initiatives included the following:

Merchandising Strategy . To appeal to a broader range of consumers, we developed a mix of pattern and product offerings specifically targeted at different consumer demographics, refined our product release strategy to significantly expand our product portfolio, and increased the number of new patterns released as well as the frequency of new product launches. In addition, we substantially enhanced our visual merchandising strategy, focusing on a consistent presentation of Vera Bradley as a lifestyle brand. In fiscal 2012, we established a dedicated merchant function and elevated the role of marketing to work more collaboratively with the design team to continue improving our process of bringing products to market.

Multi-Channel Distribution Capability . In 2006, we initiated a Direct channel strategy that was designed to expand our brand presence and broaden our consumer demographic while complementing the growing Indirect segment of our business. The first step in establishing the Direct segment of our business was selling directly to consumers through verabradley.com beginning in 2006. In September 2007, we opened our first full-price store. In fiscal 2012, we had more than 43 million visits to verabradley.com, and as of January 28, 2012, we operated 48 full-price stores and eight outlet stores, and entered the Japanese market.

Infrastructure Investment . Beginning in 2005, we made a series of investments to strengthen our supply chain capabilities, information systems, and product development processes, resulting in substantial cost savings and a more flexible and scalable operating structure. During this period, we shifted our production from a primarily domestic manufacturing model to a more cost-effective global sourcing platform. In 2007, we opened a state-of-the-art warehouse and distribution facility in Roanoke, Indiana, which will be expanded in fiscal 2013.

Our Brand

For over 30 years, we have created, developed, and solidified a true lifestyle brand that resonates with a broad range of female consumers. Our brand vision is accessible luxury that inspires a casual, fun, and family-oriented lifestyle. Employees, family members, and friends are often depicted throughout our advertising in fun, friendly, and family-oriented settings, accentuating our brand image in an authentic manner. Our visual merchandising strategy, particularly in our full-price stores, seeks to create the feeling of home. We believe that our lifestyle brand is well positioned to extend into complementary product categories. The strength of our brand is demonstrated during our annual outlet sale in Fort Wayne, Indiana, a sales event that attracts tens of thousands of highly enthusiastic shoppers from across the country each year.

We have positioned our brand to highlight the high quality, distinctive and vibrant styling, and functional design of our products. At the same time, our frequent releases of new patterns and styles keep the brand fresh, inspire our customers to express their individuality and sense of style in a colorful way, and encourage multiple purchases. We also provide consumers a consistently fresh set of patterns, styles, and products from which to choose that fit with different ages, wardrobes, seasons, and personalities.

We also offer a broad assortment of products that meets our customers’ different functional needs, including: handbags such as purses, totes, and specialty bags; accessories such as wallets, ID cases, and eyewear; and travel and leisure items such as weekend bags, duffel bags, and garment bags. We believe this combination of patterns, styles, and products allows us to appeal to all age brackets, including teens, young women, mothers, and grandmothers. Although our customers represent a broad range of demographic segments, our market research has shown that they generally have a common attitude toward the brand: Vera Bradley is a colorful way of allowing them to express their individuality and sense of style.

Competitive Strengths

We believe the following competitive strengths differentiate us within the marketplace and provide a strong foundation for our future growth:

Strong Brand Identity and Positioning. We believe the Vera Bradley brand is highly recognized for its distinctive and vibrant style. Vera Bradley is positioned in the market as a lifestyle brand that inspires consumers to express their individuality and sense of style. We have also positioned our brand to highlight the high quality and functional attributes of our products. The Vera Bradley brand is more price accessible than many competing brands, which allows us to attract a wide range of consumers and inspire repeat purchases.

Exceptional Customer Loyalty. We believe that, as consumers become familiar with the Vera Bradley brand and begin using our products, they become loyal and enthusiastic brand advocates. We believe enthusiasm for our brand inspires repeat purchases and helps us expand our customer base. Our customers often purchase our products as gifts for family members and friends, who, in turn, become loyal customers.

Product Development Expertise. Our product development team combines an understanding of consumer preferences with a knowledge of color, fashion, and style trends to design our products. Our highly creative design associates utilize a disciplined product design process that seeks to maximize the productivity of our product releases and drive consumer demand.

Dynamic Multi-Channel Distribution Model. We offer our products through a diverse choice of shopping options across channels that are intimate, highly shop-able, fun, and characteristic of our brand. Whether they are at a Vera Bradley store, a specialty retail store, or verabradley.com, we believe consumers have an opportunity to find the brand in places that match their unique shopping interests. Our multi-channel distribution model enables us to maximize brand exposure and customer access to our products.

Established Network of Indirect Retailers. Our Indirect business consists of an established and diverse network of over 3,300 specialty retailers. This channel of gift, apparel and accessories, travel, and other specialty retailers, located throughout the United States, provides a strong foundation for our growth. Our Indirect retailers include some of the brand’s strongest advocates, and their passion has been instrumental in the development of our brand.

Distinctive Retail Stores. Our stores provide a shopping experience that is uniquely “Vera Bradley.” We bring the Vera Bradley brand to life in our stores through visual presentation of our wide range of product offerings, the stylish, inviting décor of our stores, and personalized service from our friendly and knowledgeable sales associates. We believe the distinctive shopping experience and personalized service encourage repeat visits and multiple purchases.

Unique Company Culture. We were founded in 1982 by two friends, Barbara Bradley Baekgaard and Patricia Miller, who built our company around their passion for design and commitment to customer service. We believe our founders created a unique company culture that attracts passionate and motivated employees who are excited about our products and our brand. Our employees share our founders’ commitment to Vera Bradley customers. We believe that a fun, friendly, and welcoming work environment fosters creativity and collaboration and that, by empowering our employees to become personally involved in product design, testing, and marketing, they become passionate and devoted brand advocates.

Experienced Management Team. Our senior management team led by Michael C. Ray, our Chief Executive Officer, has extensive experience across a diverse range of disciplines in product design, merchandising, marketing, store development, supply chain management, and finance. The current management team has been instrumental in the development and execution of our long-term strategies.

Growth Strategies

We believe there are significant opportunities to expand our business and increase our net revenues and net income through the execution of the following growth strategies:

Grow in Underpenetrated Markets. Our historic growth focused primarily on the eastern United States, and accordingly, the Vera Bradley brand is most recognized in that region. In recent years, we have successfully expanded our Direct and Indirect channels in key developing markets, including in the Midwest and Southwest. In addition, in fiscal 2012 we expanded internationally by entering the Japanese market. We believe the success of our expansion efforts is a testament to the strength and portability of our brand and the power of our multi-channel distribution capabilities. We intend to utilize these strengths to further penetrate our existing markets and successfully expand our business into other foreign markets and relatively underpenetrated U.S. markets.

Expand Our U.S. Store Base. We plan to expand our retail presence in the United States by opening new stores. We believe that the market in the United States can support at least 300 Vera Bradley full-price stores. We plan to open 14 to 20 new stores annually during each of the next five fiscal years.

Drive Comparable-Store Sales and Our E-Commerce Business. We have several ongoing initiatives to drive comparable-store sales growth, including focusing on store-level merchandising programs and enhancing in-store customer service and selling capabilities. As a key element of our Direct channel strategy, we intend to grow our e-commerce business through focused marketing efforts, online merchandising initiatives, and social networking sites such as Facebook and Twitter. We believe our retail and e-commerce businesses are complementary and facilitate frequent contact with our customers.

Expand Our Product Offerings. We design products to “accessorize a woman’s life” and believe this core competence serves as a platform for growth within and beyond our current product lines. We have expanded our product offerings to include new line extensions, such as focused gift and special occasion offerings, and brand extensions, such as our paper and stationery collection. We believe that opportunities exist to “accessorize a woman’s life” through complementary product collections that fit within our positioning as a lifestyle brand.

Our Product Release Strategy

We introduce new patterns seasonally. Within each season, we generally introduce three to five patterns. These patterns are incorporated into the designs of a wide range of products, including handbags, accessories, and travel and leisure items, that are part of the core seasonal release. These product assortments each season, can be classic styles, updates to older designs, or new product introductions.

After each seasonal launch, we release additional new collections. These collections often utilize or are inspired by that season’s patterns (e.g., the paper and gift collection in a new pattern), but a few of our releases are separate from the Signature Collection (e.g., the Vera Vera collection in solid colors).

We have increased the number of patterns per Signature release as well as the frequency of subsequent releases over time and believe that the assortment, breadth, and cadence allow us to reach a broader range of consumer demographics and needs. We believe this approach keeps consumers continually engaged with our brand and repeatedly shopping at our points of distribution. In addition, we believe this approach allows us to minimize the risk associated with a single pattern not performing to our expectations. To keep our assortment current and fresh and to focus our inventory investments on our best performers, we discontinue patterns from time to time. We sell our remaining inventory of discontinued products at our annual outlet sale and through our website and outlet stores.

Product Development

We have implemented a fully integrated and cross-functional product development process that aligns design, market research, merchandise management, sales, marketing, and sourcing. Product development is a core capability that makes our products unique and provides us with a competitive advantage. Our designs and aesthetics set our products apart and drive customer loyalty. Our product development team mixes an understanding of the needs of our target customers with knowledge of upcoming color and fashion trends to design new collections as well as new product categories that will resonate in the market.

We begin the development stage of our products in the Vera Bradley portfolio 12 – 18 months in advance of their release. The development of each new pattern includes the design of an overall print, a complementary fabric backing, and three sizes of coordinating trim materials. To seek fresh perspectives, we collaborate with independent designers to create unique patterns for each season. We oversee the development and exercise the final approval of all patterns and designs. Once developed, we generally copyright each pattern, including the print, fabric backing and coordinating trim. We believe that great design is not only central to our product development efforts, but also is a fundamental part of our brand development and growth strategies. In the past several years, we have made investments to evolve and integrate our product development expertise, including opening a design office in New York City, as well as opening a design center in Roanoke, Indiana that puts all individuals involved in the product design process in the same location.

Our product development team works to ensure that new collections contain an assortment of products and styles that are in line with both fashion trends and customer needs and regularly updates classic styles to enhance functionality. In addition, we actively pursue opportunities to expand our product offerings through new line and brand extensions. Our product development team monitors fashion trends and customer needs by attending major trend shows in Europe and the United States, subscribing to trend monitoring services, and engaging in comparison shopping.

Our product development team is also responsible for assortment planning, pricing, forecasting, promotional development, and product lifecycle management. Forecasting is based on seasonal market research and in-store testing. We gather seasonal market research through a variety of methodologies, including scheduled interviews and online and in-person surveys. We conduct seasonal in-store testing by releasing test products in our full-price stores and evaluating their success in the marketplace prior to product introduction on a larger scale. The team assures that we offer a broad range of patterns, fabrics, styles, and functionality features in a cost-effective manner. We believe that with our cross-functional, collaborative approach, we are able to introduce and sell our merchandise in a way that clearly communicates the Vera Bradley brand and the Vera Bradley lifestyle.

Marketing

We believe that the growth of our brand and our business is influenced by our ability to introduce and sell our merchandise in a way that clearly conveys the Vera Bradley lifestyle. We use marketing and advertising as critical tools in our efforts to promote our brand.

Catalogs and Collateral. The seasonal Vera Bradley catalog is a key vehicle for the brand and our product portfolio. Each season’s catalog is sent to a targeted customer mailing list. In addition to distributing the catalog, we produce and distribute a number of other marketing pieces, or “collateral,” including postcards, gift guides, in-store signage, and release-focused mailers. Catalogs and collateral provide consumers with a powerful visual representation of both the products and lifestyle images embodied by the Vera Bradley brand. We believe that Vera Bradley’s catalogs and other mailed collateral generate excitement and awareness about the brand and seasonal introductions and allow us to reach both new and loyal customers in their homes.

Advertising. We employ print and outdoor advertising to increase overall brand awareness. Our advertisements are placed primarily in national magazines that have a readership similar to our target demographics. These publications have recently included Seventeen , InStyle, O the Oprah Magazine, and Real Simple . We continually assess our advertising strategies and tactics.

Public Relations and Product Placement. Vera Bradley has received considerable exposure in the press, including in publications such as InStyle, O the Oprah Magazine, Good Housekeeping, Coastal Living, and The New York Times . In addition, we have expanded our marketing efforts to promote product placement in feature-length films and on prime-time television shows such as Desperate Housewives, Brothers and Sisters, Entourage, Modern Family, and New Girl .

Social Media and Online Marketing. In recent years, we have greatly increased traffic to verabradley.com and have increased awareness of our brand through online marketing and social networking sites. We have captured more than 1.2 million customer e-mail addresses in our online customer file, with many of these customers providing age, occupation, and location data. This captured information provides us with deeper insight into the products and categories that are in the highest demand, and allows us to better target our customers with appropriate messages. As of January 28, 2012, we had over 700,000 Facebook fans and a growing number of Twitter followers. We believe these media not only connect us with our fans, but also allow us to target them through cross-channel marketing.

Channels of Distribution

We distribute our products through our Direct and Indirect segments. This multi-channel distribution model not only enables us to have operational flexibility, but also maximizes the methods by which we can access potential customers.

Direct Segment

Full-Price Stores. We have developed a retail presence through our full-price stores, all located in the United States, which provides us with a format to showcase the image and products of Vera Bradley. As of January 28, 2012, we operated 48 full-price stores. Our full-price stores average approximately 1,800 square feet per store. Our stores are designed to create a feeling of home with a high standard of visual merchandising. The welcoming nature of our full-price stores provides our customers with a comfortable shopping experience in a setting that showcases our merchandise and conveys the Vera Bradley lifestyle. Our sales associates are passionate about our products and customer service, which, we believe, translates into a superior shopping experience.

E-Commerce. In 2006, we began selling our products through the verabradley.com website. The objective of verabradley.com is to provide both a mechanism for marketing directly to consumers and a storefront where consumers can find the entire Vera Bradley collection. In fiscal 2010, we invested in upgrades to our website that enable us to provide customized shopping experiences tailored to each online shopper and allow better integration with third-party sites such as Facebook.com. We believe the enhanced functionality allows us to provide a superior experience to our e-commerce customers. In fiscal 2012, we had over 43 million visits to verabradley.com.

Outlet Stores. Our outlet stores are a vehicle for selling discontinued merchandise at discounted prices, while maintaining brand identity. We believe our outlet stores are an integral part of our distribution strategy, as this format provides an additional channel of distribution for our products and enables us to better target value-oriented customers.

International . We launched a marketing campaign to connect with the Japanese consumer on April 18, 2011. This campaign included seven temporary pop-up stores in several department stores including Isetan Shinjuku and Marui Yurakucho located across Tokyo and Kyoto. The international channel includes the Japanese website verabradley.co.jp launched in fiscal 2012.

Annual Outlet Sale. For the last ten years, our annual outlet sale has been held in the Allen County War Memorial Coliseum Exposition Center in Fort Wayne, Indiana. The annual outlet sale is an important tradition for Vera Bradley, has many loyal followers, and is an opportunity for us to sell our discontinued merchandise at discounted prices in a brand-right fashion. We attracted more than 60,000 attendees to our 2011 annual outlet sale.

Indirect Segment

As of January 28, 2012, we had approximately 3,300 Indirect retailers, the majority of which were specialty retailers with whom we have had long-standing relationships. In fiscal 2012, 2011, and 2010, our Indirect channel generated net revenues of $235.6 million, $214.9 million, and $192.8 million, respectively, or, as a percentage of our total net revenues, 51.1%, 58.7%, and 66.7%, respectively. Indirect retailers are primarily gift, apparel and accessories, travel, or other specialty retailers. No single account represented more than 3.0% of total Indirect net revenues in fiscal 2012, with the top ten accounts representing in the aggregate less than 13.0% of total Indirect net revenues. The majority of our Indirect retailers have been customers for over five years. In fiscal 2012, we launched our products in the department store channel.

Sales Force

We believe that having an in-house sales force results in more consistent brand presentation and messaging, enhanced support for our Indirect retailers, and a more predictable, scalable, and cost-efficient business model. As of January 28, 2012, our sales team consisted of 87 in-house, full-time sales consultants. The compensation structure for our sales consultants consists of a combination of fixed pay and sales-based incentives.

In addition to acquiring new and growing existing accounts, our sales consultants serve as a support center for our Indirect retailers by assisting and educating them in areas such as merchandising and visual presentation, marketing of the brand, product selection, and inventory management. Our sales consultants also participate in our semi-annual product introduction and education event for our Indirect retailers. Our visual merchandising program provides our sales consultants with a framework to guide our Indirect retailers regarding optimal product placement and display that is intended to reinforce the message that our brand is distinct from those of our competitors.

Our Stores

As of January 28, 2012, we operated 56 stores in 27 states throughout the United States, which includes 48 full-price stores. We believe there is a significant opportunity to grow our store base, as we believe the market in the United States can support at least 300 Vera Bradley full-price stores. Based on the success of our existing outlet stores, the number of attractive outlet centers in the United States, and the growing popularity of outlet shopping, we believe the United States has capacity to support additional Vera Bradley outlet stores.

We opened thirteen full-price stores and four outlet stores in fiscal 2012. We plan to open 14 to 20 new stores annually during each of the next five fiscal years.

Store Location Selection Strategy

Our store location decisions are made case by case, depending on the combined retail strategy we have developed for the particular market. This includes actual and planned penetration in both Indirect and Direct segments, as well as existing e-commerce demand. At this time, we do not believe any market has been fully penetrated. We believe that expansion of our store base complements our Indirect segment by increasing brand awareness and reinforcing our brand image. In addition to analyzing store economics, we pay particular attention to the location within the shopping center, the size and shape of the space, and desirable co-tenancies. Along with seeking co-tenants that we believe share our target customer, we seek a balanced mix of moderate and high-end retailers to encourage high levels of traffic. Our target full-price store size is approximately 1,800 square feet, but we are comfortable with spaces as small as 1,000 square feet or, depending on our market strategy and relevant economic factors, spaces as large as 2,800 square feet.

CEO BACKGROUND

Michael C. Ray, age 50, Chief Executive Officer and Director

Michael C. Ray has served as our Chief Executive Officer since 2007 and as a director since June 2010. From 2004 to 2007, Mr. Ray served as our Executive Vice President of Sales and Marketing. From 1999 to 2004, he served as our National Sales Director. Mr. Ray joined Vera Bradley in 1998 as Director of Finance and served us in that capacity until being promoted to National Sales Director in 1999. He is a board member of the Riley Children’s Foundation in Indianapolis, Indiana.

Mr. Ray has been instrumental in our growth and the development and execution of our long-term strategic plans. He provides our board of directors with an in-depth knowledge of our products, industry, challenges, and opportunities, and he communicates management’s perspective on important matters.

John E. Kyees, age 64, Director

John E. Kyees has served as a director since April 2010. Mr. Kyees served as the Chief Investor Relations Officer of Urban Outfitters, Inc. in 2010 and served that company as Chief Financial Officer from 2003 to 2010. Mr. Kyees formerly held the position of Chief Financial Officer and Chief Administrative Officer for bebe stores, Inc., a retail chain headquartered in San Francisco, California, from 2002 to 2003. Prior to joining bebe, Mr. Kyees served as Chief Financial Officer for Skinmarket, a startup teenage cosmetic retailer, from 2000 to 2002. Mr. Kyees was also Chief Financial Officer for HC Holdings from 1997 to 2000. HC Holdings filed a bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code in 2000. From May 1997 to December 1997, he was Chief Financial Officer for Ashley Stewart, and from 1984 to 1997, Mr. Kyees was Chief Financial Officer for Express, which was a division of The Limited Brands, Inc. Mr. Kyees is currently a director and member of the audit committee of Casual Male Retail Group, Inc., a publicly traded specialty retailer of men’s clothing.

Mr. Kyees brings to our board of directors over 40 years of experience in the consumer products retail and manufacturing industries. He has over 30 years of experience as a chief financial officer and nine years serving in that role for a public company. Institutional Investor magazine selected Mr. Kyees as a top specialty retail chief financial officer on five separate occasions, evidencing his strong skills in corporate finance, strategic, and accounting matters.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Vera Bradley is a leading designer, producer, marketer, and retailer of stylish and highly functional accessories for women. Our products include a wide offering of handbags, accessories, and travel and leisure items. Over our 30-year history, Vera Bradley has become a true lifestyle brand that appeals to a broad range of consumers. Our brand vision is accessible luxury that inspires a casual, fun, and family-oriented lifestyle. We have positioned our brand to highlight the high quality, distinctive and vibrant styling, and functional design of our products. Frequent releases of new designs help keep the brand fresh and our customers continually engaged.

We generate revenues by selling products through two reportable segments: Direct and Indirect. As of January 28, 2012, our Direct business consisted of sales of Vera Bradley products through our 48 full-price stores and eight outlet stores in the United States, seven temporary, pop-up stores in Japan, our websites, verabradley.com and verabradley.co.jp, and our annual outlet sale in Fort Wayne, Indiana. We began selling directly to consumers through verabradley.com in calendar year 2006, opened our first retail stores in calendar year 2007, and entered the Japanese market in calendar year 2011. As of January 28, 2012, our Indirect business consisted of sales of Vera Bradley products to approximately 3,300 specialty retailers, substantially all of which are located in the United States, as well as to select national retailers and independent e-commerce retailers.

In recent years, we have grown rapidly as a result of the successful implementation of strategic initiatives. These initiatives included enhancing our merchandising strategy, establishing a multi-channel distribution sales model, expanding our supply chain capabilities, product development processes, and information systems to improve operational flexibility and profitability.

In fiscal 2012, we continued to experience strong demand for our brand across all of our sales channels, as reflected in our net revenue growth of 26.0%. In our Direct segment, net revenues increased 49.1%, including an increase of $39.4 million in revenues related to the opening of new stores, a $28.6 million, or 35.3%, increase in e-commerce revenues, and a comparable-store sales increase of 10.9%. In our Indirect segment, net revenues increased 9.6%, driven primarily by the strength of product offerings, improved productivity through our retail partners, and the sale of certain retired inventory. Additionally, we achieved operating income of $96.2 million for the fiscal year ended January 28, 2012, compared to an operating income of $53.3 million in the fiscal year ended January 29, 2011. Operating income for fiscal 2011, included $21.9 million of compensation expense related to restricted-stock awards.

We remain focused on executing our growth strategies, which includes growing in underpenetrated markets and expanding our store base and product offering. We believe there is a significant opportunity to grow our store base, as we believe the market in the United States can support at least 300 Vera Bradley full-price stores. To that end, in fiscal 2012 we opened 13 full-price stores and four outlet stores and began retail operations in three new states. We partnered with Dillard’s to launch our products in 65 locations. We also introduced our brand in Japan through a combination of pop-up stores and the launch of a Japanese-language website. We also began an expansion of approximately 200,000 square-feet of our distribution facility in Roanoke, Indiana. We believe the combination of our expanding product offerings and continued growth in underpenetrated markets will lead to meaningful growth opportunities in the coming years.

We expect our full-price stores to average approximately 1,800 square feet per store, and we expect to invest approximately $0.4 million per new store, consisting of inventory costs, pre-opening costs and build-out costs less tenant-improvement allowances. New full-price stores are expected to generate on average between $1.1 million and $1.3 million in net revenues during the first twelve months, and the payback on our investment is expected to occur in less than 18 months. Typically, we have found that, as a new store becomes better integrated into its community and brand awareness grows, the store’s productivity tends to improve as measured by comparable-store sales.

We believe our business strategy will continue to offer significant opportunity, but it also presents risks and challenges. These risks and challenges include that we may not be able to effectively predict and respond to changing fashion trends and customer preferences, that we may not be able to find desirable locations for new stores, and that we may not be able to effectively manage our future growth. Addressing these risks could divert our attention from continuing to build on the strengths that we believe have driven the growth of our business, but we believe our focus on brand identity, customer loyalty, a distinctive shopping experience, product development expertise, and company culture will contribute positively to our results.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures.

Net Revenues

Net revenues reflect revenues from the sale of our merchandise and from distribution and shipping and handling fees, less returns and discounts. Revenues for the Direct segment reflect sales through our full-price and outlet stores, pop-up stores in Japan, our websites, verabradley.com and verabradley.co.jp, and our annual outlet sale in Fort Wayne, Indiana. Revenues for the Indirect segment reflect sales to Indirect specialty retailers and department stores.

Gross Profit

Gross profit is equal to our net revenues less our cost of sales. Cost of sales includes the direct cost of purchased and manufactured merchandise, distribution center costs, operations overhead, duty, and all inbound freight costs incurred. The components of our reported cost of sales may not be comparable to those of other retail and wholesale companies.

Gross profit can be impacted by changes in volume, operational efficiencies, such as leveraging of fixed costs, promotional activities, such as free shipping, commodity prices such as cotton, and fluctuations in pricing structures.

Prior to calendar year 2006, we sourced the majority of our finished products domestically. Today, the significant majority of our products are sourced internationally. During this same period, we began direct sourcing of our raw materials and brought management of logistics in-house. These sourcing changes, along with better cost management, contributed to improvements in gross margin over this period. Gross margin measures gross profit as a percentage of our net revenues.

Selling, General, and Administrative Expenses (SG&A)

SG&A expenses include selling; advertising, marketing, and product development; and administrative. Selling expenses include Direct business expenses such as store expenses, employee compensation, and store occupancy and supply costs, as well as Indirect business expenses consisting primarily of employee compensation and other expenses associated with sales to Indirect retailers. Advertising, marketing, and product development expenses include employee compensation, media costs, creative production expenses, marketing agency fees, new product design costs, public relations expenses, and market research expenses. A portion of our advertising expenses may be reimbursed by Indirect retailers, and such amount is classified as other income. Administrative expenses include compensation costs for corporate functions, corporate headquarters occupancy costs, consulting and software expenses, and charitable donations. SG&A expenses increase as the number of stores increases, but not in the same proportion as the associated increase in revenues.

Other Income

We support many of our Indirect retailers’ marketing efforts by distributing certain catalogs and promotional mailers to current and prospective customers. Our Indirect retailers reimburse us for a portion of the cost to produce these materials. Reimbursement received is recorded as other income. The related cost to design, produce, and distribute the catalogs and mailers is recorded as SG&A expense. Other income also includes proceeds from the sales of tickets to our annual outlet sale and the gain on the sale of certain life insurance policies.

Operating Income

Operating income equals gross profit less SG&A expenses plus other income. Operating income excludes interest income, interest expense, and income taxes.

Income Taxes

Prior to October 3, 2010, we were taxed as an “S” Corporation for federal income tax purposes under Section 1362 of the Internal Revenue Code, and therefore were not subject to federal and state income taxes (subject to exception in a limited number of state and local jurisdictions that do not recognize the “S” Corporation status). On October 3, 2010, our “S” Corporation status automatically terminated and we became subject to corporate-level federal and state income taxes at prevailing corporate rates.

Fiscal 2012 Compared to Fiscal 2011

Net Revenues

For fiscal 2012, net revenues increased $94.8 million, or 26.0%, to $460.8 million, from $366.1 million for fiscal 2011, primarily due to increased volume.

Direct . For fiscal 2012, net revenues increased $74.2 million, or 49.1%, to $225.3 million, from $151.1 million for fiscal 2011. This growth resulted from a $28.6 million increase in e-commerce revenues due primarily to greater traffic resulting from marketing initiatives, a $39.4 million increase in non-comparable store sales, and a $6.2 million, or 10.9%, increase in comparable-store sales. The number of our stores grew from 39 at the end of fiscal 2011 to 56 at the end of fiscal 2012.

Indirect . For fiscal 2012, net revenues increased $20.6 million, or 9.6%, to $235.6 million, from $214.9 million for fiscal 2011, due to increased sales volume to our specialty retailers, driven by strong demand for carryover patterns, fall product assortment, and the launch of rolling luggage.

Gross Profit

For fiscal 2012, gross profit increased $48.5 million, or 23.2%, to $257.6 million, from $209.1 million for fiscal 2011. As a percentage of net revenues, gross profit decreased to 55.9% for fiscal 2012, from 57.1% for fiscal 2011. The decrease in gross margin was due primarily to higher cotton and labor costs and higher sales of certain retired inventory sold at lower than normal gross margins, partially offset by an overall revenue mix shift toward higher margin, retail-store sales and e-commerce.

Selling, General and Administrative Expenses (SG&A)

For fiscal 2012, SG&A expenses increased $6.3 million, or 3.9%, to $169.4 million, from $163.1 million for fiscal 2011. As a percentage of net revenues, SG&A expenses were 36.8% and 44.5% for fiscal 2012 and fiscal 2011, respectively. The decrease as a percentage of net revenues in SG&A expenses was due primarily to $21.9 million of compensation expense related to restricted-stock awards and a decline in professional fees related to our transition from a private to a public company both of which were included in fiscal 2011. In addition, SG&A expenses declined as a percentage of net revenues due to leverage of our relatively fixed cost structure of the Indirect segment, partially offset by our investment into the Japanese market.

Fiscal 2011 Compared to Fiscal 2010

Net Revenues

For fiscal 2011, net revenues increased $77.2 million, or 26.7%, to $366.1 million, from $288.9 million for fiscal 2010.

Indirect . For fiscal 2011, net revenues increased $22.1 million, or 11.5%, to $214.9 million, from $192.8 million for fiscal 2010, due primarily to increased sales volume to our Indirect retailers. The increased sales volume resulted primarily from greater demand for our Signature Collection releases that, in most cases, had more patterns and styles relative to fiscal 2010 releases, increased offerings and sales of non-Signature Collection products, and improved economic conditions.

Direct . For fiscal 2011, net revenues increased $55.0 million, or 57.2%, to $151.1 million, from $96.1 million for fiscal 2010. This growth resulted from a $22.8 million increase in e-commerce revenues due primarily to greater traffic resulting from marketing initiatives, a $22.6 million increase in non-comparable store sales, and a $7.3 million, or 25.8%, increase in comparable-store sales due primarily to increased store traffic. The number of our stores grew from 27 at the end of fiscal 2010 to 39 at the end of fiscal 2011. In addition, our annual outlet sale revenues increased by $2.3 million due to an increase in the number of shoppers that attended the sale and higher average product pricing at the sale.

Gross Profit

For fiscal 2011, gross profit increased $58.0 million, or 38.4%, to $209.1 million, from $151.1 million for fiscal 2010. As a percentage of net revenues, gross profit increased to 57.1% for fiscal 2011, from 52.3% for fiscal 2010. The increase in gross margin was due primarily to increased leverage of fixed costs as a result of the volume growth, improved efficiency in our utilization of raw materials as a result of our expanding outlet store channel, higher average product pricing at the annual outlet sale, and an overall revenue mix shift toward higher margin, retail-store sales.

Selling, General and Administrative Expenses (SG&A)

For fiscal 2011, SG&A expenses increased $46.9 million, or 40.4%, to $163.1 million, from $116.2 million for fiscal 2010. As a percentage of net revenues, SG&A expenses were 44.5% and 40.2% for fiscal 2011 and fiscal 2010, respectively.

For fiscal 2011, selling expenses increased $19.9 million, or 36.0%, to $75.3 million, from $55.4 million for fiscal 2010. As a percentage of net revenues, selling expenses were 20.6% and 19.2% for fiscal 2011 and fiscal 2010, respectively. The increase in selling expenses was due primarily to increased store operational costs attributable to new store openings as well as e-commerce and store marketing initiatives to drive increased traffic. The increase in selling expenses also resulted from the company holding two product introduction and educational events (or Premieres) for Indirect retailers during fiscal 2011, compared to only one event during fiscal 2010, and from other increased expenses as a result of the increase in net revenues. These increases were partially offset by a $1.3 million asset-impairment charge, as further described below, recorded in fiscal 2010. No such charge was recorded in fiscal 2011.

For fiscal 2011, advertising, marketing, and product development expenses decreased $1.1 million, or 3.7%, to $28.7 million, from $29.8 million for fiscal 2010. As a percentage of net revenues, advertising, marketing, and product development expenses were 7.8% and 10.3% for fiscal 2011 and fiscal 2010, respectively. This decrease resulted primarily from reduced expenses associated with our co-op marketing programs as a result of refining the marketing support for our Indirect retailers. These reduced expenses were offset in part by increased spending on non-co-op advertising and marketing efforts and by higher employee and other costs associated with our expanded product design capabilities and with the increase in net revenues.

For fiscal 2011, administrative expenses increased $28.1 million, or 90.7%, to $59.0 million, from $30.9 million for fiscal 2010. As a percentage of net revenues, administrative expenses were 16.1% and 10.7% for fiscal 2011 and fiscal 2010, respectively. This increase was due primarily to $15.8 million of stock-based compensation expense associated with the vesting of restricted-stock awards in connection with our initial public offering as well as $6.1 million of expense associated with bonuses paid to recipients of the restricted-stock awards to satisfy tax obligations. In addition, we incurred higher corporate personnel and other costs necessary to support our growth as well as increased professional services fees related in part to our transition from a private to a public company.

Other Income

For fiscal 2012, other income decreased $3.5 million, or 32.7%, to $7.2 million, from $10.7 million for fiscal 2010. This decrease was due to the above-discussed refinement of the marketing support for our Indirect retailers, which resulted in decreased reimbursement of our advertising expenses.

Operating Income

For fiscal 2011, operating income increased $7.6 million, or 16.6%, to $53.3 million, from $45.7 million for fiscal 2010. As a percentage of net revenues, operating income was 14.6% and 15.8% for fiscal 2011 and fiscal 2010, respectively. This decrease in operating income as a percentage of net revenues was due primarily to the previously discussed $15.8 million of stock-based compensation expense associated with the vesting of restricted-stock awards in connection with our initial public offering and the $6.1 million of expense associated with bonuses paid to recipients of the restricted-stock awards.

Corporate Unallocated . For fiscal 2011, unallocated expenses increased $32.6 million, or 62.4%, primarily as a result of increased stock-based and bonus compensation expenses, higher corporate personnel and other costs, and increased professional services fees, as previously discussed.

Interest Expense, Net

Net interest expense was consistent for fiscal 2011 and fiscal 2010; a $0.2 million write off of unamortized debt-issuance costs in connection with the amendment and restatement of our credit agreement was offset by lower average borrowing levels during fiscal 2011.

Income Tax Expense

For fiscal 2011, we recorded income tax expense of $5.5 million. This expense was comprised of (1) $6.8 million of expense related to activity during the portion of fiscal 2011 that we were a “C” Corporation (October 3, 2010, through January 29, 2011) at an effective tax rate of 51.2% and (2) $0.5 million of state taxes related to taxing jurisdictions that did not recognize our previous “S” Corporation status, offset in part by a one-time deferred tax benefit of $1.8 million recognized upon the termination of our “S” Corporation status. Included in tax expense for the portion of the fiscal year that we operated as a “C” Corporation was $1.2 million related to permanently non-deductible stock-based compensation expense associated with restricted-stock awards that vested in connection with our initial public offering. For fiscal 2010, our income tax expense of $0.9 million (calculated at an effective rate of 2.0%) was comprised solely of state taxes related to taxing jurisdictions that did not recognize our previous “S” Corporation status. The increase in our effective tax rate resulted from our change in tax status.

Liquidity and Capital Resources

General

Our primary source of liquidity is cash flow from operations. We also have access to additional liquidity, if needed, through borrowings under our $125.0 million amended and restated credit agreement. Historically, our primary cash needs have been for merchandise inventories, payroll, store rent, capital expenditures associated with opening new stores, debt repayments, operational equipment, and information technology. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts receivable, accounts payable, and other current liabilities. We do not believe that the expansion of our Direct business will materially alter the nature and levels of our accounts receivable and inventories, or require materially increased borrowings under our amended and restated credit agreement, in the near term.

We believe that cash flows from operating activities and the availability of borrowings under our amended and restated credit agreement or other financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures, and debt payments for the foreseeable future.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

Vera Bradley is a leading designer, producer, marketer, and retailer of stylish, highly functional accessories for women. Our products include a wide offering of handbags, accessories, luggage, travel, eyewear, and paper and gifts. Over our 29-year history, Vera Bradley has become a true lifestyle brand that appeals to a broad range of consumers. Our brand vision is accessible luxury that inspires a casual, fun, and family-oriented lifestyle. We have positioned our brand to highlight the high quality, distinctive and vibrant styling, and functional design of our products. Frequent releases of new designs help keep the brand fresh and our customers continually engaged.

We generate revenues by selling products through two reportable segments: Indirect and Direct. As of October 29, 2011, our Indirect business consisted of sales of Vera Bradley products to approximately 3,400 independent retailers, substantially all of which are located in the United States, and to select national retailers and independent e-commerce sites. As of October 29, 2011, our Direct business consisted of sales of Vera Bradley products through our full-price, outlet, and Japanese pop-up stores, our websites, verabradley.com and verabradley.co.jp, and our annual outlet sale in Fort Wayne, Indiana. In the United States we operated 47 full-price and eight outlet stores as of October 29, 2011, compared to 34 full-price stores and four outlet stores as of October 30, 2010.

During the thirteen weeks ended October 29, 2011, we continued to experience strong demand for our brand across all of our sales channels, as reflected in our net revenue growth of 32.3%. In our Indirect segment, net revenues increased 15.7%, driven primarily by the strength of product offerings, improved productivity through our retail partners, and the sale of certain retired inventory. In our Direct segment, net revenues increased 63.4%, including an increase of $9.3 million in revenues related to the opening of new stores, a $9.9 million, or 55.1%, increase in e-commerce revenues, and a comparable-store sales increase of 7.4%. Additionally, we achieved operating income of $21.5 million for the thirteen weeks ended October 29, 2011, compared to an operating loss of $0.2 million in the thirteen weeks ended October 30, 2010. Operating income for the thirteen weeks ended October 30, 2010, included $15.7 million of stock-based compensation expense associated with vesting of restricted-stock awards upon our initial public offering.

During the thirty-nine weeks ended October 29, 2011, we remained focused on executing our growth strategies, which include growing in underpenetrated markets and expanding our store base and product offerings. In doing so, we opened 12 full-price stores and four outlet stores. We also introduced our brand in Japan through a combination of pop-up stores and the launch of a Japanese-language website. We believe the combination of our expanding product offerings and continued growth in underpenetrated markets will lead to meaningful growth opportunities throughout the remainder of fiscal 2012.

Although we believe that our strategies will continue to offer significant opportunities, they also present risks and challenges. These risks and challenges include that we may not be able to effectively predict and respond to changing fashion trends and customer preferences, that we may not be able to find desirable locations for new stores, and that we may not be able to effectively manage our future growth. Addressing these risks could divert our attention from continuing to build on the strengths that we believe have driven the growth of our business, but we believe that our focus on brand identity, customer loyalty, a distinctive shopping experience, product development expertise, and company culture will contribute positively to our results.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures.

Net Revenues

Net revenues represent revenues from the sale of our merchandise and from distribution and shipping and handling fees, less returns and discounts. Revenues for the Indirect segment represent revenues from sales to our independent retailers, select national retailers, and independent e-commerce sites. Revenues for the Direct segment represent revenues from sales through our full-price, outlet, and Japanese pop-up stores, our websites, and our annual outlet sale.

Selling, General, and Administrative Expenses (SG&A)

SG&A expenses fall into three categories: (1) selling; (2) advertising, marketing, and product development; and (3) administrative. Selling expenses include Direct business expenses such as store expenses, employee compensation, and store occupancy and supply costs, as well as Indirect business expenses consisting primarily of employee compensation and other expenses associated with sales to Indirect retailers. Advertising, marketing, and product development expenses include employee compensation, media costs, creative production expenses, marketing agency fees, new product design costs, public relations expenses, and market research expenses. A portion of our advertising expenses may be reimbursed by Indirect retailers, and such amount is classified as other income. Administrative expenses include compensation costs for corporate functions, corporate headquarters occupancy costs, consulting and software expenses, and charitable donations. SG&A expenses increase as the number of stores increases, but not in the same proportion as the associated increase in revenues. Certain prior-year amounts have been reclassified to conform to the current-year presentation.

Other Income

We support many of our Indirect retailers’ marketing efforts by distributing certain catalogs and promotional mailers to current and prospective customers. Our Indirect retailers reimburse us for a portion of the cost to produce these materials. Reimbursement received is recorded as other income. The related cost to design, produce, and distribute the catalogs and mailers is recorded as SG&A expense. Other income also includes proceeds from the sales of tickets to our annual outlet sale and the gain on the sale of certain life insurance policies.

Operating Income

Operating income equals gross profit less SG&A expenses and plus other income. Operating income excludes interest income, interest expense, and income taxes.

Income Taxes

Prior to October 3, 2010, we were taxed as an “S” Corporation for federal income tax purposes under Section 1362 of the Internal Revenue Code, and therefore were not subject to federal and state income taxes (subject to exception in a limited number of state and local jurisdictions that do not recognize the “S” Corporation status). On October 3, 2010, our “S” Corporation status automatically terminated and we became subject to corporate-level federal and state income taxes at prevailing corporate rates.

Our provisions for income taxes for interim reporting periods are based on an estimate of the effective tax rate for each of the periods presented. The computation of the effective tax rate includes a forecast of our estimated ordinary income (loss), which is the annual income (loss) from operations before income tax, excluding unusual or infrequently occurring (or discrete) items.

Thirteen Weeks Ended October 29, 2011, Compared to Thirteen Weeks Ended October 30, 2010

Net Revenues

For the thirteen weeks ended October 29, 2011, net revenues increased $29.5 million, or 32.3%, to $121.1 million, from $91.6 million in the comparable prior-year period.

Indirect . For the thirteen weeks ended October 29, 2011, net revenues in the Indirect segment increased $9.3 million, or 15.7%, to $69.1 million, from $59.8 million in the comparable prior-year period, due to increased sales volume to our Indirect retailers, driven by the strength of product offerings, improved productivity through our retail partners, and the sale of certain retired inventory.

Direct . For the thirteen weeks ended October 29, 2011, net revenues in the Direct segment increased $20.2 million, or 63.4%, to $52.0 million, from $31.8 million in the comparable prior-year period. This growth resulted from a $9.3 million increase in revenues related to the opening of new stores, a $9.9 million increase in e-commerce revenues due primarily to greater traffic resulting from marketing initiatives, and a comparable-store sales increase of $1.0 million, or 7.4%. The aggregate number of our full-price and outlet stores grew from 38 at October 30, 2010, to 55 at October 29, 2011.

Gross Profit

For the thirteen weeks ended October 29, 2011, gross profit increased $14.0 million, or 27.1%, to $65.7 million, from $51.7 million in the comparable prior-year period. As a percentage of net revenues, gross profit decreased to 54.2% for the thirteen weeks ended October 29, 2011, from 56.4% in the comparable prior-year period. The decrease in gross margin was due primarily to ongoing efforts to better manage inventory growth to more closely match sales growth. This included lower inventory receipts during the fiscal quarter resulting in supply chain cost absorption not fully aligned with lower inventory levels. In addition, the Company sold higher levels of certain retired inventory. These efforts closely aligned inventory growth with sales growth in the thirteen weeks ended October 29, 2011, which is sooner than we had planned.

Selling, General, and Administrative Expenses

For the thirteen weeks ended October 29, 2011, SG&A expenses decreased $7.9 million, or 14.8%, to $45.3 million, from $53.2 million in the comparable prior-year period. As a percentage of net revenues, SG&A expenses were 37.5% and 58.1% for the fiscal quarters ended October 29, 2011, and October 30, 2010, respectively.

For the thirteen weeks ended October 29, 2011, selling expenses increased $5.9 million, or 29.6%, to $26.1 million, from $20.2 million in the comparable prior-year period. As a percentage of net revenues, selling expenses were 21.6% and 22.0% for the fiscal quarters ended October 29, 2011, and October 30, 2010, respectively. The decrease as a percentage of net revenues in selling expenses was due primarily to leveraged fixed costs offset by costs associated with our market entry into Japan.

For the thirteen weeks ended October 29, 2011, advertising, marketing, and product development expenses increased $0.7 million, or 9.9%, to $7.6 million, from $6.9 million in the comparable prior-year period. As a percentage of net revenues, advertising, marketing, and product development expenses were 6.3% and 7.6% for the fiscal quarters ended October 29, 2011, and October 30, 2010, respectively. The decrease as a percentage of net revenues in these expenses resulted primarily from a decrease in the number of direct mailers we distributed on behalf of our independent retailers, offset in part by an increase in marketing promotional costs.

For the thirteen weeks ended October 29, 2011, administrative expenses decreased $14.5 million, or 55.6%, to $11.6 million, from $26.1 million in the comparable prior-year period. As a percentage of net revenues, administrative expenses were 9.6% and 28.5% for the fiscal quarters ended October 29, 2011, and October 30, 2010, respectively. The decrease as a percentage of net revenues, in administrative expenses was due primarily to the $15.7 million of stock-based compensation expense associated with vesting of restricted-stock awards upon our initial public offering in the prior-year. In addition, administrative expenses declined as a percentage of net revenues due to a decline in professional fees related in part to our transition from a private to a public company in the prior-year.

Other Income

For the thirteen weeks ended October 29, 2011, other income decreased $0.2 million, or 12.2%, to $1.2 million, from $1.4 million in the comparable prior-year period, due to a decline in reimbursement of our advertising expenses by our independent retailers.

Indirect . For the thirteen weeks ended October 29, 2011, operating income in the Indirect segment increased $3.1 million, or 13.0%. This increase resulted primarily from an increase in revenue and sales-driven leverage of SG&A, offset in part by a decline in gross margin as previously discussed.

Direct . For the thirteen weeks ended October 29, 2011, operating income in the Direct segment increased $4.5 million, or 50.4%, due to an increase in revenue and sales-driven leverage of SG&A, offset in part by our market entry into Japan.

Corporate Unallocated . For the thirteen weeks ended October 29, 2011, unallocated expenses decreased $14.1 million, or 43.1%, primarily as a result of stock-based compensation expense associated with vesting of restricted-stock awards upon our initial public offering in the prior-year period, offset in part by higher corporate personnel and advertising and marketing costs.

Interest Expense, Net

For the thirteen weeks ended October 29, 2011, net interest expense decreased $0.3 million, or 50.6%, to $0.3 million, from $0.6 million in the comparable prior-year period. The decrease of $0.3 million was due primarily to a write off in the same period of the prior-year of $0.2 million of unamortized debt-issuance costs in connection with the amendment and restatement of the credit agreement. The remaining $0.1 million was attributable to lower average borrowing rates in the thirteen weeks ended October 29, 2011.

Income Tax Expense

The effective tax rate for the thirteen weeks ended October 29, 2011, was 38.9%. The Company’s effective tax rate for the thirteen weeks ended October 29, 2011, was negatively impacted by the net operating loss incurred by the Company’s recently formed Japanese subsidiary, for which no tax benefit was recorded. The valuation allowance recorded against the deferred tax asset arising from the net operating loss of the Company’s Japanese subsidiary increased the effective tax rate by 1.1% for the thirteen weeks ended October 29, 2011.

Thirty-Nine Weeks Ended October 29, 2011, Compared to Thirty-Nine Weeks Ended October 30, 2010

Net Revenues

For the thirty-nine weeks ended October 29, 2011, net revenues increased $69.7 million, or 27.1%, to $326.3 million, from $256.7 million in the comparable prior-year period.

Indirect . For the thirty-nine weeks ended October 29, 2011, net revenues in the Indirect segment increased $21.0 million, or 13.0%, to $182.3 million, from $161.3 million in the comparable prior-year period, due to increased sales volume to our Indirect retailers, driven by strong demand for our winter product assortment and strong sales of carryover patterns from prior releases.

Direct . For the thirty-nine weeks ended October 29, 2011, net revenues in the Direct segment increased $48.7 million, or 51.0%, to $144.0 million, from $95.4 million in the comparable prior-year period. This growth resulted from a $25.2 million increase in revenues related to the opening of new stores, a $19.5 million increase in e-commerce revenues due primarily to greater traffic resulting from marketing initiatives, and a comparable-store sales increase of $4.1 million, or 12.0%, offset in part by a decrease of $0.3 million in outlet-sale revenues. The aggregate number of our full-price and outlet stores grew from 38 at October 30, 2010, to 55 at October 29, 2011.

Gross Profit

For the thirty-nine weeks ended October 29, 2011, gross profit increased $34.5 million, or 23.4%, to $181.8 million, from $147.3 million in the comparable prior-year period. As a percentage of net revenues, gross profit decreased to 55.7% for the thirty-nine weeks ended October 29, 2011, from 57.4% in the comparable prior-year period. The decrease in gross margin was due primarily to higher input costs and to ongoing efforts to better manage inventory growth to more closely match sales growth. This included lower inventory receipts during the fiscal quarter resulting in supply chain cost absorption not fully aligned with lower inventory levels. In addition, the Company sold higher levels of certain retired inventory in the thirteen weeks ended October 29, 2011. These efforts closely aligned inventory growth with sales growth sooner than we had planned.

Selling, General, and Administrative Expenses

For the thirty-nine weeks ended October 29, 2011, SG&A expenses decreased $1.4 million, or 1.1%, to $124.4 million, from $125.8 million in the comparable prior-year period. As a percentage of net revenues, SG&A expenses were 38.1% and 49.0% for the fiscal quarters ended October 29, 2011, and October 30, 2010, respectively.

For the thirty-nine weeks ended October 29, 2011, selling expenses increased $18.1 million, or 33.4%, to $72.4 million, from $54.3 million in the comparable prior-year period. As a percentage of net revenues, selling expenses were 22.2% and 21.2% for the thirty- nine weeks ended October 29, 2011, and October 30, 2010, respectively. The increase as a percentage of net revenues in selling expenses was due primarily to costs associated with our market entry into Japan.

For the thirty-nine weeks ended October 29, 2011, advertising, marketing, and product development expenses decreased $0.2 million, or 0.8%, to $21.2 million, from $21.4 million in the comparable prior-year period. As a percentage of net revenues, advertising, marketing, and product development expenses were 6.5% and 8.3% for the thirty-nine weeks ended October 29, 2011, and October 30, 2010, respectively. The decrease as a percentage of net revenues in these expenses resulted primarily from a decline in the number of direct mailers we distributed on behalf of our independent retailers, offset in part by increased marketing promotional costs.

For the thirty-nine weeks ended October 29, 2011, administrative expenses decreased $19.3 million, or 38.5%, to $30.8 million, from $50.1 million in the comparable prior-year period. As a percentage of net revenues, administrative expenses were 9.5% and 19.5% for the thirty-nine weeks ended October 29, 2011, and October 30, 2010, respectively. The decrease as a percentage of net revenues in administrative expenses was due primarily to $15.8 million of stock-based compensation expense associated with the vesting of restricted-stock awards in connection with the IPO as well as $6.1 million of expense associated with bonuses paid to recipients of the restricted-stock awards to satisfy a portion of the tax obligation associated with these awards in the prior-year period. In addition, administrative expenses declined as a percentage of net revenues due to a decline in professional fees related in part to our transition from a private to a public company in the prior-year.

Other Income

For the thirty-nine weeks ended October 29, 2011, other income increased $0.9 million, or 17.8%, to $6.2 million, from $5.3 million in the comparable prior-year period, due to increased reimbursement of our advertising expenses by our independent retailers.

Liquidity and Capital Resources

General

Our primary source of liquidity is cash flow from operations. We also have access to additional liquidity, if needed, through borrowings under our $125 million amended and restated credit agreement. Historically, our primary cash needs have been for merchandise inventories, payroll, store rent, capital expenditures associated with opening new stores, debt repayments, operational equipment, information technology, and quarterly shareholder distributions to cover estimated tax payments. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts receivable, accounts payable, and other current liabilities. We do not believe that the expansion of our Direct business will materially alter the nature and levels of our accounts receivable and inventories, or require materially increased borrowings under our amended and restated credit agreement, in the near future. Further, as a result of our conversion to a “C” Corporation, we no longer make tax distributions to shareholders, but we now are required to make quarterly income tax payments to various taxing authorities.

We believe that cash flows from operating activities and the availability of borrowings under our amended and restated credit agreement or other financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures, including expansion of our Direct business, and debt payments for the foreseeable future.

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